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" or other words that convey the uncertainty of future events or outcomes. Please see Part II, Item 1A., Risk Factors, in this Form 10Q for an additional discussion. Many of the factors that will impact Layne's risk factors are beyond its ability to control or predict. 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 Layne 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes included in Item 1 thereto, as well as our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
January 31, 2014("Annual Report"). As used herein, phrases such as "Layne", "we", "our" and "us" intend to refer to Layne Christensen Companywhen used.
Layne Christensenis a global water management, construction and drilling company. Layne provides responsible solutions for water, mineral and energy challenges. This integrated approach allows Layne to offer more than individual services, it ensures streamlined communications, expedited timelines, and a constant focus on its overriding values of safety, sustainability, integrity and excellence. Layne has responsible solutions for any water management challenge in every phase of water lifecycle-supply, treatment, delivery and maintenance. Specialized construction solutions provide for responsible water management in just about any industry or environment. Geotechnical capabilities allow Layne to improve soil conditions and support subterranean structures in underground projects. Layne's team of specialists understands specific site characteristics to provide drilling solutions for water management, mineral services and specialty drilling needs. Layne manages and reports its operations through six segments: Water Resources, Inliner, Heavy Civil, Geoconstruction, Mineral Services, and Energy Services. Layne's operations are cyclical and subject to seasonality. Domestic drilling and construction activities and revenues tend to decrease in the winter months. Internationally, Mineral Services operations traditionally slow down during the Christmas and New Year'sholidays. 22
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Revenues for the three months ended
April 30, 2014, decreased $35.2 million, or 15.5%, to $191.2 million, compared to $226.4 millionfor the same period last year. Revenues decreased in Heavy Civil by $24.4 million, Mineral Services decreased by $24.9 million, Water Resources decreased by $1.3 millionand Other decreased by $1.0 millionduring the first quarter of FY2015 compared to the first quarter of FY2014. Geoconstruction revenues increased by $11.0 million, Inliner revenues increased by $3.2 million, Energy Services increased by $1.0 millionand Intersegment Eliminations increased by $1.2 millionduring the first quarter this fiscal year compared to last year at the same time. A further discussion by segment is presented below. Cost of revenues decreased $27.4 million, or 14.5%, to $162.2 million, or 84.8% of revenues, for the three months ended April 30, 2014, compared to $189.6 million, or 83.7% of revenues, for the same period last year. Cost of revenues contains direct costs which decreased by $24.0 millionto $140.8 million(73.6% of revenues) in FY2015 from $164.8 million(72.8% of revenues) and field expenses which decreased by $3.4 millionto $21.3 million(11.2% of revenues) from $24.7 million(10.9% of revenues). The change in these expenses is generally related to the reduction in revenues this fiscal quarter over last fiscal quarter at this time. Selling, general and administrative expenses decreased 16.9% to $34.9 millionfor the three months ended April 30, 2014, compared to $41.9 millionfor the same period last year. The decrease is due to a decrease in compensation expense of $3.5 million, a decrease in relocation costs of $2.5 millionand a decrease in legal fees of $2.4 million, due to a reduction in outstanding legal matters, offset by a $1.3 millionincrease in consulting expenses due to consultants retained under the previous Credit Agreement and a $0.1 millionincrease in insurance expense. Depreciation and amortization decreased 8.8 % to $13.9 millionfor the three months ended April 30, 2014, compared to $15.3 millionfor the same period last year, due a reduction in capital expenditures during FY2014 and during the first three months of FY2015. Equity in losses of affiliates decreased 86.3 % to $(0.1) millionfor the three months ended April 30, 2014, compared to $(0.5) millionfor the same period last year. The global decline in mineral exploration by our customers, as further described below, continues to impact Layne's Latin American affiliates. Interest expense increased to $4.9 millionfor the three months ended April 30, 2014, compared to $1.3 millionfor the same period last year. Layne issued Convertible Notes during FY2014, executed an ABL facility during the first quarter of FY2015 and terminated its previous Credit Agreement, during the first quarter of FY2015. Included in interest expense is the write off of the unamortized debt issuance costs associated with the Credit Agreement of $1.1 million, the amortization of the deferred financing fees associated with the issuance of the Convertible Notes and the execution of the ABL facility. Other income for the three months ended April 30, 2014was $0.1 millioncompared to $3.8 millionfor the three months ended April 30, 2013. For the first quarter FY2014, other income consisted primarily of gains on sales of non-core assets in the amount of $3.4 million. Income tax expense from continuing operations of $2.2 millionwas recorded in the three months ended April 30, 2014, compared to $5.8 milliontax expense for the same period last year. Layne recorded a valuation allowance of $8.0 millionagainst its foreign tax credits generated in prior years impacting income tax expense for the three months ended April 30, 2013. The effective tax rates for continuing operations for the three months ended April 30, 2014and 2013, were (9.1)% and (31.5)%. The valuation allowance had a negative effect of 43.4% on the effective tax rate for the prior year quarter. The remaining difference in the effective tax rate as compared to the prior year was primarily due to no tax benefit being recorded on losses generated in the U.S. and certain foreign jurisdictions during the current quarter due to valuation allowances on the related deferred tax assets.
The revenue in Mineral Services has continued to decline as compared to a year ago. As expected, the downturn has extended into FY2015. An improving economic outlook contributed to lower demand for gold in calendar year 2013 and 2014, resulting in generally lower prices. For the first quarter FY2015, Mineral Services revenues are
$24.9 millionlower than first quarter FY2014. During the first quarter of calendar year 2014, copper prices declined due to concerns about slowing growth rates in Chinaand an outlook for higher near-term supplies. As gold and copper mining have traditionally accounted for approximately 80% of Mineral Services revenue, lower commodity pricing has resulted in lower revenues for this operating segment as mining companies adjust their expenditure levels. Mineral Services continues to be impacted by the global mining exploration slowdown, both in the mineral exploration markets served by Layne's wholly-owned operations and Layne's Latin American affiliates. In West Africa, due to an extended winter break and late start to mining operations this year, mining companies have decided in many cases to delay exploration until after the rainy season, which runs from June through October. Continued cost overruns associated with the completion of certain of Heavy Civil hard-bid contracts, many of which originally began in FY2012, were complicated further by a more difficult than expected winter weather season, causing delays. Heavy Civil's revenues decreased by $24.4 millioncompared to the first quarter last year. Energy Services' market penetration into the oil and gas market has been slower than initially expected, in part due to the lack of a complete product offering. This segment began FY2014 with only the capability to drill water supply wells. In mid-FY2014, water transfer capability was added and by the end of FY2014, water recycling capability was added. Layne anticipates Energy Services' complete product offering to improve its market penetration and lead to reduced losses in FY2015. Growth is expected in the Permian Basinas long as oil prices remain at current levels. Management believes that many operators are planning additional investment in the near future in this part of West Texas. Geoconstruction has announced and begun work on over $150.0 millionof contracts in the U. S. and Uruguay. FY2015 is expected to be a year focused on execution on these contracts while, selectively bidding on additional projects. The operations in Brazilhave been affected by the sharp downturn in the economy of that country. Brazilis currently preparing for the World Cup to 23
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June 2014, but while it tries to complete the infrastructure projects, many sectors of the workforce in Brazilhave gone on strike and there have been protests in many of the larger cities. Inflation in the country has decreased economic growth forecasts. Very few infrastructure projects have been awarded in the country. Management does not expect any additional infrastructure projects to become available in Brazildue to the upcoming Olympic Games under these current economic conditions, as previously anticipated. To better react to these changes within the operating segments, Layne entered into a five year $135.0 millionsenior secured ABL facility on April 15, 2014, of which up to an aggregate principal amount of $75.0 millionwill be available in the form of letters of credit and up to an aggregate principal amount of $15.0 millionis available for short-term swingline borrowings. Upon execution of this agreement, Layne paid off the outstanding portion and subsequently terminated the previously existing Credit Agreement. Management believes this type of loan provides the flexibility and structure appropriate for the project-oriented nature of Layne's business. As discussed in Note 12 to the condensed consolidated financial statements, on June 12, 2014, the Board of Directors approved management's restructuring plan to implement a series of short-term and long-term cost cutting actions in order to improve Layne's liquidity and results of operations. These actions include workforce reductions, cost containment measures, working capital management, and a strategic review of under-performing assets and operations. These actions are expected to generate annual savings of $12.0 millionto $20.0 million. Layne anticipates incurring pre-tax restructuring charges associated with the implementation of the restructuring plan of approximately $1.5 millionto $2.5 million, of which substantially all would result in cash expenditures.
Operating Segment Review of Operations
Water Resources Division Three Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues
$ 43,126 $ 44,412 $ (1,286 )(2.9 )%
Income (loss) before income taxes 1,825 (26 ) 1,851
* * Not meaningful Water Resources revenues decreased
$1.3 millionto $43.1 millionfor the three months ended April 30, 2014. Income (loss) before income taxes increased $1.9 millionto $1.8 million(4.2% of revenues) in the first quarter FY2015. The effects of Water Resources' strategic consolidation of certain offices within the division is reflected in the increase in income (loss) before income taxes during the first quarter of FY2015 compared to FY2014, despite a relatively flat level of revenues during the same periods. Water Resources is actively monitoring and reducing its costs, where appropriate, as a response to reduced revenues. Through these efforts, it has reduced selling expenses by $1.7 millionduring first quarter FY2015 compared to first quarter FY2014. Included in this reduction of selling expenses is $0.8 millionin reduced compensation expenses, $0.1 millionin reduced bad debt expense and $0.1 millionreduction in maintenance expenses. Inliner Division Three Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues $ 33,483 $ 30,280 $ 3,20310.6 % Income before income taxes 4,843 2,339 2,504 107.1 Inliner revenues increased $3.2 millionto $33.5 millionfor the three months ended April 30, 2014. Income before income taxes increased by $2.5 millionto $4.8 million(14.5% of revenues) in the first three months of FY2015 compared to $2.3 million(7.7% of revenues) in the first three months of FY2014.
Inliner's increase in revenues and the resultant increase in income before income taxes are due to the increase in work orders under existing contracts. Compensation expense also decreased by
Civil DivisionThree Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues $ 49,418 $ 73,840 $ (24,422 )(33.1 )% Loss before income taxes (8,580 ) (1,493 ) (7,087 ) * * Not meaningful
Heavy Civil revenues decreased
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Heavy Civil has certain ongoing projects that were affected by the severe weather conditions experienced in many parts of the U.S. During the first quarter of FY2015, projects which were already experiencing cost overruns were delayed even further due to heavy snowfall; beyond what was anticipated. Adverse weather conditions also caused an increase in expenses on projects as, once the weather subsided; work was restarted out of sequence in order to meet time constraints implicit within the contracts of those projects, thereby further reducing profitability. Heavy Civil also has certain projects which are in the final stages of completion. These projects were complex and difficult in nature, extending over multiple years. These projects, which have been discussed in the Annual Report, are selected types of hard bid contracts, which Layne determined in FY2013 no longer fit within the strategic focus for this segment. These contracts, which are estimated to be complete during FY2015, incurred losses of
$3.1 millionduring the first quarter of FY2015. Layne believes certain of these contracts have amounts for which it will be seeking additional payments from the owner. Management is currently quantifying these amounts, and as such, these amounts have not been included in the results of this division. Heavy Civil has made a strategic move away from these types of hard bid contracts and is actively working towards completing these projects in FY2015. Geoconstruction Division Three Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues $ 32,595 $ 21,587 $ 11,00851.0 %
Income (loss) before income taxes 1,637 (5,408 ) 7,045
* * Not meaningful Geoconstruction revenues increased
$11.0 millionto $32.6 millionin the first three months of FY2015 from $21.6 millionduring the first three months of FY2014. Income before income taxes increased $7.0 millionto $1.6 million(5.0% of revenues) during the first quarter of FY2015 from $(5.4) million(-25.1% of revenues). Geoconstruction executed approximately $150.0 millionin contracts during the last quarter of FY2014 and the first quarter of FY2015. Work on most of these projects began in the first quarter of FY2015. Projects in the U.S. during first quarter FY2015 increased revenue in comparison to first quarter of FY2014 by $8.7 millionas a result of the projects related to the Transbay Tower, the San Franciscosubway station and the Hawaiisewer tunnel. Geoconstruction experienced an unexpected delay in the startup of some of these projects. While these projects are now underway, Geoconstruction may encounter additional delays, beyond its control which could adversely affect results. Projects in Uruguayincreased revenues during the first quarter of FY2015 in comparison to first quarter of FY2014 by $4.0 million. This revenue increase quarter over quarter was partially offset by a decrease in revenue of $1.7 millionfor the operations in Italy. These newly executed contracts are in contrast to the project cancellations and delays which Geoconstruction experienced in the first quarter of FY2014. Mineral Services DivisionThree Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues $ 29,488 $ 54,404 $ (24,916 )(45.8 )% (Loss) income before income taxes (3,799 ) 1,138 (4,937 ) * Losses from affiliates, included in above earnings (66 ) (481 ) 415 * * Not meaningful Mineral Services revenues decreased $24.9 millionto $29.5 millionin the first three months of FY2015. (Loss) income before income taxes decreased $5.0 millionto $(3.8) million(13.0% of revenues) during the first quarter of FY2015 from $1.1 million(2.1% of revenues) during the first quarter of FY2014. During the first quarter of fiscal year 2015, portions of Africaexperienced significant rainfall, hampering efforts in those countries. In response, the operations in Africawere reduced and offices were consolidated to meet the level of activity.
Equity in losses of affiliates decreased by
Global exploration spending in the mining industry has continued to decrease as was experienced in FY2014 in every geographic region. The cyclical mining industry is reacting to volatile commodity prices, as well as economic and political unrest. The industry overall is seeing reduced utilization rates and continued slow traction in new projects starting, thereby placing further downward pricing pressures throughout the industry. Mineral Services and Layne's affiliates, who operate in
Latin Americaare experiencing the decreases in revenues and have monitored and reduced costs as a result. Management believes this trend will continue throughout FY2015. Given that the assets within the segment are in good working order and geographically diversified, the division has the ability to deploy rapidly to new sites. Mineral Services has also been able to retain many of its skilled employees. Layne believes it will be able to react in an expedient manner when the market improves. 25
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Energy Services DivisionThree Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenue $ 2,828 $ 1,793 $ 1,03557.7 % Loss before income taxes (726 ) (566 ) (160 ) *
Energy Services revenues increased
Energy Services has developed a more robust product offering with the roll out of its water recycling business in late FY2014. The segment is seeing some traction in marketing its capabilities as an end-to-end provider of water solutions within the energy industry as it has been successful on the projects executed in FY2014. This success has translated into obtaining extendable contracts with certain customers. The segment is actively managing its costs to better reflect its needs during this initial phase of its business. Other Three Months Ended April 30, (in thousands) 2014 2013 $ Change % Change Revenues
$ 3,943 $ 4,933 $ (990 )(20.1 )%
Income before income taxes 115 158 (43 ) (27.2 ) Other revenues and income before income taxes are primarily from small specialty and purchasing operations. Although the majority of the revenues are eliminated between segments, the operations produce positive earnings from third party sales and purchasing discounts.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were
$15.0 millionfor the three months ended April 30, 2014, compared to $13.2 millionfor the same period last year. This increase in expenses for the first quarter of FY2015 is due to increased consulting expenses of $1.4 million, an increase in rent of $0.2 million, and an increase in temporary services of $0.4 million, partially offset by a decrease in compensation expenses of $0.2 million.
Backlog represent the dollar amount of revenues Layne expects to recognize in the future from contracts that have been awarded as well as those that are currently in progress. Layne includes a project in backlog at such time as a contract is executed. Backlog amounts include anticipated revenues associated with the original contract amounts, executed change orders, and any claims that may be outstanding with customers. It does not include contracts that are in the bidding stage or have not been awarded. As a result Layne believes the backlog figures are firm, subject only to modifications, alterations or cancellation provisions contained in the various contracts. Historically, those provisions have not had a material effect on the condensed consolidated statements. Layne's backlog of uncompleted contracts at
April 30, 2014was approximately $559.7 millioncompared to $499.2 millionat January 31, 2014. During the first quarter of FY2015, Layne executed various new awards across each of its business segments. Backlog at New Business Revenues Recognized Backlog at Backlog at (in millions) January 31, 2014 Awarded(1) April 30, 2014 April 30, 2014 April 30, 2013 Water Resources $ 59.8 $ 67.7$ 43.1 $ 84.4 $ 55.5 Inliner 61.1 43.0 33.5 70.6 68.9 Heavy Civil 257.6 58.3 49.4 266.5 357.4 Geoconstruction 118 48.4 32.6 133.8 41.5 Mineral Services 2.7 31.2 29.5 4.4 9.1 Total $ 499.2 $ 248.6$ 188.1 $ 559.7 $ 532.4
(1) New business awarded consists of the original contract price of projects
added to our backlog plus or minus subsequent changes to the estimated total
contract price of existing contracts. 26
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Of Layne's current backlog amount of
$559.7 millionas of April 30, 2014, approximately $26.7 millionrelates to active contracts that are in a loss position. As of April 30, 2014, there were no significant contracts in backlog not moving forward as originally scheduled. The remainder of the contracts in backlog have future revenues which are expected to equal or exceed costs when recognized. Layne can provide no assurance as to the profitability of the contracts reflected in backlog. It is possible that the estimates of profitability could increase or decrease based on changes in productivity, actual downtime and the resolution of change orders and any claims with customers.
Liquidity and Capital Resources
Layne has experienced losses for the past three fiscal years that continued into the first quarter of FY2015. Layne's primary sources of liquidity have historically been cash from operations, supplemented by borrowings under its credit facilities. Due to the continued downturn, Layne is tightly managing cash and monitoring its liquidity position. Layne has implemented certain initiatives and plan to implement additional initiatives to conserve our liquidity position. Cash flow is affected by a number of factors, some of which are beyond Layne's control. These factors include prices and demand for Layne's services, operational risks, volatility in commodity prices, industry and economic conditions, conditions in the financial markets and other factors. Layne's financial performance has been challenged and tempered by a variety of the risks inherent to the industries and geographies it serves. Among them is the cyclical nature of minerals mining which can be affected significantly and quickly by factors beyond Layne's control. During FY2014 and continuing into FY2015, the global mining exploration slowdown continued. Factors such as mining company exploration budgets, commodity prices, changes in taxation policy, increasing labor costs and global credit markets affected Mineral Services financial performance. Weak demand for infrastructure projects in the U.S. during FY2014 impacted Geoconstruction's financial results. New projects were awarded to Geoconstruction during the fourth quarter of FY2014 and the first quarter of FY2015. However, certain of those projects experienced delays in the initial stages. These delays were not controllable by Layne, but rather by the owner of the jobs. These jobs have resumed in the second quarter of FY2015. Delays such as this have an adverse effect on Geoconstruction's financial results as the division was mobilized to the sites, but was unable to continue work. Weak infrastructure demand in
Brazilhas also impacted Geoconstruction's financial results during FY2014 and continuing into FY2015. Heavy Civil has experienced significant material losses on certain long term construction contracts during FY2014 and continuing into FY2015. Due to schedule delays and cost overruns on these contracts, Layne's financial results have been adversely impacted. These projects continue to face significant issues. At April 30, 2014, Layne has provided for estimated losses on these contracts. Although Layne continually strives to improve its ability to estimate contract costs and profitability associated with these projects, it is reasonably possible that current estimates could change and adjustments to overall contract costs may continue and be significant in future periods. This would put significant additional strain on liquidity and could have a material adverse impact on the financial position, results of operations and cash flows. As discussed in Note 12 to the condensed consolidated financial statements, on June 12, 2014, the Board of Directors approved management's restructuring plan to implement a series of short-term and long-term cost cutting actions in order to improve Layne's liquidity and results of operations. These actions include cost containment measures, working capital management, selected workforce reductions and a strategic review of under-performing assets and operations. These actions are expected to generate annual savings of $12.0 millionto $20.0 million. Management believes the restructuring plan will assist Layne to have sufficient funds and adequate financial resources available to meet its anticipated liquidity needs. The timing and costs of the restructuring plan may vary from Layne's current estimates based on many factors. Layne may incur other material charges not currently anticipated due to events that could be beyond Layne's control which occur as a result of, or associated with, the restructuring plan and related activities and as such, actual results could differ from current estimates. Layne's working capital as of April 30, 2014was $129.5 millionand $121.3 millionas of January 31, 2014. The increase in working capital as of April 30, 2014as compared to January 31, 2014of $8.2 millionis due to an overall increase in current assets of $29.3 millionoffset by an increase in current liabilities payable of $21.1 million. The overall increase in current assets is due in part to an increase in accounts receivable of $8.0 million, and an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $8.0 million, both due to the increase in project levels. Restricted deposits increased by $25.4 milliondue to the cash collateralization of Layne's letters of credit in association with the execution of the ABL facility. Inventories increased by $3.3 milliondue to projects ramping up. These increases were partially offset by a decrease in cash of $13.8 million, a decrease in deferred taxes of $0.7 million, a decrease in other miscellaneous current assets of $0.7 millionand a decrease in cash surrender value of company-owned life insurance policies of $0.2 millionThe increases in current liabilities are due to an increase in accounts payable of $5.9 millionand an increase in the current portion of long-term debt of $0.7 millionas Layne manages its cash outflow to better match its cash inflow. Income taxes payable increased by $2.8 million, accrued compensation increased by $3.5 million, accrued insurance expense increased by $2.1 million, billings in excess of costs increased by $1.8 millionand other accrued expenses increased by $4.7 million. Included in other accrued expenses are an increase in customer deposits of $2.9 millionas new projects are begun, an increase in interest payable of $1.3 milliondue to the higher level of debt during FY2015 compared to FY2014 and an increase in accrued professional fees of $0.5 million. These increases were offset by a decrease in an escrow obligation of $0.4 million. Layne's cash and cash equivalents were $21.2 millionas of April 30, 2014compared to $35.0 millionas of January 31, 2014and $27.2 millionas of April 30, 2013. Of Layne's cash and cash equivalents, amounts held by foreign subsidiaries as of April 30, 2014and April 30, 2013were $13.8 millionand $15.0 million, respectively, compared to $29.1 millionas of January 31, 2014. Repatriation of cash balances from some of Layne's foreign subsidiaries could result in withholding taxes in the local jurisdictions. Of the amounts held by foreign subsidiaries at April 30, 2014and April 30, 2013, $3.5 millionand $5.8 million, respectively, and $6.5 millionas of January 31, 2014, could be subject to repatriation restrictions if the amounts were needed for domestic operations. The amounts subject to repatriation, if needed for domestic operations, would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. Layne's intention is to permanently reinvest certain foreign cash balances outside of the U.S. and our 27
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current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Restrictions on the transfer of foreign cash and cash equivalents have not significantly impacted Layne's overall liquidity. Layne monitors developments in the foreign countries in which it operates for changes in currency regulation.
As a result of the financial performance during FY2014, Layne negotiated with its lenders to secure more favorable financial covenants by amending its Credit Agreement. Layne also issued Convertible Notes and used the net proceeds from the offering to pay down the outstanding balance on the Credit Agreement and to fund working capital for general corporate purposes. During the first quarter of FY2015, Layne terminated the Credit Agreement and entered into an ABL facility. Please read below for a description of the issuance of the Convertible Notes and the ABL facility. On
November 5, 2013, in connection with a private offering, Layne entered into a Purchase Agreement with the Initial Purchaser relating to the sale by Layne of $110.0 millionaggregate principal amount of 4.25% Convertible Notes due 2018, in a private placement to "qualified institutional buyers" in the U.S., as defined in Rule 144A under the Securities Act of 1933. The Purchase Agreement contained customary representations, warranties and covenants by Layne together with customary closing conditions. Under the terms of the Purchase Agreement, Layne agreed to indemnify the Initial Purchaser against certain liabilities. The offering of the Convertible Notes was completed on November 12, 2013, in accordance with the terms of the Purchase Agreement. The sale of the Convertible Notes generated net proceeds of approximately $105.4 millionafter deducting the Initial Purchaser's discount and commission and the estimated offering expenses payable by Layne. The Purchase Agreement also included an option to purchase up to an additional $15.0 millionaggregate principal amount of Convertible Notes. On December 5, 2013, the Initial Purchaser exercised this option, which generated proceeds net of the Initial Purchaser's discount and commission in the amount of $14.6 million.
The Convertible Notes bear interest at a rate of 4.25% per year, payable semi-annually in arrears in cash on
The initial conversion rate is 43.6072 shares of Layne's common stock per
$1,000principal amount of Convertible Notes (which is equivalent to an initial conversion price of approximately $22.93per share of Layne's common stock). The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, Layne may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including Layne's calling the Convertible Notes for redemption. On and after November 15, 2016, and prior to the maturity date, Layne may redeem all, but not less than all, of the Convertible Notes for cash if the sale price of Layne's common stock equals or exceeds 130.0% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date Layne delivers notice of the redemption. The redemption price will equal 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a fundamental change (as defined in the Indenture), holders of the Convertible Notes will have the right, at their option, to require Layne to repurchase their Convertible Notes in cash at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. During FY2014 and continuing in FY2015, Layne's business was adversely affected by the continuing global mining exploration slowdown and continuing weak demand for infrastructure projects in Braziland the U.S., especially by U.S. municipalities. As a result, Layne would not have been in compliance with the minimum EBITDA covenant in the Credit Agreement for the fourth quarter of FY2014 if certain FY2014 performance based bonuses were paid and it was also anticipated that Layne would not be in compliance with this covenant for the first quarter of FY2015 and might not be in compliance with at least one of the financial covenants during the next twelve months. As a result, on April 15, 2014, Layne entered into a five year, senior secured ABL facility which provides an aggregate principal amount of up to $135.0 million, of which up to an aggregate principal amount of $75.0 millionis available in the form of letters of credit and up to an aggregate principal amount of $15.0 millionis available for short-term swingline borrowings. Availability under the ABL facility is the lesser of (i) $135.0 millionand (ii) the borrowing base (as defined in the ABL facility agreement). As of April 15, 2014, the initial borrowing base under the ABL facility was approximately $131.0 millionand $39.0 millionwas borrowed under the ABL facility. Of this amount, $32.6 millionwas deposited as cash collateral for existing outstanding letters of credit that were issued under Layne's existing Credit Agreement; $1.5 millionwas used to repay amounts owing under its existing Credit Agreement and $3.9 millionwas used to pay commissions, discounts and fees associated with the transaction. As of April 30, 2014the borrowing base was $106.3 million, with $39.0 millionof letters of credit and borrowings outstanding. As of June 12, 2014, the balance of the borrowings outstanding on the ABL facility had not changed from April 30, 2014.
Layne has the right to request the lenders to increase the principal amount from
The ABL facility is guaranteed by Layne's direct and indirectly wholly-owned domestic subsidiaries, subject to certain exceptions described in the ABL facility. The obligations under the ABL facility are secured by a lien on substantially all of the assets of Layne and its defined subsidiaries, subject to certain exceptions described in the ABL facility. The ABL facility contains various restrictions and covenants. In general, provided that Layne maintains a certain level of Excess Availability, Layne will not be restricted from incurring additional unsecured indebtedness or making investments, distributions, 28
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capital expenditures or acquisitions. "Excess Availability" is generally defined as the amount by which the Total Availability exceeds outstanding loans and letters of credit under the ABL facility. "Total Availability" is equal to Layne's borrowing base under the ABL facility (up to the amount of the commitments under the ABL facility).
In general, if Excess Availability is less than either:
$20.0 million, or
• for a period of 5 consecutive business days, the greater of 17.5% of the
Total Availability and
a "Covenant Compliance Period" will exist until Excess Availability has been equal to or greater than the greater of 17.5% of the Total Availability and
$25.0 millionfor a period of 30 consecutive days. Layne and its subsidiaries must maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 and a maximum first lien leverage ratio of not greater than 5.0 to 1.0 for the four fiscal quarters ended immediately preceding any Covenant Compliance Period and for any four fiscal quarter period ending during a Covenant Compliance Period.
The ABL facility also contains a subjective acceleration clause that can be triggered if the lenders determine that Layne has experienced a material adverse change. If triggered by the lenders, this clause would create an Event of Default which in turn would permit the lenders to accelerate repayment of outstanding obligations.
In general, during a Covenant Compliance Period or if an Event of Default has occurred and is continuing, all Layne funds received on a daily basis will be applied to reduce amounts owing under the ABL facility. Based on current projections Layne does not anticipate being in a Covenant Compliance Period during the next twelve months. Management continues to focus on ways to enhance our overall liquidity by managing our capital expenditures; reviewing our non-core assets for potential sale, reviewing our working capital practices and focusing on reducing costs both at corporate and in the field, as appropriate. These steps are expected to reduce further the potential of a Covenant Compliance Period. Starting
May 2014until the ABL facility is no longer in place, Layne must maintain a cumulative minimum cash flow as defined in the agreement of not less than negative $45.0 millionand not less than negative $25.0 millionduring any twelve consecutive month period, until the last to occur of:
• for a period for 30 consecutive days, Excess Availability is greater than
the greater of 17.5% of the Total Availability and
$25.0 million, and • for two consecutive fiscal quarters after the closing date, the fixed
charge coverage ratio (tested on a trailing four fiscal quarter basis) has
been in excess of 1.0 to 1.0.
The ABL facility limits the amount of cash the Loan Parties may hold in foreign jurisdictions to not more than
$30.0 million. As discussed above, Layne intends to reinvest permanently certain foreign cash balances outside of the U.S. and repatriate certain other foreign cash balances consistent with its past practice. Layne does not expect the Loan Parties foreign cash balances to exceed $30.0 millionand, in the unlikely event foreign cash balances of the Loan Parties were to reach $30.0 million; management would take action to repatriate amounts sufficient to comply with this covenant. If an Event of Default (as defined in the ABL facility agreement) occurs and is continuing, the interest rate under the ABL facility will increase by 2% per annum and the lenders may accelerate all amounts owing under the ABL facility. As is customary in the construction business, we are required to provide surety bonds to secure our performance under construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. We have pledged all proceeds and other rights under our construction contracts to our bond surety company. Events that affect the insurance and bonding markets may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. To date, Layne has not encountered difficulties or a material cost increase in obtaining new surety bonds. The amount of Layne's surety bonds as of April 30, 2014was $304.0 million. Layne's ability to maintain sufficient liquidity for the next twelve months to fund its operations is contingent on improving the current trend in operating results, executing the restructuring plan, managing capital expenditures; reviewing its working capital practices, focusing on reducing the costs both at corporate and within the divisions, and strategic bid acceptance and contract management in Heavy Civil. This plan anticipates that operations and cash flow will improve over the next twelve months due to the initiatives detailed above. There are risks associated with this plan. Any substantial increase in projected cash outflow or operating losses could have a material adverse impact on the ability to secure surety bonds that are necessary for a substantial portion of work in several of Layne's divisions, access to the ABL facility and the ability to amend, extend or refinance the ABL facility. If the current trend in operating results continues or further declines, Layne will be required to borrow additional amounts under the ABL facility, make further reductions in capital expenditures and make additional reductions in the operating cost structure. Other actions to improve liquidity could include seeking to raise additional capital, reducing inventory levels, and selling under-performing assets or businesses. Management believes with the above measures, Layne will have sufficient and adequate funds to meet its anticipated liquidity needs for the next twelve months. Operating Activities Cash used in operating activities was $12.7 millionfor the three months ended April 30, 2014compared to cash provided by operating activities of $10.8 millionfor the same period last year. An increase in customer receivables and an increase in costs and estimated earnings on uncompleted contracts were due to new projects in the initial phases for Geoconstruction, Water Resources and Energy Services, partially offset by a decrease in accounts receivable for Mineral Services due to the decline in revenues earned.
Layne's capital expenditures were
$3.4 millionfor the three months ended April 30, 2014, compared to $9.1 millionfor the same period last year. With the recent declines in earnings, Layne has restricted capital spending to primarily maintenance capital expenditures, with little growth capital expenditures other than in Energy Services.
Proceeds from disposal of equipment was
During first quarter FY2015, Layne used the proceeds from its ABL facility (see Note 3 to the condensed consolidated financial statements) to cash collateralize letters of credit previously issued under the Credit Agreement. Those amounts are now held in restricted cash on the condensed consolidated balance sheet. 29
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Layne maintains corporate owned life insurance policies on certain management level employees. During the first quarter of FY2014, certain of the policies which were no longer considered necessary were redeemed. The redemptions resulted in net proceeds of
For the three months ended
April 30, 2014, Layne had borrowings of $42.2 millionand repayments of $4.4 millionunder its loan facilities as compared to borrowings of $95.5 millionand repayments of $106.0 millionfor the three months ended April 30, 2013. As discussed in Note 3 to the condensed consolidated financial statements, Layne entered into an ABL facility for up to $135.0 millionin April 2014. Layne initially borrowed $32.6 millionto cash collateralize its letters of credit. An additional $1.5 millionwas used to repay amounts owing under the Credit Agreement with $3.9 millionused to pay fees associated with the transaction. Layne also capitalized and is amortizing the associated expenses of the ABL facility of $3.9 million. During the first quarter of FY2015 and FY2014, Layne distributed $1.2 millionand $1.6 million, respectively, of joint venture funds to its noncontrolling interests.