LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

																						Total Layne
																		Accumulated				Christensen
										Capital In								Other				Company
		Common Stock								Excess of				Retained				Comprehensive				Stockholders'				Noncontrolling
(in thousands, except per share data)		Shares				Amount				Par Value				Earnings				Income (Loss)				Equity				Interest				Total
Balance February 1, 2012			19,699,272			$	197			$	351,057			$	103,634			$	(6,223	)		$	448,665			$	3,216			$	451,881
Net income			-				-				-				3,749				-				3,749				242				3,991
Other comprehensive income			-				-				-				-				496				496				-				496
Issuance of nonvested shares			94,481				1				(1	)			-				-				-				-				-
Income tax deficiency on forfeiture
of options			-				-				(165	)			-				-				(165	)			-				(165	)
Acquisition of noncontrolling interest			-				-				(2,656	)			-				-				(2,656	)			(87	)			(2,743	)
Share-based compensation			-				-				1,436				-				-				1,436				-				1,436
Balance April 30, 2012			19,793,753			$	198			$	349,671			$	107,383			$	(5,727	)		$	451,525			$	3,371			$	454,896
Balance February 1, 2013			19,818,376			$	198			$	352,048			$	66,983			$	(6,492	)		$	412,737			$	2,334			$	415,071
Net income (loss)			-				-				-				(23,779	)			-				(23,779	)			69				(23,710	)
Other comprehensive income (loss)			-				-				-				-				261				261								261
Distributions to noncontrolling interests			-				-				-				-				-								(1,600	)			(1,600	)
Foreign Currency Translation			-				-				-				-				-				-				-				-
Issuance of nonvested shares			4,744				-				-				-				-				-				-				-
Issuance of stock upon exercise			8,939				-				(53	)			-				-				(53	)			-				(53	)
Cancellation of stock options issued			(8,099	)			-				-				-				-				-				-				-
Income tax deficiency on forfeiture of options			-				-				(13	)			-				-				(13	)			-				(13	)
Share-based compensation			-				-				1,190				-				-				1,190				-				1,190
Balance April 30, 2013			19,823,960			$	198			$	353,172			$	43,204			$	(6,231	)		$	390,343			$	803			$	391,146

See Notes to Consolidated Financial Statements.

 

 

 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

Other Long-lived Assets - Long-lived assets, including amortizable intangible assets, are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include but are not limited to the following:

 

●

significant underperformance of our assets;

 

●

significant changes in the use of the assets; and

 

●

significant negative industry or economic trends.

 

The Company believes at this time that the carrying values and useful lives of its long-lived assets continue to be appropriate.

 

Cash and Cash Equivalents   - The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents. The Company’s cash equivalents are subject to potential credit risk. The Company’s cash management and investment policies restrict investments to investment grade, highly liquid securities. The carrying value of cash and cash equivalents approximates fair value.

 

Allowance for Uncollectible Accounts Receivable - The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and also considers a review of accounts receivable aging, industry trends, customer financial strength, credit standing and payment history to assess the probability of collection.

The Company does not establish an allowance for credit losses on long-term contract unbilled receivables. Adjustments to unbilled receivables related to credit quality, if they occur, are accounted for as a reduction of revenue.

 

Accrued Insurance Expense - The Company maintains insurance programs where it is responsible for a certain amount of each claim up to a self-insured limit. Estimates are recorded for health and welfare, property and casualty insurance costs that are associated with these programs. These costs are estimated based in part on actuarially determined projections of future payments under these programs. Should a greater amount of claims occur compared to what was estimated or costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.

Costs estimated to be incurred in the future for employee medical benefits, property, workers’ compensation and casualty insurance programs resulting from claims which have occurred are accrued currently. Under the terms of the 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.

 

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 April 30, 2013 and January 31, 2013, because of the relatively short maturity of those instruments. See Note 4 for disclosure regarding the fair value of indebtedness of the Company and Note 7 for other fair value disclosures.

 

Litigation and Other Contingencies - The Company is involved in litigation incidental to its business, the disposition of which is not expected to have a material effect on the Company’s business, financial position, results of operations or cash flows. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions related to these proceedings. The Company records a liability when it is both probable that a liability has been incurred and a minimum amount of loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. To the extent additional information arises or the Company’s strategies change, it is possible that the Company’s estimate of its probable liability in these matters may change.

 

Derivatives - The Company periodically enters into hedge contracts, which are recorded at fair value, related to certain forecasted foreign currency costs which are accounted for as cash flow hedges, such that changes in fair value for the effective portion of hedge contracts are recorded in accumulated other comprehensive income (loss) in stockholders’ equity, until the hedged item is recognized in operations. The ineffective portion of the derivatives’ change in fair value, if any, is immediately recognized in operations. The Company does not enter into derivative financial instruments for speculative or trading purposes.

 

Unearned compensation expense associated with the issuance of nonvested shares is amortized on a straight-line basis as the restrictions on the stock expire, subject to achievement of certain contingencies.

 

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 basis of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and affiliates is made only on those amounts in excess of funds considered to be invested indefinitely. In general, the Company records income tax expense during interim periods based on its best estimate of the full year’s effective tax rate. However, income tax expense relating to adjustments to the Company’s liabilities for uncertainty in income tax positions is accounted for discretely in the interim period in which it occurs.        

        The Company’s estimate of uncertainty in income taxes is based on the framework established in the accounting for income taxes guidance. This guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. For tax positions that meet this recognition threshold, the Company applies judgement, taking into account applicable tax laws and experience in managing tax audits and relevant accounting guidance, to determine the amount of tax benefits to recognize in the financial statements. For each position, the difference between the benefit realized on our tax return and the benefit reflected in the financial statements is recorded as a liability in the consolidated balance sheet. This liability is updated at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, develoments in tax law and ongoing issues with taxing authorities.

 

Earnings Per Share - Earnings per share are based upon the weighted average number of common and dilutive equivalent shares outstanding.  Options to purchase common stock and nonvested shares are included based on the treasury stock method for dilutive earnings per share, except when their effect is antidilutive. Options to purchase 1,470,940 and 833,736 shares have been excluded from weighted average shares in the periods ending April 30, 2013 and 2012, respectively, as their effect was antidilutive. A total of 272,311 and 321,400 nonvested shares have been excluded from weighted average shares in the periods ended April 30, 2013 and 2012, respectively, as their effect was antidilutive.

 

Supplemental Cash Flow Information - The amounts paid for income taxes, interest and noncash investing activities were as follows:

 

New Accounting Pronouncements – In January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities”, is effective for fiscal years beginning on or after January 1, 2013. This limits the scope of offsetting disclosures to recognized derivative instruments accounted for in accordance with ASC 815. Adoption of this pronouncement did not have an impact on the consolidated financial statements.

On February 5, 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, which is effective for fiscal years (and interim periods within those years) beginning after December 15, 2012. This requires the Company to present information about significant items reclassified out of Accumulated Other Comprehensive Income (AOCI) either on the face of the income statement , as well as additional disclosures on changes in AOCI by component or as a separate disclosure in the notes to the financial statements. Adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In July, 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”, which is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. This guidance permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 250-30, Intangibles-Goodwill and Other-General Intangibles Other than Goodwill. The more-likely than-not threshold is defined as having a likelihood of more than 50 percent. If the Company determines that it is not more likely than not that the asset is impaired, the Company will have an option not to calculate annually the fair value of an indefinite-lived intangible asset.  The adoption of this pronouncement did not have a significant impact on the Company’s consolidated financial statements.

 

2.  Acquisitions

 

Fiscal Year 2013

 

On March 5, 2012, the Company acquired the remaining shares in Layne do Brazil, which were previously held by noncontrolling interests. The shares were acquired for cash payments totaling $2,743,000. In conjunction with the acquisition, the Company eliminated noncontrolling interests of $87,000 and recorded an adjustment to equity of $2,656,000 in accordance with ASC Topic 810, “Consolidation”.

3.  Goodwill and Other Intangible Assets

 

(in thousands)		Water Resources				Inliner				Heavy Civil				Geoconstruction				Mineral Exploration				Energy Services				Total
Balance February 1, 2013		$	-			$	8,915			$	-			$	14,646			$	-			$	-			$	23,561
Additions			-				-				-				-				-				-				-
Balance April 30, 2013		$	-			$	8,915			$	-			$	14,646			$	-			$	-			$	23,561

Other intangible assets consist of the following:

 

Total amortization expense for other intangible assets was $ 460,000 and $712,000 for the three months ended April 30, 2013 and 2012, respectively.

 

         The Company maintains a $300,000,000 revolving credit facility (the “Credit Agreement”) which extends to March 25, 2016. During fiscal 2012, the Company funded $1,716,000 of debt issuance costs through borrowings under its Credit Agreement. These costs are being amortized over the life of the agreement.

The Credit Agreement provides for interest at variable rates equal to, at the Company’s option, a LIBOR rate plus 1.25% to 2.50%, or a base rate as defined in the Credit Agreement, plus up to 1.25%, each depending on the Company’s leverage ratio. On April 30, 2013, there were letters of credit of $ 24,298,000 and borrowings of $ 84,500,000 outstanding on the Credit Agreement resulting in available capacity of $ 191,202,000 .

The Credit Agreement contains certain covenants including restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions, transfer or sale of assets, transactions with affiliates,and payment of dividends. These provisions generally allow such activity to occur, subject to specific limitations and continued compliance with financial maintenance covenants. Significant financial maintenance covenants are a fixed charge coverage ratio and a maximum leverage ratio. The financial covenants are based on defined terms included in the Credit Agreement, such as adjusted EBITDA and adjusted EBITDAR. Compliance with the financial covenants is required on a quarterly basis, using the most recent four fiscal quarters.  Adjusted EBITDA is generally defined as consolidated net income excluding discontinued operations, net interest expense, provision for income taxes, gains or losses from extraordinary items, gains or losses from the sale of capital assets, non-cash items including depreciation and amortization, and share-based compensation. Equity in earnings of affiliates is included only to the extent of dividends or distributions received. Adjusted EBITDAR is defined as adjusted EBITDA, plus rent expense. All of these measures are considered non-GAAP financial measures and are not intended to be in accordance with accounting principles generally accepted in the United States.

    The Company’s minimum fixed charge coverage ratio covenant is the ratio of adjusted EBITDAR to the sum of fixed charges.  Fixed charges consist of rent expense, interest expense, and principal payments of long-term debt. The Company’s leverage ratio covenant is the ratio of total funded indebtedness to adjusted EBITDA. Total funded indebtedness generally consists of outstanding debt, capital leases, asset retirement obligations and escrow liabilities.

    As of April 30, 2013 and 2012, the Company’s actual and required covenant levels under the Credit Agreement were as follows:

 

In connection with the amendment, the Company and its domestic subsidiaries granted liens on substantially all of their assets, subject to certain exceptions, including a pledge of up to 65% of the equity interests in their first-tier foreign subsidiaries, to secure the Company’s obligations under the Credit Agreement. The term of the agreement was not changed.

Prior to the amendment of the Credit Agreement, the Company also maintained a private shelf agreement whereby it could issue $150 ,000,000 of unsecured notes before July 8, 2021. In connection with the amendment to the Credit Agreement, the shelf agreement was terminated. There were no outstanding notes at the time of termination.

 

5.  Other Income, Net

 

Other income, net consisted of the following for the three months ended April 30, 2013 and 2012:

		Three Months
		Ended April 30,
(in thousands)		2013				2012
Gains from disposal of property and equipment		$	3,373			$	347
Interest income			28				50
Currency exchange (loss) gain			(78	)			586
Other			428				127
Total		$	3,751			$	1,110

 

 

7.  Fair Value Measurements

 

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in the valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The three levels of inputs used to measure fair value are listed below:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets. 

 

Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.

 

The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s financial instruments held at fair value are presented below as of April 30, 2013 and January 31, 2013:

 

(1)

The fair value of the contingent earnout of acquired businesses is determined using a mark-to-market modeling technique based on significant unobservable inputs calculated using a discounted future cash flows approach.   The contingent earnout is associated with an acquisition that took place in fiscal 2011. The potential earnout period ends in July 2015. Key assumptions include a discount rate of 41.2% and annual revenues of acquired businesses ranging from $1,500,000 to $6,100,000 over the life of the earnout.  On July 31, 2012, the contingent earnout was reassessed and, based on our estimates of the likelihood of future revenues subject to the earnout provisions, assigned no value.  Our conclusions have not changed since that time.

 

8.  Stock and Stock Option Plans

 

The Company has stock option and employee incentive plans that provide for the granting of options to purchase or the issuance of shares of common stock at a price fixed by the Board of Directors or a committee. As of April 30, 2013, there were 359,394 shares which remain available to be granted under the plans as stock options. The Company has the ability to issue shares under the plans either from new issuances or from treasury, although it has previously always issued new shares and expects to continue to issue new shares in the future. For the three months ended April 30, 2013, the Company granted 4,744 nonvested shares which, in general, ratably vest over periods of one to four years from the grant date. The current quarter grants consist of both service based awards and market based awards.

The Company recognized $1,190,000 and $1,436,000 of compensation cost for these share-based plans during the three months ended April 30, 2013 and 2012, respectively. Of these amounts, $365,000 and $459,000, respectively, related to nonvested stock. The total income tax benefit recognized for share-based compensation arrangements was $464,000 and $560,000 for the three months ended April 30, 2013 and 2012, respectively.

A summary of nonvested share activity for the three months ended April 30, 2013, is as follows:

 

 

Significant stock option groups outstanding at April 30, 2013, related exercise price and remaining contractual term were as follows: