Layne Christensen Company (LAYN)

 

Reserve Estimates> - The Company’s estimates of natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of gas that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing natural gas prices, future operating costs, severance, ad valorem and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected there from may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of the Company’s oil and gas properties and the rate of depletion of the oil and gas properties. Actual production, revenues and expenditures with respect to the Company’s reserves will likely vary from estimates, and such variances may be material.

Goodwill> - The Company’s impairment evaluation for goodwill is conducted annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. The Company believes at this time that the carrying value of the remaining goodwill is appropriate, although to the extent additional information arises or the Company’s strategies change, it is possible that the Company’s conclusions regarding impairment of the remaining goodwill could change and result in a material effect on its financial position and results of operations.

Intangible Assets> - Other intangible assets primarily consist of trademarks, customer-related intangible assets and patents obtained through business acquisitions. Amortizable intangible assets are being amortized using the straight-line method over their estimated useful lives, which range from two to 35 years. The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually or more frequently if events or changes in circumstances indicate that an asset might be impaired.

Other Long-lived Assets> - Long-lived assets, including amortizable intangible assets and the Company’s gas transportation facilities and equipment, 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.

Restricted Deposits >- Restricted deposits consist of $3,446,000 of escrow funds associated primarily with the acquisitions of Bencor and Wildcat.

Allowance for Uncollectible Accounts Receivable - The Company makes ongoing estimates relating to the collectibility 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.

 

 

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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, 2012 and January 31, 2012, because of the relatively short maturity of those instruments. See Note 4 for disclosure regarding the fair value of indebtedness of the Company, Note 5 for disclosure regarding the fair value of derivative instruments 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. In addition, the Company may enter into fixed-price natural gas contracts to manage fluctuations in the price of natural gas. These contracts would result in the Company physically delivering gas, and as a result, are exempt from the requirements of ASC Topic 815 under the normal purchases and sales exception. When in place, the contracts are not reflected in the balance sheet at fair value and revenues from the contracts are recognized as the natural gas is delivered under the terms of the contracts (see Note 5 for disclosure regarding the fair value of derivative instruments). The Company does not enter into derivative financial instruments for speculative or trading purposes.

Share-based Compensation >- The Company recognizes all share-based instruments in the financial statements and utilizes a fair-value measurement of the associated costs. As of April 30, 2012, the Company had unrecognized compensation expense of $6,602,000 to be recognized over a weighted average period of 2.5 years. For all share-based awards granted after February 1, 2012, the Company determines the fair value of share-based compensation granted in the form of stock options using a lattice valuation model.  Previously, the Black-Scholes model was used.  The Company believes the lattice valuation model will produce a more accurate valuation of its compensation grants as it incorporates additional parameters of grants.  The change did not have a material effect on the consolidated financial statements.

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 judgment, 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, developments in tax law and ongoing discussions with taxing authorities.

As of April 30 and January 31, 2012, the total amount of unrecognized tax benefits recorded was $13,920,000 and $13,322,000, respectively, of which substantially all would affect the effective tax rate if recognized. The Company does not expect the unrecognized tax benefits to change materially within the next 12 months. The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company reports income tax-related interest and penalties as a component of income tax expense. As of April 30 and January 31, 2012, the total amount of accrued income tax-related interest and penalties included in the balance sheet was $7,352,000 and $6,810,000, respectively.

 

 

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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 833,736 and 270,444 shares have been excluded from weighted average shares in the periods ending April 30, 2012 and 2011, respectively, as their effect was antidilutive. A total of 321,400 and 85,077 nonvested shares have been excluded from weighted average shares in the periods ended April 30, 2012 and 2011, respectively, as their effect was antidilutive.

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

 

		Three Months
		Ended April 30,
(in thousands)		2012				2011
Income taxes		$	4,314			$	2,967
Interest			229				229
Noncash investing and financing activities:
Accrued capital additions			1,688				1,945
Deferred debt issuance costs			-				1,700

 

During the three months ended April 30, 2011, the Company deferred $1,700,000 debt issuance costs against the borrowing capacity of its $300,000,000 credit facility. These costs will be amortized over the life of the credit facility agreement. See Note 4 for further discussion of the Company’s credit facility agreement.

New Accounting Pronouncements >– In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company adopted this guidance as of February 1, 2012, which did not have a material impact on its financial position, results of operations or cash flows.

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.

 

Fiscal Year 2012

 

On February 28, 2011, the Company acquired the Kansas and Colorado cured-in-place pipe (“CIPP”) operations of Wildcat Civil Services (“Wildcat”), a sewer rehabilitation contractor. The acquisition will further the Company’s expansion and geographic reach of its Inliner group westward. The aggregate purchase price for Wildcat of $8,850,000 was comprised of cash ($442,000 of which was placed in escrow to secure certain representations, warranties and indemnifications).

The purchase price allocation was based on an assessment of the fair value of the assets and liabilities acquired, using the Company’s internal operational assessments and other analyses, which are Level 3 measurements.

Based on the Company’s allocations of the purchase price, the acquisition had the following effect on the Company’s consolidated financial position as of the respective closing date:

 

(in thousands)		Wildcat
Working capital		$	293
Property and equipment			6,244
Goodwill			2,318
Total purchase price		$	8,855

 

 

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The $2,318,000 of goodwill was assigned to the Water Infrastructure Division at the time of acquisition. In connection with the Company's change in reporting segments discussed in Note 10, the Company reallocated goodwill to the new reporting units based upon the relative fair valve of each reporting unit as of December 31, 2011. The purchase price in excess of the value of Wildcat’s net assets reflects the strategic value the Company placed on the business. The Company believed it would benefit from synergies as these acquired operations were integrated with the Company’s existing operations. Goodwill associated with the acquisition is expected to be deductible for tax purposes.

The results of operations for the acquired entity have been included in the Company’s consolidated statements of operations commencing on the closing date. Revenue and income before income taxes for Wildcat since its respective closing date were not significant. Pro forma amounts related to Wildcat for prior periods have not been presented since the acquisition would not have had a significant effect on the Company’s consolidated revenues or net income.

In fiscal year 2011, we acquired certain assets of Intevras Technologies, LLC (“Intevras”).  In addition to the Intevras cash purchase price, there is contingent consideration up to a maximum of $10,000,000 (the “Intevras Earnout Amount”), which is based on a percentage of revenues earned on Intevras products and fixed amounts per barrel of water treated by Intevras products during the 60 months following the acquisition. In accordance with accounting guidance, the Company treated the Intevras Earnout Amount as contingent consideration and estimated the liability at fair value as of the acquisition date and included such consideration as a component of total purchase price. The potential undiscounted amount of all future payments that the Company could be required to make under the agreement is between $0 and $10,000,000. The fair value of the contingent consideration arrangement was estimated by applying a market approach. That measure is based on significant inputs that are not observable in the market, also referred to as Level 3 inputs. Key assumptions include a discount rate of 41.2% and an estimated level of annual revenues of Intevras ranging from $1,500,000 to $6,100,000. During fiscal year 2012, the Intevras Earnout Amount to be paid in the future was estimated to be $541,000. As of April 30, 2012, we reassessed the Intevras Earnout Amount and determined no change to this amount was necessary.

3.  Goodwill and Other Intangible Assets

 

Other intangible assets consist of the following:

 

		April 30, 2012											January 31, 2012
(in thousands)		Gross Carrying Amount				Accumulated Amortization				Weighted Average Amortization Period in Years			Gross Carrying Amount				Accumulated Amortization				Weighted Average Amortization Period in Years
Amortizable intangible assets:
Tradenames		$	10,950			$	(5,019	)		14			$	10,950			$	(4,855	)		14
Customer/contract-related			2,340				(1,831	)		2				2,340				(1,526	)		2
Patents			4,616				(1,460	)		12				4,616				(1,372	)		12
Non-competition agreements			705				(195	)		6				705				(165	)		6
Other			2,949				(1,002	)		12				2,449				(876	)		13
Total intangible assets		$	21,560			$	(9,507	)					$	21,060			$	(8,794	)

 

Total amortization expense for other intangible assets was $712,000 and $1,582,000 for the three months ended April 30, 2012 and 2011, respectively.

The carrying amount of goodwill attributed to each reporting segment was as follows:

 

(in thousands)		Water Resources				Inliner				Heavy Civil				Geoconstruction				Mineral Exploration				Energy				Other				Total
Balance January 31, 2012		$	-			$	8,915			$	-			$	10,621			$	-			$	-			$	-			$	19,536
Additions			-				-				-				-				-				-				-				-
Balance April 30, 2012		$	-			$	8,915			$	-			$	10,621			$	-			$	-			$	-			$	19,536
Accumulated goodwill
impairment losses		$	(17,084	)		$	(23,130	)		$	(44,551	)		$	-			$	(20,225	)		$	(950	)		$	(445	)		$	(106,385	)

 

4.      Indebtedness

 

On July 8, 2011, the Company entered into a private shelf agreement (the “Shelf Agreement”) whereby it can issue $150,000,000 in unsecured notes before July 8, 2021.  No unsecured notes have been issued under the Shelf Agreement as of April 30, 2012.  The Company issued $20,000,000 of notes under a previous shelf agreement in October 2004 (“Series B Senior Notes”). The Series B Senior Notes had a fixed interest rate of 5.40% and the final payment of $6,667,000 was made on September 29, 2011.

On March 25, 2011, the Company entered into a new revolving credit facility (the “Credit Agreement”) which contains a revolving loan commitment of $300,000,000, less any outstanding letter of credit commitments (which are subject to a $100,000,000 sublimit). The unsecured $300,000,000 facility extends to March 25, 2016, and replaces the Company’s prior credit agreement, which was terminated. The Credit Agreement was entered into to extend the expiration period of the Company’s debt facilities and increase borrowing capacity.  The Company funded $1,716,000 of debt issuance costs through borrowings under its Credit Agreement. These costs will be amortized over the life of the agreement.

 

 

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The Credit Agreement provides for interest at variable rates equal to, at the Company’s option, a LIBOR rate plus 1.25% to 2.25%, 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, 2012, there were letters of credit of $18,530,000 and borrowings of $77,500,000 outstanding on the Credit Agreement resulting in available capacity of $203,970,000.

The Shelf Agreement and the Credit Agreement contain certain covenants including restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions, transfer or sale of assets, transactions with affiliates, payment of dividends and certain financial maintenance covenants, including among others, fixed charge coverage and leverage ratio. Additionally, the Company must maintain a minimum tangible net worth under the Shelf Agreement. The Company was in compliance with its covenants as of April 30, 2012, and expects to remain in compliance through the term of the agreements.

Debt outstanding as of April 30, 2012, and January 31, 2012, whose carrying value approximates fair value, was as follows:

 

		April 30,				January 31,
(in thousands)		2012				2012
Credit agreement		$	77,500			$	52,500
Capital lease obligations			290				300
Short-term notes payable			6,832				7,366
Total debt			84,622				60,166
Less notes payable and current maturities of long-term debt			(6,916	)			(7,450	)
Total long-term debt		$	77,706			$	52,716

 

5.  Derivatives

 

The Company’s Energy Division is exposed to fluctuations in the price of natural gas and periodically enters into fixed-price physical delivery contracts to manage natural gas price risk for a portion of its production, if available at attractive prices. As of April 30, 2012 and January 31, 2012 the Company held no such contracts.

The Company has entered into physical delivery contracts in order to facilitate normal recurring sales with our natural gas purchasing counterparty. As of April 30, 2012, the Company had committed to deliver a total of 2,208,000 million British Thermal Units (“MMBtu”) of natural gas through October 2012. The contract price resets daily based on a weighted average price of the reported trades for deliveries on the following day.

Additionally, the Company has foreign operations that have significant costs denominated in foreign currencies, and thus is exposed to risks associated with changes in foreign currency exchange rates. At any point in time, the Company might use various hedge instruments, primarily foreign currency option contracts, to manage the exposures associated with forecasted expatriate labor costs and purchases of operating supplies. As of April 30, 2012 and January 31, 2012 the Company held no such contracts.

6.  Other Income (Expense), Net

 

Other income (expense), net consisted of the following for the three months ended April 30, 2012 and 2011:

 

		Ended April 30,
(in thousands)		2012				2011
Gain from disposal of property and equipment		$	347			$	5,642
Gain on sale of investment securities			-				996
Interest income			50				22
Currency exchange gain			586				200
Other			162				55
Total		$	1,145			$	6,915

 

On March 21, 2011, the Company sold its operating facility in Fontana, California, with the intent of acquiring and relocating to a new facility. In the interim until a new facility can be purchased, the Company entered into a leasehold agreement of the existing facility. The total gain on the sale of the facility was $6,354,000, of which $1,379,000 was deferred to match the expected lease payments under the leasehold agreement. The deferred gain will be recognized over the 36 month term of the lease. The proceeds of the sale of $9,000,000 were placed in a restricted escrow fund for purposes of purchasing the new facility. During September 2011, the escrowed funds reverted to the Company and a new facility was purchased for $8,756,000.

 

 

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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, 2012 and January 31, 2012:

 

						Fair Value Measurements
(in thousands)		Carrying Value				Level 1				Level 2				Level 3
April 30, 2012
Financial Assets:
Restricted deposits held at fair value		$	3,446			$	3,446			$	-			$	-
Financial Liabilities:
Contingent earnout of acquired businesses(1)		$	541			$	-			$	-			$	541
January 31, 2012
Financial Assets:
Restricted deposits held at fair value		$	3,586			$	3,586			$	-			$	-
Financial Liabilities:
Contingent earnout of acquired businesses(1)		$	541			$	-			$	-			$	541

 

(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.  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.

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, 2012, there were 497,694 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, 2012, the Company granted 94,481 nonvested shares which, in general, ratably vest over periods of one to four years from the grant date.

The Company recognized $1,436,000 and $1,553,000 of compensation cost for these share-based plans during the three months ended April 30, 2012 and 2011, respectively. Of these amounts, $459,000 and $355,000, respectively, related to nonvested stock. The total income tax benefit recognized for share-based compensation arrangements was $560,000 and $606,000 for the three months ended April 30, 2012 and 2011, respectively.

A summary of nonvested share activity for the three months ended April 30, 2012, is as follows:

 

 

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		Number of Shares				Average Grant Date Fair Value					Intrinsic Value (in thousands)
Nonvested stock at January 31, 2012			226,919			$	29.94
Granted			94,481				24.32
Vested			-				-
Canceled			-				-
Nonvested stock at April 30, 2012			321,400				28.29			$	6,605

 

Significant option groups outstanding at April 30, 2012, related exercise price and remaining contractual term were as follows:

 

Grant Date			Options Outstanding				Options Exercisable				Exercise Price				Remaining Contractual Term (Months)
6/04				20,000				20,000			$	16.60			26
6/04				60,076				60,076				16.65			26
6/05				10,000				10,000				17.54			38
9/05				104,707				104,707				23.05			41
1/06				173,981				173,981				27.87			45
6/06				80,000				80,000				29.29			50
6/07				65,625				65,625				42.26			62
7/07				25,500				25,500				42.76			63
2/08				72,439				72,439				35.71			69
1/09				6,000				6,000				24.01			80
2/09				196,794				196,791				15.78			81
2/09				4,580				4,580				15.78			81
6/09				106,146				70,761				21.99			85
6/09				2,472				2,472				21.99			85
2/10				80,149				53,429				27.79			93
2/10				2,721				2,721				25.44			93
2/11				96,732				32,233				33.10			105
3/11				1,312				437				34.50			107
6/11				2,096				-				28.71			109
7/11				17,893				-				29.31			111
2/12				180,344				10,140				24.32			117
4/12				74,172				-				21.77			119
				1,383,739				991,892

 

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 the options granted was $11.96 and $19.08 for the three months ended April 30, 2012 and 2011, respectively. The fair value was based on an expected life of approximately six years, no dividend yield, an average risk-free rate of 1.3% and 2.12%, respectively, and assumed volatility of all options outstanding are expected to net 56%. The options have terms of ten years from the date of grant and generally vest ratably over periods of one month to five years. Transactions for stock options for the three months ended April 30, 2012, were as follows:

 

 

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		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Intrinsic Value (in thousands)
Outstanding at January 31, 2012			1,133,211			$	26.12				5.8			$	2,244
Granted			254,516				23.58								-
Forfeited			(3,988	)			50.06								-
Outstanding at April 30, 2012			1,383,739				25.58				6.4				1,304
Exercisable at January 31, 2012			860,756				26.11				5.0				1,710
Exercisable at April 30, 2012			991,892				25.59				5.2				1,304

 

The aggregate intrinsic value was calculated using the difference between the current market price and the exercise price for only those options that have an exercise price less than the current market price.

9.  Investment in Affiliates

 

The Company’s investments in affiliates are carried at the fair value of the investment considered at the date acquired, plus the Company’s equity in undistributed earnings from that date. These affiliates are engaged in mineral exploration drilling, infrastructural construction and the manufacture and supply of drilling equipment, parts and supplies.

 

		Percentage Owned
Christensen Chile, S.A. (Chile)			50.00		%
Christensen Commercial, S.A. (Chile)			50.00
Geotec Boyles Bros., S.A. (Chile)			50.00
Boytec, S.A. (Panama)			50.00
Plantel Industrial S.A. (Chile)			50.00
Boytec Sondajes de Mexico, S.A. de C.V. (Mexico)			50.00
Geoductos Chile, S.A. (Chile)			50.00
Boytec, S.A. (Columbia)			50.00
Centro Internacional de Formacion S.A. (Chile)			50.00
Diberil Sociedad Anónima (Uruguay)			50.00
Costa Fortuna (Brazil)			50.00
Costa Fortuna (Uruguay)			50.00
Diamantina Christensen Trading (Panama)			42.69
Boyles Bros. do Brasil Ltd. (Brazil)			40.00
Christensen Commercial, S.A. (Peru)			35.38
Geotec, S.A. (Peru)			35.38
Boyles Bros., Diamantina, S.A. (Peru)			29.49
Mining Drilling Fluids (Panama)			25.00
Geoestrella S.A. (Chile)			25.00

 

Financial information of the affiliates is reported with a one-month lag in the reporting period. The impacts of the lag on the Company’s investment and results of operations are not significant.  Summarized financial information of the affiliates was as follows:

 

		Three Months
		Ended April 30,
(in thousands)		2012				2011
Income statement data:
Revenues		$	136,036			$	108,685
Gross profit			34,396				24,078
Operating income			21,531				15,460
Net income			16,801				10,511

 

 

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10.  Operating Segments

 

The Company is a global solutions provider to the world of essential natural resources – water, minerals and energy. Management defines the Company’s operational organizational structure into discrete divisions based on its primary product lines. Each division comprises a combination of individual district offices, which primarily offer similar types of services and serve similar types of markets. Although individual offices within a division may periodically perform services normally provided by another division, the results of those services are recorded in the offices’ own division. For example, if a Mineral Exploration Division office performed water well drilling services, the revenues would be recorded in the Mineral Exploration Division rather than the Water Resources Division.

 

During fiscal year 2012, the Company changed its reporting segments in connection with the transition to new leadership, reporting relationships and our new One Layne strategy. The Company previously reported segment information under three reporting segments including the Water Infrastructure Group, Mineral Exploration Division and Energy Division. The Company’s new reporting segments include the Water Resources Division, Inliner Division, Heavy Civil Division, Geoconstruction Division, Mineral Exploration Division and Energy Division. The reporting segment information for prior periods has been recast to match the new reporting segment structure. The Company’s segments are defined as follows:

Water Resources Division

 

The Water Resources Division provides every aspect of water supply system development and technology, including hydrologic design and construction, source of supply exploration, well and intake construction and well and pump rehabilitation. The division also brings new technologies to the water and wastewater markets and offers water treatment equipment engineering services, which supports the Company’s historic municipal business, providing systems for the treatment of regulated and “nuisance” contaminants, specifically, iron, manganese, hydrogen sulfide, arsenic, radium, nitrate, perchlorate, and volatile organic compounds. The Water Resources Division provides water systems and services in most regions of the U.S.

Inliner Division

 

The Inliner Division provides a diverse range of wastewater pipeline and structure rehabilitation services with a focus on our proprietary Inliner® cured-in-place pipe (“CIPP”) which allows us to rehabilitate aging sanitary sewer, storm water and process water infrastructure to provide structural rebuilding as well as infiltration and inflow reduction. While we focus on CIPP efforts, we also provide a wide variety of other rehabilitative methods including Janssen structural renewal for service lateral connections and mainlines, slip lining, traditional excavation and replacement, U-Liner high-density polyethylene fold and form and a variety of products for structure rebuilding and coating.

Heavy Civil Division

 

The Heavy Civil Division provides and oversees the design and construction of water and wastewater treatment plants, as well as pipeline installation. In addition, this division designs and builds integrated water supply and wastewater treatment facilities and provides filter media and membranes. These services are also provided in connection with collector wells, surface water intakes, pumping stations and groundwater pump stations. We also design and construct biogas facilities (anaerobic digesters) for the purpose of generating and capturing methane gas, an emerging renewable energy resource.

Geoconstruction Division

 

The Geoconstruction Division provides specialized foundation construction services that are focused primarily on soil stabilization and subterranean structural support during the construction of dams/levees, tunnels, shafts, water lines, subways, highways and marine facilities. Services offered include jet grouting, structural diaphragm and slurry cutoff walls, cement and chemical grouting, drilled piles, vibratory ground improvement and installation of ground anchors.

Mineral Exploration Division

 

The Mineral Exploration Division conducts primarily aboveground drilling activities, including all phases of core drilling, reverse circulation, dual tube, hammer and rotary air-blast methods. Our service offerings include both exploratory and definitional drilling. Global mining companies hire us to extract samples from sites that the mining companies analyze for mineral content before investing heavily in development. We help them determine if there is a minable mineral deposit on the site, assess whether it will be economical to mine and to assist in mapping the mine layout. Our primary markets are in the western U.S., Mexico, Australia, Brazil and Africa. We also have ownership interests in foreign affiliates operating in Latin America that form our primary presence in this market.

 

 

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Energy Division

 

The Energy Division focuses on the exploration and production of oil and gas properties, primarily concentrating on projects in the mid-continent region of the United States.

Other

 

Other includes small energy service companies and any other specialty operations not included in one of the other divisions.

 

Financial information for the Company’s segments is presented below. Unallocated corporate expenses primarily consist of general and administrative functions performed on a company-wide basis and benefiting all segments. These costs include accounting, financial reporting, internal audit, treasury, corporate and securities law, tax compliance, certain executive management (chief executive officer, chief financial officer, chief operating officer and general counsel) and board of directors. Corporate assets are all assets of the Company not directly associated with a segment, and consist primarily of cash and deferred income taxes.

 

		Three Months
		Ended April 30,
(in thousands)		2012				2011
Revenues
Water Resources		$	69,987			$	64,352
Inliner			34,368				29,055
Heavy Civil			72,871				84,656
Geoconstruction			24,205				19,824
Water Infrastructure Group			201,431				197,887
Mineral Exploration			70,567				62,767
Energy			3,022				5,660
Other			1,445				1,057
Total revenues		$	276,465			$	267,371
Equity in earnings of affiliates
Geoconstruction		$	1,932			$	126
Mineral Exploration			5,830				4,543
Total equity in earnings of affiliates		$	7,762			$	4,669
Income (loss) before income taxes
Water Resources		$	1,457			$	9,601
Inliner			1,915				2,736
Heavy Civil			(7,302	)			2,247
Geoconstruction			2,181				429
Water Infrastructure Group			(1,749	)			15,013
Mineral Exploration			19,731				17,246
Energy			(1,642	)			980
Other			(617	)			(490	)
Unallocated corporate expenses			(8,266	)			(9,102	)
Interest expense			(575	)			(344	)
Total income before income taxes		$	6,882			$	23,303

 

 

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Product Line Revenue Information
Water systems		$	54,671			$	49,065
Water treatment technologies			11,352				12,024
Sewer rehabilitation			34,368				29,055
Water and wastewater plant construction			34,122				56,648
Pipeline construction			31,232				22,405
Soil stabilization			31,770				24,930
Environmental and specialty drilling			3,380				4,427
Exploration drilling			71,425				63,034
Oil and gas production			4,145				5,660
Other			-				123
Total revenues		$	276,465			$	267,371
Geographic Information
Revenue
United States		$	217,740			$	216,636
Africa/Australia			27,369				26,718
Mexico			19,016				11,462
Other foreign			12,340				12,555
Total revenues		$	276,465			$	267,371

 

11.  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, bundled basis where the Company delegates certain functions to subcontractors but remains responsible to the customer for the subcontracted work. In addition, the Company is exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with its services and products. Litigation arising from any such occurrences may result in the Company being named as a defendant in lawsuits asserting large claims. Although the Company maintains insurance protection that it considers economically prudent, there can be no assurance that any such insurance will be sufficient or effective under all circumstances or against all claims or hazards to which the Company may be subject or that the Company will be able to continue to obtain such insurance protection. A successful claim or damage resulting from a hazard for which the Company is not fully insured could have a material adverse effect on the Company. In addition, the Company does not maintain political risk insurance with respect to its foreign operations.

In connection with the Company updating its Foreign Corrupt Practices Act ("FCPA") policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments by the Company to agents and other third parties interacting with government officials in certain countries in Africa. The Audit Committee of the Board of Directors engaged outside counsel to conduct an internal investigation to review these payments with assistance from outside accounting firms. The internal investigation has found documents and information suggesting that improper payments, which may violate the FCPA and other local laws, were made over a considerable period of time, by or on behalf of, certain foreign subsidiaries of the Company to third parties interacting with government officials in Africa relating to the payment of taxes, the importing of equipment and the employment of expatriates. We have made a voluntary disclosure to the United States Department of Justice (“DOJ”) and the Securities and Exchange Commission ("SEC") regarding the results of our investigation and we are cooperating with the DOJ and the SEC in connection with their review of the matter.

In February 2012, we commenced preliminary discussions with the DOJ and SEC regarding the potential resolution of this matter. The discussions with the government are still at an early stage, and the Company is currently unable to assess whether the government will accept voluntary settlement terms that would be acceptable to the Company. In the fourth quarter of the year ended January 31, 2012, the Company accrued a $3,715,000 liability representing the Company's initial estimate, based on, among other things, the results of its own internal investigation and an analysis of recent and similar FCPA settlements, of the amount that it may be required to disgorge to the SEC in estimated benefits, plus interest thereon. At the request of the SEC and DOJ, the Company has provided the agencies with additional information regarding possible alternative methods of estimating the benefits that the Company may have received, or intended to receive, and interest from the payments in question. Accordingly, no assurance is made or can be given that the government will accept the Company’s estimated disgorgement and interest amount. Investors are cautioned to not rely upon the presently accrued liability as accurately reflecting the ultimate amount that the Company may be required to pay as disgorgement and interest thereon.

 

 

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In addition to the ultimate liability for disgorgement and related interest, the Company believes that it could be further liable for fines and penalties as part of any settlement. At this time, the Company is not able to reasonably estimate the amount of any fine or penalty that it may have to pay as a part of any possible settlement. Furthermore, the Company cannot currently assess the potential liability that might be incurred if a settlement is not reached and the government were to litigate the matter. As such, based on the information available at this time any additional liability related to this matter is not reasonably estimable. The Company will continue to evaluate the amount of its liability pending final resolution of the investigation and any related settlement discussions with the government. The amount of the actual liability for any fines, penalties, disgorgement or interest that may be recorded in connection with a final settlement could be significantly higher than the liability accrued to date.

The Company is involved in various other matters of litigation, claims and disputes which have arisen in the ordinary course of the Company’s business. The Company believes that the ultimate disposition of these matters will not, individually and in the aggregate, have a material adverse effect upon its business or consolidated financial position, results of operations or cash flows.

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Language Regarding Forward-Looking Statements

 

This Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements may include, but are not limited to, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements, and statements of management’s intentions, hopes, beliefs, expectations or predictions of the future. Forward-looking statements can often be identified by the use of forward-looking terminology, such as “should,” “intended,” “continue,” “believe,” “may,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “estimate” and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to: the outcome of the ongoing internal investigation into, among other things, the legality, under the FCPA and local laws, of certain payments to agents and other third parties interacting with  government officials in certain countries in Africa relating to the payment of taxes and the importing of equipment (including any government enforcement action which could arise out of the matters under review or that the matters under review may have resulted in a higher dollar amount of payments or may have a greater financial or business impact than management currently anticipates), prevailing prices for various commodities, unanticipated slowdowns in the Company’s major markets, the availability of credit, the risks and uncertainties normally incident to the construction industry and exploration for and development and production of oil and gas, the impact of competition, the effectiveness of operational changes expected to increase efficiency and productivity, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Layne Christensen Company, our operations and our present business environment. MD&A is provided as a supplement to — and should be read in connection with — our consolidated financial statements and the accompanying notes thereto included under Part I Item 1 of this report.  MD&A should also be read in conjunction with our consolidated financial statements as of January 31, 2012, and for the year then ended, and the related MD&A, both of which are contained in our Form 10-K for the year ended January 31, 2012.  MD&A includes the following sections:

 

●

Our Business — a general description of our business and key fiscal 2013 events.

 

●

Consolidated Review of Operations — an analysis of our consolidated results of operations for the three months ended April 30, 2012.

 

●

Operating Segment Review of Operations — an analysis of our results of operations for the three months ended April 30, 2012, as presented in our consolidated financial statements for our reporting segments:  Water Resources Division, Inliner Division, Heavy Civil Division, Geoconstruction Division, Mineral Exploration Division and Energy Division.

 

●

Liquidity and Capital Resources — an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.

 

●

Critical Accounting Policies — a discussion of changes to our critical accounting policies in the current period that involve a higher degree of judgment or complexity.  This section also includes the impact of new accounting standards.

Our Business

 

Layne is a global water management, construction and drilling company. We provide responsible solutions for water, mineral and energy challenges. The Company’s operational and organizational structure is divided into six divisions based on primary service lines. Each division is comprised of individual district offices, which primarily offer similar services and serve similar markets. Periodically, individual offices within a division may perform services that are normally provided by another division. When that happens, the results of those services are recorded in the originating offices’ own division. For example, if a Mineral Exploration Division office performed water well drilling services, the revenues would be recorded in the Mineral Exploration Division rather than the Water Resources Division. See Note 10 to the consolidated financial statement for a discussion of the Company’s segments and the changes to the segments in FY2012.

 

 

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Key Fiscal 2013 Events

●

Margins in all of our Water Infrastructure businesses have continued to decline, producing an overall cost of revenues of 80.2% as compared to 74.9% a year ago. The Company’s Heavy Civil Division has been particularly hard hit by margin declines due to lower prices in the municipal bid market as well as by delays and cost overruns. For the first quarter of fiscal 2013, Heavy Civil division’s revenues have decreased 13.9% compared to first quarter last year and has experienced a pre-tax loss. We believe the municipal bid market has been impacted by the entry of a large number of competitors which have traditionally served other markets, but are now seeking municipal work to keep equipment and personnel utilized.

●

The Company’s Mineral Exploration Division continues its strong performance both in the minerals exploration markets served by our wholly owned operations and our Latin America affiliates. For the first quarter of fiscal 2013, revenues in our Mineral Exploration Division have increased 12.4% and pre-tax earnings have improved 14.4% compared to last year.

Consolidated Review of Operations

The following table presents, for the periods indicated, the percentage relationship which certain items reflected in the Company's consolidated statements of income bear to revenues and the percentage increase or decrease in the dollar amount of such items period to period.

 

Three Months

Period-to-Period

Ended April 30,

Change