Item 1. Business
General
Layne Christensen Company provides drilling services and related products and services in four principal markets: water well drilling and maintenance, mineral exploration drilling, geotechnical drilling and environmental drilling. Layne Christensen's customers include municipalities, industrial companies, mining companies and environmental 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. The CBC acquisition also gave the Company substantial capabilities in designing and manufacturing drill rigs, diamond drill bits and related equipment used by the mineral exploration industry.
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.
Market Overview
The principal markets in which the Company operates are: water well drilling and maintenance, mineral exploration drilling, geotechnical drilling and environmental drilling. In addition, the Company's mineral exploration drilling includes drill and blast operations used in mine development. For purposes of this Form 10-K, the phrase "mineral exploration drilling" includes drill and blast operations, unless otherwise noted. 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.
Water Well Drilling and Maintenance
Demand for water well drilling services is driven by the need to access groundwater, which is affected by many factors including population movements and expansions, such as new housing developments, deteriorating water quality and limited availability of surface water. Groundwater is a vital natural resource that is pumped from the earth for drinking water, irrigation and industrial use. In many parts of the United States and other parts of the world, groundwater is the only reliable source of water. Groundwater is located in saturated geological zones at varying depths beneath the surface and accumulates in subsurface strata (aquifers). Surface water, the other major source of potable water, comes principally from large lakes and rivers.
The water well drilling market is highly fragmented, consisting of several thousand water well drilling contractors in the United States. However, the Company believes that a substantial majority of these contractors are regionally and locally based, and are primarily involved in drilling low volume water wells for agricultural and residential customers, markets in which the Company does not generally compete. The Company's target groundwater drilling market consists of high volume water wells drilled principally for municipal and industrial customers. These wells have more stringent design specifications and are deeper and larger in diameter than low-volume residential and agricultural wells. Drillers for high-volume wells must have strong technical expertise, expert knowledge of local geology, large drilling equipment and the ability to procure sizable performance bonds.
The demand for well and pump repair and maintenance depends upon the age and use of the well and pump, the quality of material and workmanship applied in the original well installation and changes in the depth and quality of the aquifer. Repair and rehabilitation work is often required on an emergency basis or within a relatively short period of time after a performance decline is recognized and is often awarded to the firm that initially drilled the well. Scheduling flexibility, together with appropriate expertise and equipment, are critical for a repair and maintenance service provider. Like the water well drilling market, the market for repair and maintenance is highly fragmented. It consists of most well drilling companies as well as firms that provide solely repair and maintenance services.
Mineral Exploration Drilling
Demand for mineral exploration drilling and products is driven by the demand 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.
In recent years, important changes in the international mining industry have led to the development and growth of mineral exploration in developing regions of the world, including West Africa, Asia and South America. Certain countries, such as Chile and Peru, have liberalized their mining codes to permit foreign investment, and investment conditions generally have improved in those countries. 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 exploration industry has also increased its focus on these areas due to their early stage of mining development, relative to the more mature mining regions of the world such as the United States and South Africa.
Mining companies hire exploration drillers to extract samples from sites that the mining companies analyze for mineral content. Mineral exploration drilling requires a high level of expertise and technical competence because the samples extracted must be free of contamination and accurately reflect the underlying mineral deposit. Familiarity with the local geology is critical to acquiring this competence. Mineral exploration drilling consists of exploratory drilling and definitional drilling. Exploratory drilling is conducted to determine if there is a minable mineral deposit (an orebody) on the site. Definitional drilling is typically conducted at a site to assess whether it would be economical to mine. 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.
In drill and blast operations conducted at open pit mines under production, the driller drills holes for the placement of explosives; the explosives are then detonated to loosen and dislodge earth, which is hauled away by the mining company for processing. Drill and blast contracts typically have lower margins than traditional mineral exploration drilling projects; however, they provide more stable revenues because drill and blast contracts typically have a duration of three to five years whereas traditional mineral exploration projects typically have substantially shorter terms. To win drill and blast contracts, a drilling company must be familiar with the mine site and its geology, have proven drill and blast expertise and personnel and easily transferable rigs and appropriate drilling equipment that can be dedicated to the site.
Geotechnical Drilling Services
Geotechnical drilling services are used to modify weak and unstable soils, decrease water flow in bedrock and provide support and groundwater control for excavation. Methods used include cement and chemical grouting and 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. Geotechnical drilling services are important during the construction of dams, tunnels, shafts, water lines, subways and other civil construction projects. Demand for geotechnical drilling 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 geotechnical drilling services industry is highly fragmented.
Environmental Drilling
Demand for environmental drilling services is driven by public concern over groundwater contamination and resulting regulatory requirements to investigate and remediate contaminated sites and aquifers. Numerous and complex federal, state and local laws have been enacted for the purpose of investigating and remediating pollution of underground aquifers as well as preventing or controlling the potential environmental hazards caused by groundwater contamination. 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.
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:
Expand Mineral Exploration Drilling Internationally
The Company believes that its best mineral exploration drilling opportunities exist in Australasia, Africa and South America. To position itself to take advantage of such opportunities, the Company intends to expand its international mineral exploration business through internal expansion and acquisitions. 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, access to transferable drilling equipment and employee training and safety programs. With the additional resources and capabilities provided by its acquisitions of CBC and Stanley, the Company believes it will be better positioned to expand its operations in countries such as Argentina, Bolivia, Brazil, Tanzania and Zambia, where it expects the mineral exploration industry to grow.
Acquire Water Well Drilling Businesses in the United States
Layne Christensen is currently the largest provider of water well drilling services in the United States, operating in all regions of the country. The Company intends to expand its water well drilling business in the United States by making strategic acquisitions of selected regional privately-held water well drilling firms. For example, in July 1997 the Company acquired Stamm-Scheele Inc., a water well drilling company based near Baton Rouge, Louisiana, and in March 1998, acquired certain assets of Hydro Group, Inc., a water well, geotechnical and environmental drilling company with operations in New York, New Jersey, Ohio, Pennsylvania and Virginia. The Company believes that by combining the Company's capabilities with regional firms, the Company will improve such firms' efficiency, safety record, bonding capacity, profitability and professionalism and enable these firms to win project bids that they would not otherwise have won.
Expand Water Well Drilling Internationally
The Company intends to build its groundwater business internationally by leveraging the mineral exploration services that it currently provides to mining customers. Mining companies frequently need to implement a dewatering program that requires the installation of wells to remove groundwater from the mine excavation or to construct a groundwater well to obtain process water for use in connection with mining activities. For example, the Company recently completed a project through one of the Company's Chilean affiliates for the completion of multiple water production wells in the Collahuasi mine in Northern Chile, with technical support provided through Layne Christensen. Many developing countries also have significant and growing requirements to access groundwater to satisfy their potable water needs. In all of its regions, the Company intends to concentrate on large scale industrial and government water well drilling projects.
Expand Presence in Geotechnical Drilling Services
The Company's participation in the geotechnical drilling services market is still in an early stage. 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. An example of the implementation of this strategy is the Company's recently completed project in Timmins, Ontario, Canada where the Company was engaged by Echo Bay Mines Ltd. to construct a subsurface frozen earth barrier around a 3.5 kilometer perimeter open pit gold mine.
While the Company expects to continue conducting environmental drilling business, and continues to consider such market as one of its principal markets, the Company does not expect such business to provide growth opportunities in the foreseeable future.
Services and Products
Layne Christensen's current business is divided into four primary areas: water well drilling and maintenance services; mineral exploration drilling services and products; geotechnical drilling services; and environmental drilling services.
Overview of the Company's Drilling Techniques
The types of drilling techniques employed by the Company in its drilling activities have different applications:
- Conventional and reverse circulation rotary rigs are used in water well and mineral exploration drilling primarily for drilling large diameter wells and employ air or drilling fluid circulation for removal of cuttings and borehole stabilization.
- Dual tube drilling, an innovation advanced by the Company primarily for mineral exploration and environmental drilling, conveys the drill cuttings to the surface inside the drill pipe. This drilling method is critical in mineral exploration drilling and environmental sampling
because it provides immediate representative samples and because the drill cuttings do not contact the surrounding formation thus avoiding contamination of the borehole while providing reliable, uncontaminated samples. Because this method involves circulation of the drilling fluid inside the casing, it is highly suitable for penetration of underground voids or faults where traditional drilling methods would result in the loss of circulation of the drilling fluid, thereby preventing further penetration.
- Diamond core drilling is used in mineral exploration drilling to core solid rock, thereby providing geologists and engineers with solid rock samples for evaluation.
- Cable tool drilling, which requires no drilling fluid, is used primarily in water well drilling for larger diameter wells. While slower than other drilling methods, it is well suited for penetrating boulders, cobble and rock.
- Auger drilling is used principally in water well and environmental drilling for efficient completion of relatively small diameter, shallow wells. Auger rigs are equipped with a variety of auger sizes and soil sampling equipment.
Water Well Drilling and Maintenance
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.
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 civil and geological engineers, geologists, hydrogeologists, geophysicists, and microbiologists.
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 certain third party 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 the Company as well as 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.
Mineral Exploration Drilling and Products
Drilling Services
The Company provides drilling services for geological assessment, in site mining and mineral exploration. These services are used primarily by major gold and copper producers based in the United States 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 foreign affiliates operating in South America with facilities in Chile and Peru. These affiliates have projects in Argentina, Bolivia, Brazil, Chile, Mexico and Peru, among other locations. In addition, with the Stanley Acquisition, the Company now has operations in Australia and Africa.
Products
With its acquisition of CBC, the Company expanded its operations to include the manufacture and marketing of a wide range of standard equipment used by the Company and third party drilling contractors involved in mineral exploration and mine development in various parts of the world. The Company's products include
drill rigs, coring equipment and drill bits. The Company uses its experience gained from completing a wide range of drilling projects to design products, particularly drill bits, that are well suited to current drilling applications, and from time to time, will design and manufacture products for custom applications. The Company's products are designed and manufactured to meet its own rigid standards of quality and utility as well as the standards of various trade associations.
Layne Christensen manufactures a line of diamond core mineral exploration drill rigs which are designed to meet the specialized work requirements of mineral exploration sites and can also be used at environmental sites. The Company's line of rig accessory equipment and tools includes subs, bushings and adapters; water swivels; a variety of safety related equipment; and hoisting, lowering and pulling equipment.
The Company manufactures conventional and wireline coring equipment for recovery of core samples from the earth. The Company's wireline core barrels are core recovery tools designed for operation at the bottom of the drill string where a core bit cuts the core that is collected and retained inside the core barrel. The Company also offers a full line of equipment for conventional coring. The Company's conventional and wireline coring products include drill rods manufactured by third parties to which the Company adds industry standard threading suited to its products.
The diamond drill bit products manufactured by the Company include products incorporating matrix powder technology coupled with both synthetic and natural diamonds. The principal categories of drilling bits are surface set diamond bits, impregnated synthetic diamond bits and polycrystalline synthetic diamond bits. Each category of bit is specifically designed for maximum drilling efficiency in different geological formations and drilling applications, and the Company frequently updates and redesigns its bits for various formations and applications. The Company's bit products also include reamers and stabilizers for stabilizing and centering the drill bit. The Company distributes its products to distributors, general contractors, mineral exploration companies and equipment and parts suppliers.
The Company engages in on-going engineering, research and development activities to improve its existing products and to design and develop new products for both existing and new drilling applications. To further promote efficiency, reduce development costs and enhance customer relationships, the Company's research and engineering staff works closely with its customers to design and develop custom-engineered drilling solutions.
Geotechnical Drilling Services
Geotechnical drilling 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. The Company recently completed a project for Echo Bay Mines Ltd. to construct a subsurface frozen earth barrier around an open pit gold mine in Timmins, Ontario, Canada.
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 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 Occupation and Safety Health Administration ("OSHA") and Mine Safety and Health Administration of the Department of Labor ("MSHA").
Operations
The Company operates on a decentralized basis, with approximately 74 sales and operations offices located in most regions of the United States as well as in Canada, Australia, Africa, Mexico and Thailand. In addition, the Company, through its foreign affiliates, operates out of locations in Mexico, South America and Europe.
The Company is primarily organized domestically by geographic regions, with an eastern and western regional vice president, a vice president responsible for geotechnical services and a vice president responsible for products/international locations. District managers are in charge of individual district office profit centers. The district managers report to their respective regional 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. 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 vice presidents oversee the Company's interests in its foreign affiliates as well as the operations of its foreign subsidiaries. In addition, the Company manages its interests in its foreign affiliates through regular management meetings and analysis of comprehensive operating and financial information. In 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 well drilling service line, the Company's customers are typically municipalities and local operations of industrial businesses. Of the Company's water well drilling revenues in fiscal 1999, approximately 68% were derived from municipalities and approximately 13% were derived from industrial businesses while the balance was derived from other customer groups. The term "municipalities" is used to include 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 over its competitors due to its drilling expertise and financial resources.
In the water well repair and maintenance service line, the Company's customers also include municipalities and local operations of industrial businesses. In fiscal 1999, approximately 53% of the Company's repair and maintenance revenues were derived from municipalities, approximately 27% of such` revenues were derived from industrial businesses and the balance was derived from other customer groups.
Customers for the Company's mineral exploration drilling 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 and Canada. Customers for mineral exploration products manufactured or sold by the Company include distributors, general contractors, mineral exploration companies and equipment and parts suppliers.
In its geotechnical drilling 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 geotechnical drilling services.
The Company's primary environmental drilling customers are regional or national consulting firms retained by federal or state agencies or by industrial companies to assist in the assessment and cleanup of groundwater contamination.
Backlog
The Company's backlog consists of executed service and product purchase 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 $68,787,000 at January 31, 1999, compared to approximately $45,005,000 at January 31, 1998. The Company's backlog as of year end is generally completed within the following fiscal year.
Competition
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 technology, expertise and equipment utilized in these businesses differ significantly. Only a small percentage of all companies that perform water well drilling services have the technical competence and drilling expertise to compete effectively for high volume municipal and industrial projects, which typically are more demanding than projects in the agricultural or residential well markets. In addition, smaller companies often do not have the financial resources or bonding capacity to compete for large projects. However, there are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to the Company. Water well drilling work is usually obtained on a competitive bid basis for municipalities, while work for industrial customers is obtained on a negotiated or informal bid basis.
As is the case in the water well drilling business, the well repair and maintenance business is characterized by a large number of relatively small competitors. The Company believes only a small percentage of the companies performing these services have the technical expertise necessary to diagnose complex problems, perform many of the sophisticated rehabilitation techniques offered by the Company or repair a wide range of pumps in their own facilities. In addition, many of these companies have only a small number of pump service rigs. Repair and maintenance projects are typically negotiated at the time of repair or contracted for in advance depending upon the lead time available for the repair work. Since pump repair and rehabilitation work is typically negotiated on an emergency basis or within a relatively short period of time, those companies with available rigs and the requisite expertise have a competitive advantage by being able to respond quickly to repair requests.
In its mineral exploration drilling business, the Company competes with a number of drilling companies as well as vertically integrated mining companies that conduct their own exploration drilling or drill and blast 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, expertise and reputation. The Company believes it has a well-recognized reputation for expertise and performance in this market, although the Company is not the largest company providing these services on a national or international basis. The Company believes that this market is becoming more competitive, particularly in the United States. Mineral exploration drilling work is typically
performed on a negotiated basis. In the market for the Company's manufactured mineral exploration drilling products, the Company's competitors consist of the Boart Longyear Group, an indirect subsidiary of Anglo-American Industrial Corporation, Ltd., and a small number of other manufacturers. The Company competes in this market based on price, technical design and reputation.
The geotechnical drilling 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 environmental drilling market, Layne Christensen competes with different types of drillers depending on the services involved. Small site assessments and routine underground storage tank assessment and remediation projects are highly competitive and attract a large number of local drilling competitors. More sophisticated and demanding projects generally require the expertise and resources of larger drilling operators with access to multiple rigs and alternative drilling techniques. The larger drilling companies generally also have the requisite expertise and safety training to assess the risks associated with drilling on sites having higher contamination levels and larger amounts of hazardous wastes. The Company believes its risk assessment process enables it to select projects prudently and to better manage risks associated with those projects. The Company focuses on the more technically demanding projects in this area and avoids the smaller and highly competitive site assessment and remediation projects. Environmental drilling contracts are usually bid or negotiated at the initial stage but major contract extensions are often negotiated.
Employees and Training
At January 31, 1999, the Company had 2,810 employees, 240 of whom were hourly employees and members of collective bargaining units represented by locals affiliated with major labor unions in the United States. The Company believes that its relationship with its employees is satisfactory.
In all of the Company's service lines, an important competitive factor is technical expertise. As a result, the Company emphasizes the training and development of its personnel. Periodic technical training is provided for senior field employees covering such areas as pump installation, drilling technology and electrical troubleshooting. In addition, the Company emphasizes strict adherence to all health and safety requirements and offers incentive pay based upon achievement of specified safety goals. This emphasis encompasses developing site-specific safety plans, ensuring regulatory compliance and training employees in regulatory compliance and good safety practices. Training includes an OSHA-mandated 40-hour hazardous waste and emergency response training course as well as the required annual eight hour updates. The Company has an environmental health sciences staff which allows it to offer such training in-house. This staff also prepares health and safety plans for specific sites and provides input and analysis for the health and safety plans prepared by others.
On average, the Company's field supervisors and drillers have 16 and 10 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 product customers and influence their determination whether to conduct mineral exploration and development.
Many localities require well operating licenses which typically specify that wells be constructed in accordance with applicable regulations. Various state, local and foreign laws require that water wells and monitoring wells be installed by licensed well drillers. The Company maintains well drilling and contractor's licenses in those jurisdictions in which it operates and in which such licenses are required. In addition, the Company employs licensed engineers, geologists and other professionals necessary to the conduct of its business. In those circumstances in which the Company does not have a required professional license, it subcontracts that portion of the work to a firm employing the necessary professionals.
Potential Liability and Insurance
The Company's drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when the Company, as is frequently the case, conducts a project on a fixed-price, "turnkey" basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its 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 or business interruption 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. 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.
Under Superfund 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.
Item 2.
Item 2. Properties and Equipment
The Company's corporate headquarters are located in Mission Woods, Kansas (a suburb of Kansas City, Missouri), in approximately 30,000 square feet of office space leased by the Company pursuant to a written lease agreement which expires February 28, 2005. The Company's manufacturing operations are primarily conducted from an approximately 84,000 square foot plant located in Salt Lake City, Utah and owned by the Company (the "Plant").
As of January 31, 1999, the Company (excluding foreign affiliates) owned or leased approximately 660 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, 1999, the Company's foreign affiliates owned or leased approximately 118 drill rigs.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various matters of litigation, claims and disputes which have arisen in the ordinary course of the Company's business. While the resolution of any of these matters may have an impact on the financial results for the period in which the matter is resolved, the Company believes that the ultimate disposition of these matters will not, in the aggregate, have a material adverse effect on the Company's business or consolidated financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the stockholders of the Company during the last quarter of the fiscal year ended January 31, 1999.
Item 4A. Executive Officers of the Registrant
Executive officers of the Company are appointed by the Board of Directors for such terms as shall be determined from time to time by the Board, 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.
The business experience of each of the executive officers of the Company during the last five fiscal years is as follows:
Andrew B. Schmitt has served as President and Chief Executive Officer of the Company 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.
Greg F. Aluce has served as the Company's Senior Vice President since April 14, 1998 and is responsible for the Company's geotechnical construction services. Mr. Aluce has over 19 years experience in various areas of the Company's operations.
H. Edward Coleman has served as an officer of the Company since 1976 and as its Senior Vice President since 1985 and is responsible for most of the Company's operations in the eastern half of the country. Mr. Coleman has over 35 years experience in various areas of the Company's operations.
Eric R. Despain has served as the Company's Senior Vice President since February 1996 and is responsible for the Company's manufacturing facilities and operations in Australasia and Africa. Prior to joining the Company in December 1995, Mr. Despain was President and a member of the Board of Directors of CBC since 1986.
Norman E. Mehlhorn has served as the Company's Senior Vice President since September 1992 and as Vice President from 1986 to September 1992 and is responsible for most of the Company's operations in the western half of the country. Mr. Mehlhorn has nearly 40 years experience in the drilling business, with particular emphasis on dual tube drilling technology.
Jerry W. Fanska has served as the Company's 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.
Kent B. Magill has served as the Company's Vice President-General Counsel and Secretary since August 1992 and served as Vice President and Associate General Counsel of The Marley Company since May 1989.
There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an executive officer of the Company.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded in the over-the-counter market through the NASDAQ National Market System under the symbol LAYN. The stock has been traded in this market since the Company became a publicly-held company on August 20, 1992. The following table sets forth the range of high and low sales prices of the Company's stock by quarter for fiscal 1999 and 1998, as reported by the NASDAQ National Market System. These quotations represent prices between dealers and do not include retail mark-up, mark-down or commissions.
At March 23, 1999, there were approximately 176 owners of record of the Company's common stock.
The Company has not paid any cash dividends on its common stock during its two most recent fiscal years. 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 Bank of America National Trust and Savings Association as agent ("Credit Agreement"), the Note Agreement between the Company and Massachusetts Mutual Life Insurance Company 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 8 of the Notes to Consolidated Financial Statements.
Item 6.
Item 6. Selected Financial Data
The following selected historical financial information as of and for the fiscal years ended January 31, 1999, 1998, 1997, 1996 and 1995, respectively, has been derived from the Company's audited consolidated financial statements. During fiscal years 1999, 1998 and 1996, the Company completed various acquisitions, which are more fully described in Note 2 of the Notes to Consolidated Financial Statements. 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. The information below should be read in conjunction with "Managements' Discussion and Analysis of Financial Condition and Results of Operations" under Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto under Item 8.
Cautionary Language Regarding Forward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements are 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
The Company substantially consummated the acquisition of Stanley Mining Services Pty., Limited ("Stanley") at the end of July, 1997 (the "Stanley Acquisition"). Stanley has been reflected in Layne Christensen's results of operations beginning August 1, 1997. The Stanley Acquisition has been accounted for using the purchase method of accounting, and will have a significant effect on Layne Christensen's future operations and on comparisons of income and expense items between periods, after the date of acquisition and prior. Among other things, the Company has incurred a substantial increase in long-term debt and goodwill and will incur a substantial increase in interest expense and goodwill amortization in the current and future periods.
With the Stanley Acquisition and other smaller acquisitions thereafter, the percentage of the Company's revenues and operating income tied to the mining industry has increased substantially. Demand for the Company's mineral
exploration drilling services and products 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 decline in the prices of various metals has continued to adversely impact the level of mineral exploration and development activities conducted by mining companies and has had, and could continue to have, a material adverse effect on the Company.
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. Certain 1998 and 1997 service revenues by product line have been reclassified to conform to 1999 presentation in the following table and comparisons thereafter.
* Not meaningful.
Comparison of Fiscal 1999 to Fiscal 1998
Results of Operations
Revenues for fiscal 1999 decreased $10,352,000, or 3.5%, to $284,248,000 compared to $294,600,000 for fiscal 1998. Water well drilling and maintenance revenues increased 14.0% to $137,094,000 for fiscal 1999 compared to revenues of $120,280,000 for fiscal 1998. The increase in water well drilling and maintenance revenues was primarily the result of the acquisition of certain assets of Hydro Group, Inc., a New Jersey-based drilling contractor, in March 1998 (the "Hydro Acquisition"). Additionally, the Company experienced stronger demand for services at various domestic locations. Mineral exploration drilling revenues decreased 1.8% to $78,305,000 for fiscal 1999 from $79,726,000 for fiscal 1998. The decrease was primarily a result of lower demand for the Company's services as a result of the decrease in exploration and development activities conducted by mining companies. The decrease was less than it otherwise would have been as fiscal 1999 included a full year of revenues following the Stanley Acquisition. Geotechnical drilling revenues decreased 39.3% to $27,409,000 for fiscal 1999 compared to revenues of $45,191,000 for fiscal 1998. Exclusive of the Company's ground freeze project in Timmins, Ontario, Canada for Echo Bay Mines, Ltd. (the "Timmins Project"), which was completed in the first quarter of fiscal 1999, geotechnical drilling revenues increased 24.0% in fiscal 1999. The increase in the base geotechnical business revenues was primarily a result of increased activity in this market. Environmental drilling revenue increased 6.1% to $20,316,000 for fiscal 1999 compared to revenues of $19,157,000 for fiscal 1998. The Company believes the improvement was largely attributable to an increase in the number of larger and more technically demanding projects, which were substantially completed during the year. Product sales decreased 30.2% to $21,124,000 for fiscal 1999 from $30,246,000 for fiscal 1998. The decrease was a result of the lower demand for the Company's services in the mining industry as previously discussed.
Gross profit as a percentage of revenues was 27.9% for fiscal 1999 compared to 27.5% for the same period last year. The increase was primarily attributed to the Company realizing better than previously expected gross profit margins on certain complex international projects which were finalized during the year.
Selling, general and administrative expenses increased to $49,938,000 for fiscal 1999 compared to $45,908,000 for fiscal 1998. The increase was primarily a result of the Hydro Acquisition and other smaller acquisitions.
Depreciation and amortization increased to $22,361,000 for fiscal 1999 compared to $15,681,000 in fiscal 1998. The increase in depreciation and amortization was primarily a result of the Hydro Acquisition and additions to property and equipment since last year.
Equity in earnings of foreign affiliates was $1,128,000 for fiscal 1999 compared to $3,022,000 in fiscal 1998. The decrease from the previous period was primarily a result of lower exploration and development activities conducted by mining companies in Latin America.
Income tax expense was $2,333,000 for fiscal 1999 compared to $7,004,000 in fiscal 1998. The effective tax rate for the year ended January 31, 1999 increased to 66% compared to 38% for the year ended January 31, 1998. This was primarily a result of a combination of a reduction in the amount of equity in
earnings of foreign affiliates (on which income tax is normally not provided as foreign tax credits are generally available to offset the tax liability) and the increased impact of certain non-deductible expenses resulting from lower earnings for the fiscal year.
Comparison of Fiscal 1998 to Fiscal 1997
Results of Operations
Revenues for fiscal 1998 were $294,600,000, a 32.2% increase compared to $222,853,000 for fiscal 1997. Water well drilling and maintenance revenues increased 7.9% to $120,280,000 for fiscal 1998 from $111,462,000 for fiscal 1997. The increase was primarily a result of the acquisition of a Louisiana drilling company and strong demand for these services in certain central and southern areas of the United States. Mineral exploration drilling revenues increased to $79,726,000 for fiscal 1998, compared to $51,142,000 for fiscal 1997. The increase was primarily a result of the Stanley Acquisition combined with the Company's recent expansion into Africa. Geotechnical drilling revenues increased to $45,191,000 for fiscal 1998, compared to $10,536,000 for fiscal 1997. The increase was primarily the result of the Timmins Project. Excluding the Timmins Project, geotechnical drilling revenues increased 86.2% for the year due to increased market penetration of the geotechnical drilling market. Product sales increased 15.0% for fiscal 1998 to $30,246,000 from $26,309,000 for fiscal 1997. The increase was primarily the result of strong demand for the Company's mineral exploration drill rigs and related products.
Gross profit as a percentage of revenues remained constant at 27.5% for each of the years ended January 31, 1998 and 1997.
Selling, general and administrative expenses increased to $45,908,000 for fiscal 1998, compared to $38,956,000 for fiscal 1997. Depreciation and amortization expense increased to $15,681,000 for fiscal 1998, compared to $10,974,000 for fiscal 1997. The increases in these expenses were primarily a result of the Stanley Acquisition.
Interest expense increased to $3,618,000 for fiscal 1998, compared to $2,447,000 for fiscal 1997. The increase was primarily the result of additional borrowings to finance the Stanley Acquisition. Equity in earnings of foreign affiliates decreased to $3,022,000 for fiscal 1998, compared to $3,895,000 for fiscal 1997. The decrease was primarily the result of difficult weather conditions in Chile and Peru, as well as lower demand for drilling products and services due to depressed minerals prices.
Income taxes increased to $7,004,000 for fiscal 1998, compared to $4,913,000 for fiscal 1997, as a result of higher income before taxes. The Company's effective tax rate was 38% for both years.
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 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.
Liquidity and Capital Resources
The primary source of the Company's liquidity in fiscal 1999, 1998, and 1997 was its cash from operating activities of $13,637,000, $14,270,000 and $17,116,000, respectively. Cash from operations and borrowings under the Company's revolving credit agreement were utilized primarily for additions to property and equipment of $16,817,000 and various acquisitions. See Note 2 of the Notes to Consolidated Financial Statements. Capital expenditures during fiscal 1999 were directed primarily toward expansion and upgrading of the Company's equipment and facilities. The Company expects to spend approximately $10,000,000 in the next fiscal year for capital expenditures. The Company anticipates fiscal 2000 capital expenditures will be used to maintain the Company's equipment and capabilities and continue its international expansion. As of January 31, 1999, the Company had no material commitments outstanding for capital assets.
During July 1997, the Company amended its existing credit agreement to provide a reducing revolving cash borrowing facility of up to $100,000,000 (the "Credit Agreement"). As of January 31, 1999, the borrowing facility under the Credit Agreement was reduced to $93,000,000. Borrowings under the Credit Agreement were used to complete various acquisitions. See Note 2 of the Notes to the Consolidated Financial Statements. The Company's borrowings and outstanding letter of credit commitments under the Credit Agreement were $38,500,000 and $4,591,000, respectively, at January 31, 1999, leaving
approximately $49,909,000 of unused availability. See Note 8 of the Notes to Consolidated Financial Statements.
The Company's working capital as of January 31, 1999, 1998 and 1997 was $46,211,000, $39,661,000 and $29,643,000, respectively. The increases in working capital in fiscal 1999 and fiscal 1998 were primarily the result of the Hydro and Stanley Acquisitions. The Company believes borrowings from its available Credit Agreement and cash from operations will be sufficient to meet the Company's seasonal cash requirements and to fund its budgeted capital expenditures for the fiscal 2000 year.
Costs estimated to be incurred in the future for employee medical benefits 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 10 of the Notes to Consolidated Financial Statements.
Year 2000 Discussion
The Year 2000 ("Y2K") problem relates to the fact that many computer programs use only two digits to refer to a year. As a result, many computer programs do not properly recognize a year that begins with "20" instead of "19" (the "Y2K Issue"). The Company believes that issues related to Y2K compliance of its information technology ("IT") and non-information technology ("non-IT") systems should not have a material adverse impact on its business operations or financial results. Further, the Company believes that the estimated costs of Y2K compliance will not be material. Other than the Company's financial reporting systems, the nature of the Company's business is such that it is generally not reliant upon date sensitive IT and non-IT systems.
Readiness
In the fall of 1995, the Company initiated efforts to become Y2K compliant. These efforts included, in part, a review of six types of IT and non-IT systems that the Company believed might be subject to the Y2K Issue. The identified systems included personal computers, networks, mainframes, telecommunication equipment, automated control/manufacturing equipment and facility security/environmental control equipment. The review conducted by the Company evaluated the operating systems, application software and IT and non-IT hardware used in each of the six types of identified systems. The Company estimates that approximately 75% of its Y2K testing and remediation plan has been completed. The Company expects to complete the balance of its Y2K testing and remediation plan by the end of the second quarter of 1999.
In conducting its business, the Company does not rely upon a limited number of third party vendors or customers. No single vendor or customer accounts for more than 10% of the Company's purchases or sales, respectively. In addition, there are generally a number of alternative vendors from which the Company can obtain its supplies and services. As a result, the Company does not believe that Y2K problems experienced by third parties will have a material adverse impact on the Company's business operations or financial results. Nevertheless, the Company is in the process of conducting a review of the Y2K readiness of its major vendors (both of products and services) and customers. The Company's belief that
it will not be adversely impacted by the Y2K readiness of third parties with which it conducts business is based not only upon the number and diversity of its customer and vendor base but also upon the Y2K compliance that is anticipated to be achieved by the majority of its customers and vendors. In light of the fact that the Company's position is based, in part, upon information supplied by third parties, there is of necessity an element of uncertainty in the Company's assessment.
Costs
The Company is primarily relying upon internal resources to implement its Y2K readiness plan and to upgrade and/or replace IT and non-IT systems that the Company believes might be subject to the Y2K Issue. Accordingly, much of the cost associated with its Y2K efforts have been incurred through the reallocation of the Company's internal resources. Over approximately the past three fiscal years through the end of its fiscal year ended January 31, 1999, the Company has expended approximately $1.5 million in allocated internal resources and incremental costs for routine IT and non-IT hardware and software replacements. All of these hardware and software replacements have been Y2K compliant. The Company will continue its routine upgrading of IT and non-IT hardware and software during calendar 1999, all of which will also be Y2K compliant. The estimated costs of allocated internal resources and routine systems upgrades during the year ending January 31, 2000 will be approximately $500,000. The Company believes that the prospective costs of Y2K compliance will not have a material adverse impact on its financial position or results of operations. This conclusion is based, in part, upon the Company's belief that it will not incur significant Y2K related costs on behalf of third parties with which the Company conducts business. The Company expects cash flows from operations to be sufficient to fund the costs associated with Y2K compliance.
Risks
As the nature of the Company's business is such that it is not generally dependent upon date sensitive data for the production of its goods and services, the Company believes that any problems associated with the Y2K Issue will not have a material adverse impact on the Company's business operations or financial results. In spite of these presumptions, the inherent uncertainty associated with the Y2K Issue makes it impossible for the Company to reach a definitive conclusion as to the actual impact of the Y2K Issue on its business operations and financial results. As a result, the Company will continue to review and update, where necessary, its Y2K strategy and to develop Y2K contingency plans. Further, the costs and timetables in which the Company plans to complete the Y2K readiness activities, as well as potential outcomes of non-compliance, are based on management's best estimates. These estimates were derived using numerous assumptions as to the occurrence of future events, including actions by third parties over which the Company has no control.
Contingency Plans
The Company's Y2K efforts are ongoing and its overall plan, as well as consideration of contingency plans where applicable, will continue to evolve as new information becomes available. Currently, the Company believes that internal Y2K problems, should any occur, could be addressed through the use of alternative resources and manual processes without a significant interruption in the Company's business operations. Further, the Company believes that the nature of
its business does not make it exclusively reliant upon a limited number of third party vendors or customers. In addition, the Company believes that third party vendor Y2K problems, should any occur, could be mitigated by utilizing alternative third party resources without adversely impacting the Company's business operations or financial results.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The principal market risks to which the Company is exposed are interest rates on variable rate debt, equity risk on investments, and foreign exchange rates giving rise to translation and transaction gains and losses.
The Company centrally manages its debt and investment portfolios considering overall financing strategies and tax consequences. The Company uses derivative financial instruments as part of its overall strategies. A description of these instruments, as well as the Company's variable rate debt, is described in Note 8 to the Notes to Consolidated Financial Statements appearing on page 46 of this Form 10-K. Assuming January 31, 1999 debt levels, an instantaneous change in interest rates of one percentage point would impact the Company's interest expense by $135,000, compared to $325,000 assuming January 31, 1998 debt levels. The Company's investments are described in Note 1 to the Notes to Consolidated Financial Statements appearing on page 35 of this Form 10- K. The 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, Indonesia and Thailand. The operations are described in Notes 1 and 11 to the Notes to Consolidated Financial Statements appearing on pages 35 and 50, respectively, of this Form 10-K. 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 ten percent change in foreign exchange rates would have impacted operating income for the years ended January 31, 1999 and 1998 by approximately $222,000 and $100,000, respectively. This represents approximately ten percent of the international segment operating profit after adjusting for primarily U.S. dollar based operations. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in the Company's financing and operating strategies.
Foreign exchange gains and losses in the Company's Consolidated Statements of Income reflect transaction gains and losses and translation gains and losses from the Company's Mexican subsidiary, which uses the U.S. dollar as its functional currency. Net foreign exchange gains and losses for 1999, 1998 and 1997 were not significant.
Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other schedules have been omitted because they are not applicable or not required as the required information is included in the Consolidated Financial Statements of the Company or the Notes thereto.
INDEPENDENT AUDITORS' REPORT
Layne Christensen Company:
We have audited the accompanying consolidated balance sheets of Layne Christensen Company and subsidiaries (together, the "Company") as of January 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Kansas City, Missouri March 19, 1999
Layne Christensen Company and Subsidiaries Consolidated Balance Sheets As of January 31, 1999 and 1998 (In Thousands of Dollars)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Balance Sheets(Continued) As of January 31, 1999 and 1998 (In Thousands of Dollars, except per share data)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Income For the Years Ended January 31, 1999, 1998 and 1997 (In Thousands of Dollars, except per share data)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Stockholders' Equity For the Years Ended January 31, 1999, 1998 and 1997 (In Thousands of Dollars)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Cash Flows For the Years Ended January 31, 1999, 1998 and 1997 (In Thousands of Dollars)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Consolidated Statements of Cash Flows - (Continued) For the Years Ended January 31, 1999, 1998 and 1997 (In Thousands of Dollars)
See Notes to Consolidated Financial Statements.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
Description of Business -- Layne Christensen Company and subsidiaries (together, the "Company") provide comprehensive services for water well drilling (including related equipment sales), well and pump repair and maintenance, geotechnical construction services and environmental drilling in most regions in the United States, and provides mineral exploration drilling services primarily in the western United States, Australia, Africa, Mexico, Canada and Indonesia. Its customers include municipalities, industrial companies, mining companies, environmental consulting and engineering firms and, to a lesser extent, agribusinesses. In addition, the Company manufactures diamond core bits, drilling rigs and other equipment utilized in the mineral exploration, mine development and pre-construction analysis markets throughout the United States and internationally.
Fiscal Year - References to years are to the fiscal years then ended.
Investment in Affiliated Companies - Investments in affiliates (33% to 50% owned) in which the Company exercises significant influence over operating and financial policies are accounted for on the equity method. Financial information for the Company's foreign affiliates is reported in the Company's consolidated financial statements with a one month lag in reporting periods. The effect of this one month lag on the Company's financial results is not significant.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated.
Use of Estimates in Preparing Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Transactions and Translation - The cash flows and financing activities of the Company's Mexican subsidiary are primarily denominated in the U.S. dollar. Accordingly, this subsidiary uses the U.S. dollar as its functional currency and translates monetary assets and liabilities at year-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for depreciation, certain cost of revenues and selling expenses. Gains or losses from changes in exchange rates are recognized in consolidated income in the year of occurrence.
Other foreign subsidiaries and affiliates use local currencies as their functional currency. Assets and liabilities have been translated to U.S. dollars at year-end exchange rates. Income and expense items have been translated at exchange rates which approximate the average of the rates prevailing during each
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
year. Translation adjustments are reported as a separate component of accumulated other comprehensive income (loss). As a result of the acquisition of an Australian company during 1998, (see Note 2), the Company has reflected substantial changes in the cumulative translation account during 1999 and 1998, primarily attributed to the devaluation of the Australian dollar.
Net foreign currency transaction gains and losses for 1999, 1998 and 1997 were not significant.
Revenue Recognition - Revenue is recognized on large, long-term contracts using the percentage of completion method based upon materials installed and labor costs incurred. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue is recognized on smaller, short-term contracts using the completed contract method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
Inventories - The Company values inventories at the lower of cost (first-in, first-out, including material, labor, and manufacturing overhead costs) or market (in thousands of dollars):
Property and Equipment and Related Depreciation - Property and equipment (including major renewals and improvements) are recorded at cost. Depreciation is provided using the straight-line method. Depreciation expense was $21,454,000, $15,123,000 and $10,974,000 for fiscal 1999, 1998 and 1997, respectively. The lives used for the more significant items within each property classification are as follows:
Intangible Assets - Intangible assets consist of goodwill related to acquisitions, purchased technical manuals and other assets which are being amortized over their estimated economic lives which range from thirty to thirty-five years. Amortization expense for intangible assets was $1,058,000, $626,000 and $116,000 for 1999, 1998 and 1997, respectively.
Investments - During 1999 and 1998, the Company, through its wholly owned subsidiary Layne Christensen Australia Pty Limited ("Layne Australia"), purchased common stock of a publicly traded company on the Australian Stock Exchange. The Company has classified this investment as available-for-sale. The
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
non-current investment has a cost basis of $3,538,000 and is reported at its fair value of approximately $1,708,000 at January 31, 1999. The gross unrealized loss of $1,830,000, net of taxes of $706,000 at January 31, 1999, has been recorded as a component of accumulated other comprehensive income (loss).
Impairment of Long-Lived Assets - At each balance sheet date, a determination is made by management as to whether the value of long-lived assets, including intangible assets and assets to be disposed of, has been impaired. The determination is based on several criteria, including, but not limited to, revenue trends, undiscounted operating cash flows and other operating factors.
Accrued Insurance Expense - Costs estimated to be incurred in the future for employee medical benefits and casualty insurance programs resulting from claims which have been incurred are accrued currently. Under the terms of the Company's agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies (see Note 10).
Fair Value of Financial Instruments - The carrying amounts of financial instruments including cash and cash equivalents, customer receivables and accounts payable approximate fair value at January 31, 1999 and 1998 because of the relatively short maturity of those instruments. Investments in equity securities are carried at quoted market values. See Note 8 for disclosure regarding the fair value of indebtedness of the Company.
Consolidated Statements of Cash Flows - Highly liquid investments with a remaining maturity of three months or less at the time of purchase are considered cash equivalents.
The amounts paid for income taxes and interest are as follows (in thousands of dollars):
Supplemental Noncash Transactions -- In 1999 and 1998, the Company issued 9,636 and 3,524 shares of common stock, respectively, and 21,504 and 15,727 stock options, respectively, related to 1998 and 1997 compensation awards. In 1997, the Company issued 31,622 shares of common stock to employees related to 1996 compensation awards. Total value of these awards was approximately $206,000, $113,000 and $339,000, respectively, which was accrued at January 31, 1998, 1997, and 1996, respectively.
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. See Note 5.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
Earnings Per Share - Earnings per common share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock are included based on the treasury stock method for dilutive earnings per share except when their effect is antidilutive.
Stock-Based Compensation - Stock-based compensation may be accounted for either based on the estimated fair value of the awards at the date they are granted (the "SFAS 123 Method") or based on the difference, if any, between the market price of the stock at the date of grant and the amount the employee must pay to acquire the stock (the "APB 25 Method"). The Company uses the APB 25 Method to account for its stock-based compensation programs (see Note 9). Pro forma net income for 1999, 1998 and 1997, determined as if the SFAS 123 Method had been applied, would have been $936,000, $11,204,000 and $7,842,000, respectively. Basic and diluted earnings per share would have been $0.08 for 1999, $1.11 and $1.06, respectively, for 1998 and $0.88 and $0.86, respectively, for 1997.
Comprehensive Income - Accumulated balances of Other Comprehensive Income are as follows (in thousands of dollars):
Reclassifications - Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation.
(2) Acquisitions
On March 26, 1998, the Company completed a transaction to purchase certain assets of Hydro Group, Inc., a New Jersey-based drilling contractor (the "Hydro Acquisition") for approximately $6,293,000 in cash. The acquisition has been accounted for using the purchase method of accounting and accordingly, the operations of Hydro Group, Inc. have been included from the date of acquisition. Had this acquisition taken place as of February 1, 1998, pro forma operating results would not have been significantly different from those reported.
On December 31, 1998, the Company also acquired certain assets of Colog Inc., a geophysical services company, based in Golden, Colorado, for approximately $800,000 in cash. The acquisition has been accounted for using the purchase method of accounting. Had this acquisition taken place as of February 1, 1998, pro forma operating results would not have been significantly different from those reported.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
On January 20, 1999, the Company acquired the outstanding stock of Tecniwell S.r.l., a manufacturer of pumps and accessories used in the geotechnical construction industry, based in Podenzano, Italy, for approximately $1,285,000 in cash and a contingent payment of $500,000. The contingent payment will be held by the Company in escrow for a period of five years from the date of the acquisition to provide security to the Company for the accuracy and performance of certain covenants guaranteed by the acquired company. The payment will be made at the end of the contingency period in common stock of the Company. The contingent stock was valued at $9.85 per share, the average trading price for the ten trading days immediately preceding the acquisition. The acquisition has been accounted for using the purchase method of accounting. Had this acquisition taken place as of February 1, 1998, pro forma operating results would not have been significantly different from those reported.
The above fiscal 1999 acquisitions had the following effect on the Company's 1999 consolidated financial position (in thousands of dollars):
On May 20, 1997, the Company, through its wholly owned subsidiary Layne Christensen Australia Pty Limited ("Layne Australia"), made a tender offer to the security holders of Stanley Mining Services Limited ("Stanley"), a company listed on the Australian Stock Exchange (the "Stanley Acquisition"). Stanley is an Australian mineral exploration drilling company that provides services predominantly to gold mining companies in Australia and Africa. As of October 1, 1996, Stanley purchased 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. The remaining 49% of G&K was acquired by Stanley as of July 1, 1997 for a purchase price of $7,814,000. The purchase price was paid on September 5, 1997.
The Stanley Acquisition was substantially consummated on July 25, 1997 for a purchase price of approximately $50,070,000 consisting of a cash purchase price for the tender offer of $48,337,000 and $1,733,000 of transaction costs. The Company also assumed approximately $12,523,000 of Stanley's existing indebtedness. The Company accounted for the acquisition using the purchase method of accounting. Stanley has been reflected in the Company's results of operations beginning August 1, 1997. The purchase price has been allocated based on fair values of assets and liabilities as of July 31, 1997. On August 19, 1997, the Company completed the sale of 2,756,565 shares of Common Stock in a public offering. Net proceeds to the Company from the offering of approximately $43,510,000 were used to reduce the debt incurred under the Credit Agreement in connection with the Stanley Acquisition.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company as if the acquisitions of Stanley and G&K and the stock offering had occurred at the beginning of fiscal year 1997, with pro forma adjustments to give effect to interest expense on acquisition debt, amortization of goodwill and certain other adjustments, together with related income tax effects:
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of February 1, 1997, nor are they necessarily indicative of future operating results.
In July 1997, the Company also acquired the outstanding stock of Stamm- Scheele, Inc., ("Stamm-Scheele") a water well drilling and maintenance company in Louisiana, for approximately $2,574,000 in cash. The acquisition has been accounted for using the purchase method of accounting. Had this acquisition taken place as of February 1, 1997, pro forma operating results would not have been significantly different from those reported.
In October 1997, the Company also acquired certain assets of Afridrill Limited, a mineral exploration company located in East Africa, for approximately $3,700,000 in cash and certain contingent future payments of approximately $684,000. The acquisition has been accounted for using the purchase method of accounting. Had this acquisition taken place as of February 1, 1997, pro forma operating results would not have been significantly different from those reported.
The above fiscal 1998 acquisitions had the following effect on the Company's fiscal 1998 consolidated financial position (in thousands of dollars):
(3) Investments in Foreign Affiliates
The Company's investments in foreign affiliates are carried at the Company's equity in the underlying net assets plus an additional $4,753,000 as a result of purchase accounting. This additional amount is being amortized over the remaining useful lives of the applicable underlying assets ranging from 20 to 35 years. Accumulated amortization at January 31, 1999 and 1998, was $389,000 and $259,000, respectively. These affiliates, which generally are engaged in
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
mineral exploration drilling and the manufacture and supply of drilling equipment, parts and supplies, are as follows:
Financial information from foreign affiliates is reported with a one month lag in the reporting period. Summarized financial information of the Company's foreign affiliates, as of January 31, 1999, 1998 and 1997 and for the years then ended were as follows (in thousands of dollars):
The Company has transactions and balances with foreign affiliates which resulted in the following amounts being included in the consolidated financial statements as of January 31, 1999, 1998 and 1997 and for the years then ended (in thousands of dollars):
Undistributed equity in earnings of foreign affiliates totaled $4,447,000, $4,171,000 and $1,905,000 as of January 31, 1999, 1998 and 1997, respectively.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
(4) Costs and Estimated Earnings on Uncompleted Contracts (in thousands of dollars):
The Company generally does not bill contract retainage amounts until the contract is completed. The Company bills its customers based on specific contract terms. Substantially all billed amounts are collectible within one year.
(5) Income Taxes
Income before income taxes is as follows (in thousands of dollars):
Components of the income tax expense are (in thousands of dollars):
Deferred income taxes result from temporary differences between the financial statement and tax bases of the Company's assets and liabilities. The sources of these differences and their cumulative tax effects are (in thousands of dollars):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
For federal income tax purposes, the Company has a net operating loss carryforward of $837,000 relating to a company acquired in fiscal 1996 which is subject to certain restrictions, and expires in fiscal 2010.
The Company has several Australian subsidiaries which have tax loss carryforwards totaling $5,000,000 at January 31, 1999. There are no restrictions on the utilization of the loss and the carryforward period is indefinite. The Company's subsidiary in Mexico has a $200,000 loss carryforward. These losses can be carried forward for five years.
At January 31, 1999, undistributed earnings of foreign subsidiaries and foreign affiliates included $14,900,000 for which no U.S. Federal income and foreign withholding taxes have been provided as foreign tax credits should become available under current tax law to significantly reduce or eliminate the resulting U.S. income tax liability.
A reconciliation of the total income tax expense to the statutory federal rate is as follows (in thousands of dollars):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
(6) Leases
Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year from January 31, 1999 are as follows (in thousands of dollars):
Operating leases are primarily for automobiles, small trucks and office and shop facilities. Rent expense under operating leases (including insignificant amounts of contingent rental payments) was $5,742,000, $4,605,000 and $5,010,000, in 1999, 1998 and 1997, respectively.
(7) Employee Benefit Plans
The Company sponsors a pension plan covering certain hourly employees not covered by union-sponsored, multi-employer plans. Benefits are computed based mainly on years of service. The Company makes annual contributions to the plan substantially equal to the amounts required to maintain the qualified status of the plans. Contributions are intended to provide for benefits related to past and current service with the Company. Assets of the plan consist primarily of stocks, bonds and government securities.
The following table sets forth the plan's funded status as of December 31, 1998 and 1997 (the measurement dates) and the amounts recognized in the Company's balance sheets at January 31, 1999 and 1998 (in thousands of dollars):
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
Amounts recognized in the Company's balance sheets at January 31, 1999 and 1998 (in thousands of dollars) consist of:
Net periodic pension cost for 1999, 1998 and 1997 includes the following components (in thousands of dollars):
The Company has recognized the full amount of its actuarially determined pension liability and the related intangible asset. The unrecognized pension cost has been recorded as a charge to stockholders' equity after giving effect to the related future tax benefit.
The projected benefit obligation for 1999, 1998 and 1997 was computed using a discount rate of 6.75%, 7.25% and 7.50%, respectively, and an estimated long-term rate of return on assets of 8.75%. Benefit level assumptions for 1999, 1998 and 1997 are based on fixed amounts per year of credited service.
The Company also participates in a number of defined benefit, multi-employer plans. These plans are union-sponsored, and the Company makes contributions equal
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
to the amounts accrued for pension expense. Total union pension expense for these plans was $683,000, $646,000 and $638,000 in 1999, 1998 and 1997, respectively. Information regarding assets and accumulated benefits of these plans has not been made available to the Company.
The Company's salaried and certain hourly employees participate in Company-sponsored, defined contribution plans. Company contributions are determined annually at the discretion of the Board of Directors of the Company. Total expense for the Company's portion of these plans was $808,000, $1,349,000 and $1,264,000 in 1999, 1998 and 1997, respectively. The Company reserves the right to amend or terminate the plans, but the Company cannot recover contributions already paid.
(8) Indebtedness
During July 1997, contemporaneously with the consummation of the Stanley Acquisition (see Note 2), the Company amended its existing credit agreement to provide a $100,000,000 reducing revolving credit facility ("Credit Agreement"), less any outstanding letter of credit commitments ($20,000,000 sublimit). As of January 31, 1999, the commitment under the Credit Agreement had been reduced to $93,000,000. The Credit Agreement was used to finance the Stanley Acquisition and refinance the Company's existing indebtedness under a $30,000,000 credit facility, and is available for working capital and capital expenditures and for other general corporate purposes. During May, 1998, the Company entered into an interest rate swap agreement (the "Swap Agreement") with Bank of America National Trust and Savings Association. The Swap Agreement, which effectively fixes the interest rate at 5.965%, plus the margin (currently .5%) as defined in the Company's credit agreement, on $25,000,000 of the Company's outstanding indebtedness under its credit agreement, calls for quarterly interest payments which commenced on August 15, 1998. The Swap Agreement will terminate in May, 2002. As of January 31, 1999, letters of credit in an aggregate amount of $4,591,000 had been issued on behalf of the Company. The Credit Agreement will terminate in July 2002 and any borrowings thereunder will mature at that time. Layne Australia is eligible to draw down up to $30,000,000 under the Credit Agreement. The Credit Agreement provides for guarantees by certain of the Company's domestic subsidiaries and contains certain covenants including restrictions on the incurrence of additional indebtedness and liens, sale of assets or other dispositions, transactions with affiliates, mandatory prepayments based on the proceeds from the sale of assets and debt and equity securities and certain financial maintenance covenants, including among others, minimum interest coverage and maximum leverage ratios. The Credit Agreement provides for interest at variable rates equal to (I) for loans in Australian dollars, an Australian Bill rate plus .50% to .875% (depending upon debt to capitalization ratios) or (ii) for loans in United States dollars, at the Company's option, a Eurodollar rate plus .50% to .875% (depending upon debt to capitalization ratios) or an alternate reference rate as defined in the Credit Agreement. As of January 31, 1999, outstanding borrowings under the Credit Agreement were $38,500,000, at an average interest rate of 6.135%. The variable interest rates on the outstanding balance approximate the current market rates.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
Maximum borrowings outstanding under the Company's then existing credit agreements during 1999, 1998 and 1997 were $49,000,000, $58,000,000 and $7,500,000, respectively, and the average outstanding borrowings were $42,458,000, $21,250,000 and $4,875,000, respectively. The weighted average interest rates were 7.0%, 7.3% and 7.5%, respectively.
During March, 1996, the Company completed the private placement of an unsecured note agreement (subsequently amended) for $25,000,000 ("Senior Notes"). The Senior Notes bear a fixed interest rate of 6.75% and will be due March 15, 2006 with annual installments of $3,571,000 beginning March 15, 2000. As of January 31, 1999 and 1998, such interest rate approximates market for similar securities. Financial guarantees and covenants are similar to those in the Credit Agreement.
Loan costs incurred in securing long-term financing are amortized over the term of the respective loan agreement. Amortization of these costs for 1999, 1998 and 1997 was $252,000, $180,000 and $171,000, respectively. Amortization of loan costs is included in interest expense in the statements of income.
Long-term debt is as follows (in thousands of dollars):
As of January 31, 1999, long-term debt will mature as follows (in thousands of dollars):
(9) Stock and Stock Option Plans
In October 1998, the Company adopted a Rights Agreement whereby the Company has authorized and declared a dividend of one preferred share purchase right ("Right") for each outstanding common share of the Company. Subject to limited exceptions, the Rights are exercisable if a person or group acquires or announces a tender offer for 25% or more of the Company's common stock. Each right will entitle shareholders to buy one one-hundredth of a share of a newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $45.00. The Company is entitled to redeem the Right at $.01 per Right at any time before a person has acquired 25% or more of the Company's outstanding common stock. The Rights expire 10 years from the date of grant.
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
The Company has reserved 500,000 shares of common stock for issuance under Employee Incentive Compensation Plans. Issuance of shares under the Plans is based on performance as determined annually by a committee appointed by the Company's Board of Directors. During 1999, 1998 and 1997, 9,636, 3,524 and 31,622 shares, respectively, were issued at $13.72, $15.20 and $10.75 per share, respectively.
The Company also has two stock option plans which provide for the granting of options to purchase up to an aggregate of 2,000,000 shares of Common Stock at a price fixed by the Board of Directors or a committee.
Significant option groups outstanding at January 31, 1999 and related weighted average price and life information follows:
All options were granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The weighted average fair value at the date of grant for options granted during fiscal year 1999, 1998 and 1997 were $5.43, $8.02 and $6.98 per option, respectively. The options generally have a ten year term from the date of grant and vest ratably over five years. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
(10) Contingencies
The Company's drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when the Company, as is frequently the case, conducts a project on a fixed-price, "turnkey" basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its provision of services and products. 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 or business interruption insurance with respect to its foreign operations.
The Company is involved in various matters of litigation, claims and disputes which have arisen in the ordinary course of the Company's business. While the resolution of any of these matters may have an impact on the financial results for the period in which the matter is resolved, the Company believes that the ultimate disposition of these matters will not, in the aggregate, have a
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
material adverse effect upon its business or consolidated financial position, results of operations or cash flows.
(11) Operating Segments and Foreign Operations
The Company is a multi-national company operating predominantly in two operating segments. The first operating segment includes the Company's drilling operations with wholly owned operations in the United States, Australia, East Africa, Mexico, Canada, Indonesia and Thailand, as well as a 50% owned joint venture in West Africa, which are consolidated into the Company's January 31, 1999 financial statements. The drilling operation segment derives its revenues from water well drilling and maintenance, mineral exploration drilling, geotechnical drilling and environmental drilling and services. The second operating segment includes the manufacturing and supply of drilling equipment, parts and supplies. The manufacturing and supply operations are primarily in the United States. Refer to Note 3 for information on other foreign investments.
Revenues, operating income, total assets, capital expenditures and depreciation and amortization pertaining to the Company's operating segments are presented below (in thousands of dollars). Total revenues of foreign subsidiaries are those revenues related to the operations of those subsidiaries. Intersegment sales are accounted for based on the estimated fair market value of the products sold. In computing operating income for foreign subsidiaries, no allocations of general corporate expenses have been made. Total assets of foreign subsidiaries are those assets related to the operations of those subsidiaries, including goodwill associated with the Stanley Acquisition. Corporate assets are all assets of the Company not directly associated with an operating segment, and consist primarily of cash, deferred income taxes and investments in foreign affiliates (see Note 3).
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
Layne Christensen Company and Subsidiaries Notes to Consolidated Financial Statements For the Years Ended January 31, 1999, 1998 and 1997
Of the Manufacturing and Supply sales to unaffiliated customers, approximately $3,909,000, $9,581,000 and 10,023,000 in 1999, 1998 and 1997, respectively, were export sales, principally to Latin and South America.
(12) Quarterly Results (Unaudited)
Unaudited quarterly financial data is as follows (see Note 2 regarding the Stanley acquisition) (thousands of dollars, except per share data):
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SCHEDULE II
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS OF DOLLARS)
(a) Represents reserves recorded in connection with dissolution of an investment in a domestic affiliate. See Note 12 to the Consolidated Financial Statements.
(b) Represents reserves recorded in connection with various acquisitions. See Note 2 to the Consolidated Financial Statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 27, 1999, (I) contains, under the caption "Election of Directors," certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference (except that the information set forth under the following subcaptions thereunder is expressly excluded from such incorporation: "Compensation of Directors" and "Meetings of the Board and Committees"), and (ii) contains, under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," certain information required by Item 10 of Form 10-K and such information is incorporated herein by this reference. The information required by Item 10 of Form 10-K as to executive officers is set forth in Item 4A of Part I hereof.
Item 11.
Item 11. Executive Compensation
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held May 27, 1999, contains, under the caption "Executive Compensation and Other Information," the information required by Item 11 of Form 10-K and such information is incorporated herein by this reference (except that the information set forth under the following subcaptions is expressly excluded from such incorporation: "Report of Board of Directors and Compensation Committee on Executive Compensation" and "Company Performance").
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 27, 1999, contains, under the caption "Ownership of Layne Christensen Common Stock," the information required by Item 12 of Form 10-K and such information is incorporated herein by this reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Registrant's Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on May 27, 1999, contains, under the caption "Executive Compensation and Other Information-Certain Change-In-Control Agreements," the information required by Item 13 of Form 10-K and such information is incorporated herein by this reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements:
The financial statements are listed in the index for Item 8 of this Form 10-K.
2. Financial Statement Schedules:
The financial statement schedules are listed in the index for Item 8 of this Form 10-K.
3. Exhibits:
The exhibits filed with or incorporated by reference in this report are listed below:
Exhibit No. Description
4(1) - Restated Certificate of Incorporation of the Registrant (filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 3(1) and incorporated herein by this reference)
4(2) - Bylaws of the Registrant (filed with Amendment No. 2 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 3(2) and incorporated herein by reference)
4(3) - Specimen Common Stock Certificate (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 4(1) and incorporated herein by reference)
4(4) - Amended and Restated Credit Agreement, dated as of July 25, 1997, among the Company, Layne Christensen Australia Pty Limited, National Trust and Savings Association, various financial institutions, Bank of America, as Letter of Credit Issuer, and Bank of America National Trust and Savings Association, as Agent ("Credit Agreement") (filed with Amendment No. 3 to the Company's Form S-2 Registration Statement (File No. 333-29581) as Exhibit 10(12) and incorporated herein by this reference)
4(4.1) - First Amendment to the Credit Agreement dated December 5, 1997
4(4.2) - Second Amendment to the Credit Agreement dated February 23, 1998
4(4.3) - Third Amendment to the Credit Agreement dated October 16, 1998
4(5) - Note Agreement dated as of March 15, 1996, between the Company and Massachusetts Mutual Life Insurance Company ("Purchaser") for the issuance and sale to Purchaser of $25,000,000 aggregate principal amount of 6.75% Senior Notes due March 15, 2006 (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(14) and incorporated herein by this reference)
4(6) - Amendment to Note Agreement, dated as of July 25, 1997, between the Company and Massachusetts Mutual Life Insurance Company (filed with Amendment No. 3 to the Company's Form S-2 Registration Statement (File No. 333-29581) as Exhibit 10(14) and incorporated herein by this reference)
4(7) - Rights Agreement, dated October 12, 1998, between Layne Christensen Company and National City Bank, which includes the Form of Certificate of Designations of Series A Junior Participating Preferred Stock of Layne Christensen Company as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C. (Filed with the Company's Form 8-K dated October 12, 1998 (File No. 0-20578) as Exhibit 4(1) and incorporated herein by reference.
10(1) - Tax Liability Indemnification Agreement between the Registrant and The Marley Company (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(2) and incorporated herein by reference)
10(2) - Lease Agreement between the Registrant and Parkway Partners, L.L.C. dated December 21, 1994 (filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995 (File No. 0-20578) as Exhibit 10(2) and incorporated herein by reference)
10(2.1) - First Modification & Ratification of Lease, dated as of February 26, 1996, between Parkway Partners, L.L.C. and the Registrant (filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(2.1) and incorporated herein by this reference)
10(2.2) - Second Modification and Ratification of Lease Agreement between Parkway Partners, L.L.C. and Layne Christensen Company dated April 28, 1997
10(2.3) - Third Modification and Extension Agreement between Parkway Partners, L.L.C. and Layne Christensen Company dated November 3, 1998 (filed with the Company's 10-Q for the quarter ended October 31, 1998 (File No. 0-20578) as Exhibit 10(1) and incorporated herein by reference)
**10(3) - Form of The Layne Capital Accumulation Plan and Trust Agreement (filed with the Registrant's Registration Statement (File No.
33-48432) as Exhibit 10(5) and incorporated herein by reference)
**10(4) - Layne, Inc. 1992 Stock Option Plan (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(6) and incorporated herein by reference)
**10(5) - Form of Stock Option Agreement between the Company and management of the Company (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(7) and incorporated herein by reference)
**10(6) - Form of Non Qualified Stock Option Agreement (Spin-Off Options) between the Company and Robert J. Dineen (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432)as Exhibit 10(9) and incorporated herein by reference)
10(7) - Insurance Liability Indemnity Agreement between the Company and The Marley Company (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(10) and incorporated herein by reference)
**10(8) - Form of the Layne, Inc. Executive Incentive Compensation Plan (filed with the Registrant's Form 10-Q for the quarterly period ended July 31, 1994 (File No. 33-48432) as Exhibit 10(2) and incorporated herein by reference)
10(9) - Agreement between The Marley Company and the Company relating to tradename (filed with the Registrant's Registration Statement (File No.33-48432) as Exhibit 10(10) and incorporated herein by reference)
**10(10) - Form of Subscription Agreement for management of the Company (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(16) and incorporated herein by reference)
**10(11) - Form of Subscription Agreement between the Company and Robert J. Dineen (filed with Amendment No. 3 to the Registrant's Registration Statement (File No. 33-48432) as Exhibit 10(17)and incorporated herein by reference)
10(12) - Amended and Restated Credit Agreement, dated as of July 25, 1997, among the Company, Layne Christensen Australia Pty Limited, National Trust and Savings Association, various financial institutions, Bank of America, as Letter of Credit Issuer, and Bank of America National Trust and Savings Association, as Agent ("Credit Agreement") (filed with Amendment No. 3 to the Company's Form S-2 Registration Statement (File No. 333-29581) as Exhibit 10(12) and incorporated herein by this reference)
10(12.1) - First Amendment to the Credit Agreement dated December 5, 1997
10(12.2) - Second Amendment to the Credit Agreement dated February 23, 1998
10(12.3) - Third Amendment to the Credit Agreement dated October 16, 1998
**10(13) - Letter Agreement between Andrew B. Schmitt and the Company dated October 12, 1993 (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1995 (File No. 0-20578) as Exhibit 10(13) and incorporated herein by reference)
10(14) - Note Agreement dated as of March 15, 1996, between the Company and Massachusetts Mutual Life Insurance Company ("Purchaser") for the issuance and sale to Purchaser of $25,000,000 aggregate principal amount of 6.75% Senior Notes due March 15, 2006 (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(14) and incorporated herein by this reference)
10(15) - Amendment to Note Agreement, dated as of July 25, 1997, between the Company and Massachusetts Mutual Life Insurance Company (filed with Amendment No. 3 to the Company's Form S-2 Registration Statement (File No. 333-29581) as Exhibit 10(14) and incorporated herein by this reference)
**10(16) - Form of Incentive Stock Option Agreement between the Company and management of the Company (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(15) and incorporated herein by this reference)
10(17) - Registration Rights Agreement, dated as of November 30, 1995, between the Company and Marley Holdings, L.P. (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(17) and incorporated herein by this reference)
10(18) - Stockholders Agreement, dated as of December 28, 1995, among the Company, Marley Holdings, L.P., Greylock Investments Limited Partnership and certain other stockholders of the Registrant identified therein (filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1996 (File No. 0-20578), as Exhibit 10(18) and incorporated herein by this reference)
**10(19) - Form of Stock Option Agreement between the Company and Management of the Company effective February 1, 1998 (filed with the Company's Form 10-Q for the quarter ended April 30, 1998 (File No. 0-20578) as Exhibit 10(1) and incorporated herein by reference)
10(20) - Letter agreement between the Company and Bank of America National Trust and Savings Association dated May 8, 1998, confirming the terms and conditions of an interest rate swap agreement (filed with the Company's Form 10-Q for the quarter
ended July 31, 1998 (File No. 0-20578) as Exhibit 10(1) and incorporated herein by reference)
11(1) - Statement regarding Computation of per share earnings
22(1) - List of Subsidiaries
23(1) - Consent of Deloitte & Touche LLP
27(1) - Financial Data Schedule
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** Management contracts or compensatory plans or arrangements required to be identified by Item 14(a)(3).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the last quarter of the fiscal year ended January 31, 1999.
(c) Exhibits
The exhibits filed with this report on Form 10-K are identified above under Item 14(a)(3).
(d) Financial Statement Schedules
None required.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAYNE CHRISTENSEN COMPANY
By /s/Andrew B. Schmitt ---------------------------- Andrew B. Schmitt President and Dated: April 23, 1999 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Exhibit Index
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