LAYN

Layne Christensen Company (LAYN)

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Layne Christensen (LAYN)

Q2 2012 Earnings Call

September 07, 2011 11:00 am ET

Executives

Andrew Schmitt - Chief Executive officer and Director

Rene Robichaud - President, Director, Member of Compensation Committee, Member of Nominating & Corporate Governance Committee and Member of Nominating & Corporate Governance Committee

Jerry Fanska - Principal Financial Officer, Senior Vice President of Finance and Treasurer

Analysts

Gerard Sweeney - Boenning and Scattergood, Inc.

Christopher Purtill - Janney Montgomery Scott LLC

John Rogers - D.A. Davidson & Co.

Steven Fisher - UBS Investment Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Layne Christensen's Fiscal 2012 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Andrew Schmitt, Chief Executive Officer of Layne Christensen. You may begin.

Andrew Schmitt

Thanks, Jen. Good morning, everyone. I'm here with Jerry Fanska, our Senior VP of Finance; and Rene Robichaud, our new President. We would like to welcome you to Layne Christensen's second quarter conference call.

Earlier today, we issued a press release outlining the result for the second quarter ended July 31, 2011. Before we discuss the financial results, I would like to remind the participants that the call may contain forward-looking statements that are subject to the Safe Harbor statement found in today's press release.

Jerry will take you through the financial results, and I will give you an overview of division operating performance and how we see things going forward. Okay, Jerry, why don't you take us through the numbers?

Jerry Fanska

Thank you, Andy. Good morning, everyone. Revenues for the second quarter increased $41.8 million or 16.5% to $295.1 million from $253.3 million in the prior year.

Water Infrastructure revenues increased $23.7 million or 12.2% for the quarter to $217.7 million. Revenues from previously acquired and startup operations increased $16.5 million, and water supply and treatment technologies increased $9.3 million, accounting for most of the Water Infrastructure increase. These increases were offset by decreases of more than $4.1 million in heavy construction.

Mineral Exploration revenues increased 34 -- 35.9% to a record $69 million, with increased activity across all regions. Layne Energy revenues decreased 1.7% to $5.7 million, due to the current lower natural gas price environment.

Cost of revenues increased $33.7 million to $231.4 million or 78.4% of revenues for the quarter, compared to $197.7 million or 78.1% of revenues for the same period last year. Margin pressures, especially in the Water Infrastructure's heavy construction unit, were substantially offset by other product lines and divisions.

Selling, general and administrative expenses increased to $38.1 million in the quarter from $31.7 million in the prior year, primarily the result of $2.8 million in expenses from acquired operations, $2.8 million of increased compensation and related expenses, and $1.9 million in legal and professional costs. Depreciation, depletion and amortization increased in the quarter to $14.7 million from $12.1 million, primarily due to acquisitions and property additions.

Equity in earnings of affiliates increased 385.5% to a record $7.8 million in the quarter, due to improved Mineral Exploration markets in Latin America. Interest expense increased to $717,000 from $517,000 for the quarter as a result of additional working capital borrowings during the quarter. And Other income and expense for the quarter of $1.3 million included primarily gains of $2.3 million on equipment sales and a loss on currency exchange of $793,000.

The income tax rate for the quarter was 41.9% compared to 50.4% in the prior year. The decrease in the effective rate is primarily attributable to a lesser tax impact of certain foreign operations and foreign affiliates as income before taxes increases. The net result for the quarter was $0.54 per diluted share in earnings compared to $0.33 for last year.

The company's balance sheet at July 31 reflects total assets of $886.7 million; stockholders' equity of $529 million; total long-term debt of $47.5 million, excluding current maturities of $6.7 million; and cash and cash equivalents of $33.3 million.

The company used $14.8 million in cash from operating activities in the quarter. Investing activities totaled $11.6 million, net of proceeds from equipment sales. The investing activities included $904,000 in energy expenditures, with the remainder primarily for PP&E additions to other divisions.

With that, I'll turn it back over to Andy to talk about the operations.

Andrew Schmitt

Thanks, Jerry. We have said from time to time in this weaker economy we were having to generate a lot more revenue to achieve a continued stream of earnings improvement. Certainly, that was true this quarter, as we reported an all-time company record for quarterly revenue, and we needed it.

In our Water Infrastructure group, we had a number of job-related problems in our heavy construction division that adversely affected the quarter. There were several weather events in the Midwest, but most of the damage were self-inflicted, as we were plagued with cost overruns and performance issues.

Year-over-year revenue was down only about 2%, but the aforementioned problems resulted in negative operating EBIT swing of $6 million. Now we've owned Reynolds since late 2005, and except for our record wet spring a couple of years ago, have never had a quarter that was impaled year-over-year like this one, and certainly not on job execution. We have resolved those operating and job management issues and do not expect a recurrence going forward. Naturally, these performance events occur when you can least afford them, as we are experiencing declining heavy construction backlog and tight margins. In the past, at least until this quarter, our job execution has always been the positive offset that allowed us to still show progress, and for once that didn't happen.

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