Description
Filed with the SEC from April 12 to April 18:
Layne Christensen (LAYN)
Gamco Investors (GBL) boosted its holdings to 1,198,844 shares (6.1%), by purchasing 132,400 from Feb. 23 through April 16 at prices ranging from $20.04 to $26.67. Gamco also disclosed selling 400 shares on April 13 at $20.85 each.
BUSINESS OVERVIEW
Our Businesses
We operate within three primary reporting segments – Water Infrastructure, Mineral Exploration and Energy. The characteristics of each of these reporting segments are described below. We operate on a decentralized basis, with approximately 80 sales and operations offices located in most regions of the United States as well as in Africa, Australia, Canada, Mexico, Brazil and Italy.
Since February 1, 2011, Jeffrey J. Reynolds has acted as chief operating officer, and in that capacity is responsible for all operations. Operating presidents for Mineral Exploration, Energy and each reporting unit within Water Infrastructure report to Mr. Reynolds. In addition, our foreign affiliates operate locations in South America and Mexico. See Note 17 to the Consolidated Financial Statements for certain financial information, the operations and geographic spread of our segments and foreign operations.
Each of our service and product lines has major customers; however, no single customer accounted for 10% or more of the Company’s revenues in any of the past three fiscal years. Generally, we negotiate our service contracts with industrial and mining companies and other private entities, while our service contracts with municipalities are generally awarded on a bid basis. Our contracts vary in length depending upon the size and scope of the project. The majority of such contracts are awarded on a fixed price basis, subject to change of circumstance and force majeure adjustments, while a smaller portion are awarded on a cost plus or time and materials basis. Substantially all of the contracts are cancelable for, among other reasons, the convenience of the customer.
Water Infrastructure
Operations
During fiscal 2011, we began to reorganize the management and structure of the Water Infrastructure Division. This culminated in a structure whereby beginning in fiscal 2012, the Water Infrastructure Division, will operate five reporting groups – Water Resources, Water Technologies, Inliner, Heavy Construction and Geoconstruction. Water Resources and Water Technologies formerly constituted the Water Resources group, and Inliner and Heavy Construction constituted the Reynolds group. An operating president heads each of these groups, and has managers reporting to them that are responsible for geographic regions or product lines within each group. Our primary marketing activities for our Water Infrastructure Division are through the division’s local business development managers and project managers who cultivate and maintain contacts with existing and potential customers. We also maintain a business development effort on a national basis which seeks opportunities with industrial customers. In this way, we learn of and are in a position to compete for proposed projects. In addition, water infrastructure personnel monitor industry publications for upcoming bid opportunities.
We are a leading provider of water and wastewater systems and water treatment facilities. We offer, on a bundled basis, a comprehensive range of design, construction and maintenance services for municipal, industrial and agricultural water and wastewater systems. We believe our Water Infrastructure Division is a market leader in the water well drilling industry and provides a full suite of water-related products and services.
The operating groups in the Water Infrastructure Division are described below.
Water Resources – We offer our customers every aspect of a water system, including hydrologic design and construction, source of supply exploration, well and intake construction and well and pump rehabilitation. The Water Resources group provides services in most regions of the U.S.
Our target groundwater drilling market consists of high-volume water wells drilled principally for municipal, industrial and agricultural customers. These wells have more stringent design specifications and are typically deeper and larger in diameter than low-volume residential and agricultural wells. We have strong technical expertise, an in-depth knowledge of U.S. geology and hydrology, a well-maintained modern fleet of appropriately sized drilling equipment and a demonstrated ability to procure sizable performance bonds often required for water related projects.
Water supply development mainly requires the integration of hydrogeology and engineering with proven knowledge and application of drilling techniques. The drilling methods, size and type of equipment depend upon the depth of the wells and the geological formations encountered at the project site. We have extensive well archives in addition to technical personnel to determine geological conditions and aquifer characteristics. We provide feasibility studies using complex geophysical survey methods and have the expertise to analyze the survey results and define the source, depth and magnitude of an aquifer. We can estimate recharge rates, recommend well design features, plan well field design and develop water management plans. To conduct these services, we maintain a staff of professional employees, including geological engineers, geologists, hydro geologists and geophysicists. These attributes enable us to locate suitable water-bearing formations to meet a wide variety of customer requirements.
Our expertise includes all sources of water supply including groundwater as previously discussed, surface sources, and groundwater under the influence of surface waters. We design and construct bank intake structures, submerged intakes, infiltration galleries, and horizontal collector wells. We also design and construct the pipelines and pump stations necessary to convey water from its source to the users.
We believe we are a leader in the rehabilitation of wells and well equipment. Our involvement in the initial drilling of a well positions us to win follow-up rehabilitation business, which is generally a higher margin business than well drilling. Such rehabilitation is required periodically during the life of a well. For instance, in locations where the groundwater contains bacteria, iron, or high mineral content, screen openings may become blocked, reducing the capacity and productivity of the well.
We offer complete diagnostic and rehabilitation services for existing wells, pumps and related equipment through a network of local offices throughout our geographic markets in the U.S. In addition to our well service rigs, we have equipment capable of conducting downhole closed circuit televideo inspections, one of the most effective methods for investigating water well problems, enabling us to effectively diagnose and respond quickly to well and pump performance problems. Our trained and experienced personnel can perform a variety of well rehabilitation techniques, both chemical and mechanical methods; we perform bacteriological well evaluation and water chemistry analyses to complement this effort. We also have the capability and inventory to repair, in our own machine shops, most water well pumps, regardless of manufacturer, as well as to repair well screens, casings and related equipment such as chlorinators, aerators and filtration systems.
We are engaged in helping to evaluate entire well fields and water systems to increase reliability and efficiency. We have the proper combination of technical and service capabilities to bring practical solutions to our clients.
Our Water Resources group also offers environmental drilling services to assist in assessing, investigating, monitoring and characterizing water quality and aquifer parameters. The customers are typically national and regional consulting firms engaged by federal and state agencies, as well as industrial companies that need to assess, define or clean up groundwater contamination sources. We offer a wide range of environmental drilling services including: investigative drilling, installation and testing of monitoring wells to assist the customer in determining the extent of groundwater contamination, installation of recovery wells that extract contaminated groundwater for treatment, which is known as pump and treat remediation, and specialized site safety programs associated with drilling at contaminated sites. In our Health and Safety department, we employ a full-time staff qualified to prepare site specific health and safety plans for hazardous waste cleanup sites as required by the Occupational Safety and Health Administration (“OSHA”) and the Mine Safety and Health Administration (“MSHA”).
We offer specialized drilling services to industrial and mining customers who need dewatering and other construction related services. We also drill deep injection wells for industrial (primarily power) and municipal clients that need to dispose of waste water associated with their treatment processes.
Water Technologies – Our Water Technologies group brings new technologies to the water and wastewater markets, whether through internal development, acquisition or strategic alliance. This group provides Layne’s water treatment equipment engineering services, and 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.
We project opportunities in water treatment to be strongest in the industrial sectors where the challenges are greatest and competitors are fewer. One such industry is oil shale, where oil and gas reserves cannot be accessed without first planning for the handling of contaminant-laden flow-back and produced water. Through internal research and development, acquisition and strategic alliances, we have established a comprehensive and portable filtration/evaporation system that provides a zero-liquid discharge solution, enabling industrial development of energy resources.
Other technologies include a micro-filtration disk filter designed to withstand industrial environments, and a hydro-phobic membrane for the removal of entrained air, trihalomethanes and radon. We offer the only membrane bioreactor made from polytetrafluoroethylene (“PTFE”). This product improves the biological wastewater treatment process, and is more robust than competing products.
Opportunities exist in the power industry where there is demand for mobile de-ionization and mobile reverse osmosis trailers. Target applications include treatment of feed water for boilers and re-use of cooling tower water.
Power plants using steam-driven turbines require silica-free de-ionized water to prevent scaling of the turbines, and the treatment systems that produce this deionization water require periodic re-charging. We are equipped and staffed to provide high flow-rate, mobile de-ionization trailers that produce an adequate supply of high purity water that is silica and scale-free. Rotating and recharging these systems is expected to provide a stable source of repeat business.
Layne’s mobile reverse osmosis and deionization trailers help power plants to provide uninterrupted service and to minimize maintenance. With pre-filtration, these high volume systems process 300-400 gallons per minute, enabling power plants to re-use water from cooling ponds as boiler feed. These systems can also be used in conjunction with other Layne technologies to pre-filter the reject stream for re-use or to discharge to atmosphere through evaporation/crystallizati on. Other industries benefiting from these mobile systems include chemical manufacturing, manufacturers of health and beauty products and food and beverage manufacturers.
Inliner – We provide a diverse range of wastewater pipeline and structure rehabilitation services to our clients. We 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. The trenchless technology minimizes environmental impact and reduces or eliminates surface and social disruption. We are somewhat unique in that the technology itself, the liner tube manufacturer and the largest installer of the CIPP technology are all housed within our family of companies. This vertical integration and ISO quality certifications allow us to provide our clients with single-source accountability as well as added quality assurance and control when it comes to CIPP. While we focus on those CIPP efforts, we also provide a wide variety of other rehabilitative methods including slip lining, excavation and replacement, U-Liner high density polyethylene fold and form and a variety of products for structure rebuilding and coating. Our expertise, experience and customer-oriented contracting combined with our ability to provide a diverse line of products and services allows us to be a unique provider of rehabilitative services.
The geographic reach of our Inliner group was recently expanded through the acquisition in March 2011 of the Kansas and Colorado CIPP operations of Wildcat Civil Services, a sewer rehabilitation contractor. This acquisition will further our expansion westward.
Heavy Construction – We are well-positioned to serve the needs of our municipal and industrial customers by providing the design and construction of both water and wastewater treatment plants, as well as pipeline installation. Continued population growth in water-challenged regions and more stringent regulatory requirements lead to increasing needs to conserve water resources and control contaminants and impurities. We can provide both the design and construction of integrated water and wastewater treatment facilities and the provision of filter media and membranes. These services can also be provided in connection with Ranney collector wells, surface water intakes, pumping stations and groundwater pump stations. We have also expanded into the design and construction of bio-gas facilities.
We have bolstered our capabilities and resources in Heavy Construction through the acquisition in fiscal 2010 and 2009 of W.L. Hailey & Company and Meadors Construction Co., Inc., respectively. These acquisitions expanded our operations in the southeast and Florida.
Geoconstruction – We provide specialized geotechnical construction services to the heavy civil, industrial, and commercial construction markets that are focused primarily on soil stabilization and subterranean structural support during the construction of highways, dams/levees, tunnels, shafts, water lines, subways, marine facilities and other major underground civil construction projects. Soil stabilization services are used to modify weak and unstable soils and provide structural support and groundwater control for excavations. 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. We have expertise in selecting the appropriate ground modification and support techniques to be applied in highly variable geological conditions in addition to extensive experience in successful completion of complex and schedule-driven major underground construction projects.
In the Geoconstruction group, we acquired Bencor Corporation of America – Foundation Specialist (“Bencor”) in October 2010, and a 50% interest in Diberil Sociedad Anonima (“Diberil”) in July 2010. Bencor is a leading contractor in foundation and underground engineering, and Diberil is one of the largest providers of specialty foundation and marine geotechnical services in South America.
Customers and Markets
In the Water Infrastructure Division, our customers are typically municipalities and local operations of industrial businesses. Of our Water Infrastructure revenues in fiscal 2011, approximately 75% were derived from municipalities and approximately 9% were derived from industrial customers while the balance was derived from other customer groups. The term “municipalities” includes local water districts, water utilities, cities, counties and other local governmental entities and agencies that have the responsibility to provide water supplies to residential and commercial users. In the drilling of new water wells, we target customers that require compliance with detailed and demanding specifications and regulations and that often require bonding and insurance, areas in which we believe we have competitive advantages due to our drilling expertise and financial resources.
Water infrastructure demand is driven by the need to provide and protect one of earth’s most essential resources, water, which is drawn from the earth for drinking, irrigation and industrial use. Main drivers for water supply and treatment include shifting demographics and urban sprawl, deteriorating water quality and infrastructure that supplies our water, increasing water demand from industrial expansion, stricter regulation and new technology that allows us to achieve new standards of quality. The U.S. water well drilling industry is highly fragmented, consisting of several thousand regionally and locally based contractors. The majority of these contractors are primarily involved in drilling low-volume water wells for agricultural and residential customers, markets in which we do not generally participate.
Well and pump rehabilitation demand depends on the age and application of the equipment, the quality of material and workmanship applied in the original well construction and changes in depth and quality of the groundwater. Rehabilitation work is often required on an emergency basis or within a relatively short period of time after a performance decline is recognized. Scheduling flexibility and a broad national footprint combined with technical expertise and equipment, are critical for a repair and maintenance service provider. Like the water well drilling market, the market for rehabilitation is highly fragmented. The demand for well and pump rehabilitation in the public market is highly influenced by municipal budgets.
Demand for specialty drilling services is driven by activity at sites operated by governmental agencies (Department of Energy, Department of Defense and the Corps of Engineers), as well as industrial and mining sites. Additionally, the deep injection well market is driven by new regulations and the need to economically dispose of waste associated with municipal and industrial water treatment.
Demand for heavy construction continues to grow as municipalities, industry and agriculture compete for increasingly limited water resources. The combination of tightening regulations and water scarcity has resulted in increasingly sophisticated water consumers, and this in turn has created opportunities for the introduction of long-term sustainable methods and technologies such as aquifer recharge, water re-use, injection wells and zero-liquid discharge treatment systems.
As demographic shifts occur to more water-challenged areas and the number and allowable level of regulated contaminants and impurities becomes stricter, the demand for water recycling (re-use) and conservation services, as well as new specialized treatment media and filtration methods, is expected to remain strong.
Sewer rehabilitation demand is largely a function of deteriorating urban infrastructure compounded by population growth. Additionally, federal and state agencies are forcing municipalities and industry to address pollution resulting from infiltration of damaged or leaking lines.
Competition
Competition for our Water Infrastructure Division’s bundled construction services are primarily local and national specialty general contractors. Our competition in the water well drilling business consists primarily of small, local water well drilling operations and some larger regional competitors. Oil and conventional natural gas well drillers generally do not compete in the water well drilling business because the typical well depths are greater for oil and conventional natural gas and, to a lesser extent, the technology and equipment utilized in these businesses are different. Only a small percentage of all companies that perform water well drilling services have the technical competence and drilling expertise to compete effectively for high-volume municipal and industrial projects, which typically are more demanding than projects in the agricultural or residential well markets. In addition, smaller companies often do not have the financial resources or bonding capacity to compete for large projects. However, there are no proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating into larger companies more comparable in size to us. Water well drilling work is usually obtained on a competitive bid basis for municipalities, while work for industrial customers is obtained on a negotiated or informal bid basis.
As is the case in the water well drilling business, the well and pump rehabilitation business is characterized by a large number of relatively small competitors. We believe only a small percentage of the companies performing these services have the technical expertise necessary to diagnose complex problems, perform many of the sophisticated rehabilitation techniques we offer or repair a wide range of pumps in their own facilities. In addition, many of these companies have only a small number of pump service rigs. Rehabilitation projects are typically negotiated at the time of repair or contracted for in advance depending upon the lead time available for the repair work. Since well and pump rehabilitation work is typically negotiated on an emergency basis or within a relatively short period of time, those companies with available rigs and the requisite expertise have a competitive advantage by being able to respond quickly to repair requests.
Treatment plant and pipeline competitors consist mostly of a few national and many regional companies. The majority of the municipal market is contracted through a public bidding process. While the majority of the market is still price driven, a growing trend supports best value proposals.
Backlog
We track backlog only in our Water Infrastructure Division as we do not believe it has any significance for our other businesses. Our backlog consists of the expected gross revenues associated with executed contracts, or portions thereof, not yet performed by the Company. Backlog is not necessarily a short term business indicator as there can be significant variability in the composition of the contracts and the timing of completion of the services. Our backlog for the Water Infrastructure Division was $585.2 million at January 31, 2011, compared to $554.2 million at January 31, 2010. Our backlog as of year-end is generally completed within the following 12 to 24 months.
Mineral Exploration
Operations
The president for the Mineral Exploration Division has an operations staff as well as country managers who are responsible for operations in each country in which we do business. These managers are responsible for maintaining contact and relationships with large mining operations that perform work on a global basis, as well as junior mining operations that operate more regionally.
CEO BACKGROUND
David A. B. Brown currently serves as Chairman of the Board of Directors of Pride International, Inc. He is also on the board of directors of EMCOR Group, Inc., and from 1984 to 2005 Mr. Brown was president of The Windsor Group, a consulting firm that focuses on energy related issues facing oilfield services and engineering companies. He is a Chartered Accountant and has over 30 years of energy related experience. Mr. Brown’s pertinent experience, qualifications, attributes and skills include: financial literacy and extensive managerial experience attained from serving as the president of The Windsor Group, and the chairman of Pride International, Inc., the knowledge and experience he has attained from service on other public company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 2003, and in his capacity as the Company’s Chairman since 2005.
Andrew B. Schmitt has served as President and Chief Executive Officer of the Company since October 1993. For approximately two years prior to joining the Company, Mr. Schmitt was a partner in two privately owned hydrostatic pump and motor manufacturing companies and an oil and gas service company. He served as President of the Tri-State Oil Tools Division of Baker Hughes Incorporated from February 1988 to October 1991. Mr. Schmitt is also a director of Euronet Worldwide Inc. Mr. Schmitt’s pertinent experience, qualifications, attributes and skills include: financial literacy and extensive managerial experience attained from serving as the president of the Tri-State Oil Tools Division of Baker Hughes Incorporated, a partner in various oil and gas industry companies, and the president and chief executive officer of the Company for over 17 years, the knowledge and experience he has gained from service on other public company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 1993.
J. Samuel Butler has been president of Trinity Petroleum Management, LLC, an oil and gas management outsourcing company, since 1996. Mr. Butler has also served as Chairman of the Board, chief executive officer and president of ST Oil Company, an independent oil and gas exploration and production company, since 1996. Mr. Butler was appointed to the Colorado School of Mines Foundation Board of Governors in 2009, and in 2007, Mr. Butler became the Chairman of Genesis Gas & Oil Partners LLC, a private oil and gas partnership focused on the acquisition and exploitation of coalbed methane and other unconventional oil and gas reserves. Mr. Butler’s pertinent experience, qualifications, attributes and skills include: financial literacy and extensive managerial experience attained from serving as the president, chairman and chief executive officer of two companies in the oil and gas industry, Trinity Petroleum Management, LLC and ST Oil Company, the knowledge and experience he has attained from service on other company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 2003.
Anthony B. Helfet , a retired investment banker, served as the Vice Chairman of the Board of Directors and co-head of Mergers and Acquisitions for Merriman Curhan Ford & Co. from September 2005 to September 2007. Prior to that, he was a special advisor to UBS from September 2001 through December 2001. From 1991 to August 31, 2001, Mr. Helfet was a managing director of the West Coast operations of Dillon, Read & Co. Inc. and its successor organization, UBS. Mr. Helfet was also managing director of the Northwest Region of Merrill Lynch Capital Markets from 1979 to 1989. Historically, Mr. Helfet has held other positions with Dean Witter Reynolds Inc. and Dillon, Read & Co. Inc. Mr. Helfet also served as a director of Alliance HealthCare Services, Inc. from 2001 to 2009. Mr. Helfet’s pertinent experience, qualifications, attributes and skills include: financial literacy and expertise, capital markets expertise, and managerial experience gained through his mergers and acquisitions experience and leadership roles with investment banking firms, Merriman Curhan Ford & Co., UBS, Dillon, Read & Co. Inc., Merrill Lynch Capital Markets and Dean Witter Reynolds Inc., the knowledge and experience he has attained from service on other public company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 2003.
Nelson Obus has served as president of Wynnefield Capital, Inc. since November 1992 and as the managing member of Wynnefield Capital Management, LLC since January 1997. Wynnefield Capital Management manages two partnerships and Wynnefield Capital, Inc. manages one partnership, all three of which invest in small-cap value U.S. public equities. Mr. Obus is also a member of the board of directors of Gilman Ciocia, Inc., a company that provides income tax return preparation, accounting and financial planning services. Mr. Obus’ pertinent experience, qualifications, attributes and skills include: financial literacy and expertise, capital markets expertise and managerial experience gained through his leadership roles and ownership interest in related investment management companies, Wynnefield Capital Management, LLC and Wynnefield Capital, Inc., the knowledge and experience he has attained from service on other public company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 2004.
Jeffrey J. Reynolds became a director of the Company on September 28, 2005, in connection with the acquisition of Reynolds, Inc. by Layne Christensen Company. Mr. Reynolds served as the President of Reynolds, Inc., a company which provides products and services to the water and wastewater industries, from 2001 until February of 2010. Mr. Reynolds also became a Senior Vice President of the Company on September 28, 2005. On March 30, 2006, Mr. Reynolds was promoted to Executive Vice President of the Company overseeing the Water Infrastructure Division and on February 1, 2010, Mr. Reynolds was promoted to Executive Vice President of Operations for the Company overseeing all of the Company’s operating divisions. On February 1, 2011, Mr. Reynolds’ title was changed to Executive Vice President and Chief Operating Officer, but his duties remained the same. Mr. Reynolds’ pertinent experience, qualifications, attributes and skills include: financial literacy and managerial experience attained from serving as the president of Reynolds, Inc., and a senior vice president, executive vice president and chief operating officer for the Company, and the knowledge and experience he has attained from his service on the Company’s Board since 2005.
Robert R. Gilmore is an independent CPA. From 1997 to May 2006 and from March 2008 to present, Mr. Gilmore has served as an independent financial consultant to a number of companies. From May 2006 to February 2008, he was CFO of NextAction Corporation, a private company engaged in multi-channel direct marketing using technology based proprietary lead generation methods for the retail industry. Since April 2003, Mr. Gilmore has been a Director of Eldorado Gold Corporation, serving as Non-Executive Chairman since December of 2009 and as Chairman of its Audit Committee and as a member of its Compensation Committee. Since June 2010, Mr. Gilmore has been a director and the Audit Committee Chairman of Fortuna Silver Mines, Inc. Mr. Gilmore also served as a Director and Audit Committee Chairman of Global Med Technologies, Inc. from March 31, 2006, until March of 2010. He served as a member of its Compensation Committee from October 26, 2007, until March of 2010. From July 2007 to March 2009, Mr. Gilmore was also a Director of Frontera Copper Corporation and served as the Chairman of its Audit Committee. Mr. Gilmore was also a Director and Audit Committee Chairman of Ram Power Corporation from October of 2009 until April of 2010. Mr. Gilmore’s pertinent experience, qualifications, attributes and skills include: public accounting and financial reporting expertise (including extensive experience as a certified public accountant), managerial experience attained from serving as the chief financial officer of NextAction Corporation, the knowledge and experience he has attained from service on other public company boards, and the knowledge and experience he has attained from his service on the Company’s Board since 2009.
Rene J. Robichaud has served as a consultant to various corporate clients, including Black Mesa Energy Services and Prospect Capital, since 2008. Mr. Robichaud served as president and chief executive officer of NS Group, Inc., a publicly traded manufacturer of oil country tubular goods and line pipe, from February of 2000 until the company’s sale in December of 2006. Prior to that, Mr. Robichaud served as president and chief operating officer of NS Group, Inc. from June of 1999 to February of 2000. From 1997 to 1998, Mr. Robichaud served as a managing director and co-head of the Global Metals & Mining Group for Salomon Smith Barney. Mr. Robichaud also served as a director of The Midland Company from 2006 to 2008. Mr. Robichaud’s pertinent experience, qualifications, attributes and skills include: managerial experience he has attained from serving as the president, chief executive officer and chief operating officer of NS Group, Inc., financial literacy and expertise, capital markets expertise, and managerial expertise gained through his mergers and acquisitions experience and leadership roles with Salomon Smith Barney, and the knowledge and experience he has attained from his service on other public company boards and on the Company’s Board since 2009.
MANAGEMENT DISCUSSION FROM LATEST 10K
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 contained in Item 8 of this report. MD&A includes the following sections:
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Our Business — a general description of our business and key 2011 events.
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Consolidated Review of Operations — an analysis of our consolidated results of operations for the three years presented in our Consolidated Financial Statements.
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Operating Segment Review of Operations — an analysis of our results of operations for the three years presented in our Consolidated Financial Statements for our three operating segments: Water Infrastructure, Mineral Exploration and Energy.
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Liquidity and Capital Resources — an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.
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Critical Accounting Policies — a discussion of our critical accounting policies that involve a higher degree of judgment or complexity. This section also includes the impact of new accounting standards.
Our Business
The Company is a multinational company that provides drilling and construction services and related products in two principal markets: water infrastructure and mineral exploration, as well as operates as a producer of oil and unconventional natural gas for the energy market. We operate throughout North America, as well as in Africa, Australia, Brazil and Italy. We also operate through our affiliates in South America. Layne Christensen’s customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting engineering firms, heavy civil construction contractors, oil and gas companies and agribusiness.
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 office’s 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 Infrastructure Division. The Company’s reporting segments are defined as follows:
Water Infrastructure Division
This division provides a full line of water and wastewater related services and products including soil stabilization, hydrological studies, well design, drilling and well development, pump installation, sewer rehabilitation, pipeline construction and well rehabilitation. The division’s offerings include the design and construction of treatment facilities and the provision of filter media and membranes to treat volatile organics and other contaminants such as nitrates, iron, manganese, arsenic, radium and radon in groundwater. The division also offers environmental drilling services to assess and monitor groundwater contaminants.
Through internal growth and acquisitions, the division has continued to expand its capabilities in the areas of the design and build of water and wastewater treatment plants, water treatment product research and development, sewer rehabilitation, water and wastewater transmission lines and soil stabilization.
The division’s operations rely heavily on the municipal sector as approximately 75% of the division’s fiscal 2011 revenues were derived from the municipal market. The municipal sector can be adversely impacted by economic slowdowns. Reduced tax revenues can limit spending and new development by local municipalities. Generally, spending levels in the municipal sector lag an economic recession or recovery.
Mineral Exploration Division
This division provides a complete range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include all phases of core drilling, diamond, reverse circulation, dual tube, hammer and rotary air-blast methods.
Demand for the Company’s mineral exploration drilling services depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold and copper. Mineral exploration is highly speculative and is influenced by a variety of factors, including the prevailing prices for various metals that often fluctuate widely and the availability of credit for mining companies.
The division relies heavily on mining activity in Africa where approximately 31% of total division revenues were generated for fiscal 2011. The Company believes this concentration of risk is mitigated by working for larger international mining companies and the establishment of permanent operating facilities in Africa. Operating difficulties, including but not limited to, political instability, workforce instability, harsh environment, disease and remote locations, all create natural barriers to entry in this market by competitors. The Company believes it has positioned itself as a market leader in Africa and has established the infrastructure to operate effectively.
Energy Division
This division focuses on the exploration and production of unconventional gas and, to a lesser extent, oil properties. This division has primarily been concentrated on projects in the mid-continent region of the United States.
The expansion of the Company’s Energy Division is contingent upon significant cash investments to develop the Company’s unproved acreage. The Company expects to spend approximately $5,000,000 in development activities in fiscal 2012. The production curve for a typical unconventional gas well in the Company’s operating market is generally 10-15 years. Accordingly, the Company expects to earn a return on its investment through proceeds from gas production over an extended period. However, future revenues and profits will be dependent upon a number of factors including consumption levels for natural gas, commodity prices, the economic feasibility of gas exploration and production and the discovery rate of new gas reserves. The Company has 642 net producing wells on-line as of January 31, 2011.
Other
Other includes small service companies and any other specialty operations not included in one of the other divisions.
Key 2011 Events
We have completed three acquisitions during fiscal 2011, Bencor Corporation of America – Foundation Specialist (“Bencor”) in the third quarter and Diberil Sociedad Anónima (“Diberil”) and Intevras Technologies, LLC (“Intevras”) in the second quarter. All of these acquisitions have occurred in our Water Infrastructure Division. Bencor is a foundation construction and underground engineering company operating in the U.S., and was purchased to complement and expand our geoconstruction capabilities. We acquired a 50% interest in Diberil, a specialty foundation and marine geotechnical provider operating in Brazil and Uruguay. This investment was made to expand our soil stabilization service capabilities into these geographic markets. Intevras is a Texas based water treatment operation focusing on the treatment and handling of industrial wastewater which will expand our offerings in the industrial water markets.
In a joint drilling operation with our affiliates in Chile, our personnel and equipment succeeded in reaching 33 trapped miners at the San Jose mine in Chile. The rescue efforts were completed two months ahead of original estimates.
We experienced continued improvements in the minerals exploration markets served by our wholly owned operations and our affiliates. Revenues have increased 69.2% for the year and pre-tax earnings have improved 213.5%.
The Company’s water supply contract in Afghanistan continued during the year. For the year we have recognized revenue of $20.3 million from that contract. We have recently been informed that the drilling program will be curtailed, and expect our involvement to wind down over the course of the first quarter of fiscal 2012.
The majority of the Company’s forward sales contracts in its Energy Division expired in March 2010, and as a result of unfavorable natural gas pricing have not been renewed. Revenues in this division have accordingly dropped 43.9% for the year.
Impact of New Federal Legislation
In the first quarter of fiscal 2011, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act were signed into law. Because the Company generally does not offer post-employment healthcare benefits, the Company was not required to recognize a significant charge associated with the change in tax treatment of Medicare Part D benefits.
Internal Investigation
See Part I, Items 3 (Legal Proceedings) and 1A (Risk Factors) in this Form 10-K for additional information regarding our internal investigation of compliance with the FCPA.
Consolidated Review of Operations
The following table, which is derived from the Company’s Selected Financial Data included in Item 6, presents, for the periods indicated, the percentage relationship which certain items reflected in the Company’s Statements of Income bear to revenues and the percentage increase or decrease in the dollar amount of such items period-to-period.
Comparison of Fiscal 2011 to Fiscal 2010
Revenues increased $159,242,000, or 18.4% to $1,025,659,000, for fiscal 2011, compared to $866,417,000 for fiscal 2010. A further discussion of results of operations by division is presented below.
Cost of revenues increased $125,737,000, or 19.0% to $787,289,000 (76.8% of revenues) for fiscal 2011, compared to $661,552,000 (76.3% of revenues) for fiscal 2010. The increase as a percentage of revenues was primarily due to margin pressures in our heavy construction and energy businesses, partially offset by higher margins in mineral exploration, on our work in Afghanistan and on certain soil stabilization projects.
Selling, general and administrative expenses were $142,808,000 for fiscal 2011, compared to $128,244,000 for fiscal 2010. The increase was primarily the result of increased incentive compensation expenses of $10,399,000 $5,578,000 in added expenses from acquired operations, an increase in consulting expenses of $5,023,000 primarily related to systems implementation and merger and acquisition projects, and an increase in other compensation costs of $737,000. These increases were partially offset by a decrease as the prior year included $4,980,000 of settlement charges recorded for the elimination of our hourly pension plan liabilities.
Depreciation, depletion and amortization expenses were $53,468,000 for fiscal 2011, compared to $57,679,000 for fiscal 2010. The decrease was primarily due to $8,340,000 lower depletion in the Energy Division as a result of updated estimates of economically recoverable gas reserves, partially offset by higher depreciation in the Water Infrastructure Division from acquired assets and ongoing capital expenditures.
In fiscal 2010, the Company recorded a non-cash impairment of oil and gas properties of $21,642,000, or $13,039,000 after income taxes, primarily as a result of a significant continued decline in natural gas prices and the expiration of higher priced forward sales contracts. There were no such impairments recorded in fiscal 2011.
During fiscal 2010, the Company received litigation settlements valued at $3,495,000. The settlements included receipt of land and buildings valued at $2,828,000, and cash receipts of $667,000, net of contingent attorney fees. There were no litigation settlement gains in fiscal 2011.
Equity in earnings of affiliates was $13,153,000 for fiscal 2011, compared to $8,198,000 for fiscal 2010. The increase reflects the impact of an improved minerals exploration market in Latin America, primarily for gold and copper in Chile and Peru.
Interest expense decreased to $1,594,000 for fiscal 2011, compared to $2,734,000 for fiscal 2010. The decrease was a result of scheduled debt reductions.
Income tax expense of $22,581,000 (an effective rate of 41.7%) was recorded for fiscal 2011, compared to income tax expense of $5,093,000 (an effective rate of 78.9%) for fiscal 2010, including an $8,603,000 benefit related to the non-cash impairment charge of proved oil and gas properties recorded as a discrete item in the three months ended July 31, 2009. Excluding the impairment and related tax benefit, the Company would have recorded income tax expense of $13,696,000 (an adjusted effective rate of 48.7%) for fiscal 2010. The effective rate for fiscal 2011 was lower than the adjusted rate for last year due to the reduced impact of non-deductible expenses and the tax treatment of certain foreign operations. As earnings increase, these factors will have a reduced impact on the effective rate since they are relatively fixed.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual divisions, primarily included in selling, general and administrative expenses, were $30,267,000 for fiscal 2011, compared to $28,889,000 for fiscal 2010. The increase was primarily due to an increase in incentive compensation of $2,950,000 based on increased earnings and an increase in consulting fees of $4,000,000 related to systems implementation and merger and acquisition projects. These increases were partially offset by a reduction of $4,980,000 in settlement charges recorded last year for the elimination of our hourly pension plan liabilities.
Comparison of Fiscal 2010 to Fiscal 2009
Revenues for fiscal 2010 decreased $141,646,000, or 14.1%, to $866,417,000 compared to $1,008,063,000 for fiscal 2009. A further discussion of results of operations by division is presented below.
Selling, general and administrative expenses decreased to $128,244,000 for fiscal 2010 compared to $136,687,000 for fiscal 2009 (14.8% and 13.6% of revenues, respectively). The decrease was primarily the result of decreased compensation related expenses, lower legal, professional and consulting fees and reduced travel. These reductions were partially offset by $4,980,000 in settlement charges recorded for the elimination of our hourly pension plan liabilities and increased non-income tax expenses of $2,577,000. Compensation expenses declined based on lower incentive compensation given the Company’s reduced earnings, as well as headcount reductions. Other expense reductions were primarily due to lower activity levels and cost control measures. The increased non-income tax expenses were primarily due to a reassessment in the first quarter of the recoverability of value added tax balances in certain foreign jurisdictions given declines in those economies and higher business tax expenses in those jurisdictions.
Depreciation, depletion and amortization increased to $57,679,000 for fiscal 2010 compared to $52,840,000 for fiscal 2009. The increase was primarily due to higher depletion in the Energy Division and depreciation on capital expenditures in the Water Infrastructure Division. The higher depletion is a result of reduced estimated proved oil and gas reserves due to lower spot gas prices, which are used in estimating future economic production.
The Company recorded non-cash impairments to oil and gas properties of $21,642,000 in fiscal 2010 compared to $28,704,000 in fiscal 2009, with 2009 including $2,014,000 related to an exploration project in Chile. The impairments are primarily a result of low gas prices in the Company’s markets, as noted above, and the expiration of higher priced forward sales contracts. On an after tax basis, the impairments were $13,039,000 and $17,251,000 for 2010 and 2009, respectively.
The Company recorded litigation settlement gains of $3,495,000 and $2,173,000 for the years ended January 31, 2010 and 2009. The settlements in 2010 included receipt of land and buildings valued at $2,828,000, and cash receipts of $667,000, net of contingent attorney fees. Cash receipts, net of contingent attorney fees, of $2,173,000 were received for the year ended January 31, 2009.
Equity in earnings of affiliates decreased to $8,198,000 for fiscal 2010 compared to $14,089,000 for fiscal 2009. The decrease reflects the impact of a soft minerals exploration market in Latin America, primarily for gold and copper.
Interest expense decreased to $2,734,000 for fiscal 2010 compared to $3,614,000 for fiscal 2009. The decrease was primarily a result of scheduled debt reductions.
The Company recorded income tax expense of $5,093,000 (an effective rate of 78.9%) and $21,266,000 (an effective rate of 44.8%) for fiscal 2010 and 2009, respectively. The effective rates exceeded statutory rates due to the impact of nondeductible expenses and the taxation of foreign income. The Company’s effective rate in both years was further impacted by lower pretax income as a result of the non-cash impairment charges in the Energy Division. Excluding the impairments and related tax benefits, the Company would have recorded income tax expense of $13,696,000 (an adjusted effective rate of 48.7%) and $32,719,000 (an adjusted effective rate of 43.0%) for each year. The higher adjusted effective rate in 2010 over 2009 resulted primarily from the impact of nondeductible expenses as adjusted pretax income declined.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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, 2011, 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, 2011. MD&A includes the following sections:
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Our Business — a general description of our business and key fiscal 2012 events.
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Consolidated Review of Operations — an analysis of our consolidated results of operations for the three and nine months ended October 31, 2011.
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Operating Segment Review of Operations — an analysis of our results of operations for the three and nine months ended October 31, 2011 as presented in our Consolidated Financial Statements for our three primary operating segments: Water Infrastructure Division, Mineral Exploration Division and Energy Division.
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Liquidity and Capital Resources — an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.
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Critical Accounting Policies — a discussion of our critical accounting policies that involve a higher degree of judgment or complexity. This section also includes the impact of new accounting standards.
Our Business
The Company is a global solutions provider to the world of essential natural resources – water, minerals and energy. We operate throughout North America, as well as in Africa, Australia, Brazil and Italy. We also operate through our affiliates in South America and Mexico. Layne Christensen’s customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting engineering firms, heavy civil construction contractors, oil and gas companies and agribusiness.
Key Fiscal 2012 Events
On August 23, 2011, the Company appointed Gernot Penzhorn, who was Vice President of Operations for the Mineral Exploration Division, to replace Eric Despain as President of the division. In connection with Mr. Despain’s departure, the Company recognized $820,000 in severance expenses during the three months ended October 31, 2011.
On August 1, 2011, the Company announced its chief executive officer (“CEO”), Andrew B. Schmitt, will retire at the end of the fiscal year ending January 31, 2012. Rene J. Robichaud, a board member, assumed the position of President as of September 6, 2011, and will assume the additional role of CEO upon Mr. Schmitt’s retirement. Mr. Schmitt will continue to serve on the Company’s Board of Directors. In connection with Mr. Schmitt’s retirement, the Company recognized $1,255,000 in retirement benefit costs during the three months ended October 31, 2011, and estimates that it will recognize additional expenses of $1,000,000 during the last three months of fiscal 2012.
The Company’s Water Infrastructure Division has experienced increased competition in the municipal bid market. Competitors are migrating into the market from other areas that are experiencing softness, such as retail housing construction. As a result of this margin pressure and some cost overruns, earnings for the division are down 34.7% for the nine months despite a 9.1% increase in revenues.
The Company experienced continued improvements in the minerals exploration markets served by our wholly owned operations and our Latin America affiliates. For the nine months ended October 31, 2011, revenues in our Mineral Exploration Division have increased 37.5% and pre-tax earnings have improved 96.4% compared to the same period last year.
The Company recognized a gain of $5,282,000 (inclusive of $307,000 amortization of deferred gain) on the sale of a facility in Fontana, California. The facility was sold March 21, 2011, in anticipation of relocating existing operations to a different property. During the three months ended October 31, 2011, a new property was purchased for $8,756,000 and is being prepared for use.
On February 28, 2011, the Company acquired the Kansas and Colorado cured-in-place pipe operations of Wildcat Civil Services, a sewer rehabilitation contractor. The acquisition will further the Company’s expansion and geographic reach of its Inliner group westward.
The majority of the Company’s forward sales contracts in the Energy Division expired in March 2010, and as a result of the unfavorable natural gas pricing have not been renewed. For the nine months ended October 31, 2011, revenues in this division have accordingly dropped 18.9% and pre-tax earnings have decreased 54.4% compared to the same period last year.
CONF CALL
Devin Sullivan
Thank you, Karen. Good morning, everyone, and thank you for joining us today for Layne Christensen's Fourth Quarter and Fiscal Year End 2012 Conference Call. Our speakers today will be Rene Robichaud, President and Chief Executive Officer of Layne Christensen; and Jerry Fanska, Senior Vice President of Finance.
Before we get started, I'd like to remind everyone that statements made during today's call 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, plans, estimates and similar words or phrases. Such statements are based on current expectations and are subject to risks and 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 greater financial or business impact that and management currently anticipates; prevailing prices for various commodities and 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 political condition; and foreign currency fluctuations that may affect worldwide results of operations. Should one or more of these risks and 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 were 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 differ materially from those anticipated in such forward-looking statements.
I'd now like to turn the call over to Rene Robichaud. Rene, please go ahead.
Rene J. Robichaud
Thanks, Devin, and good morning, everyone. By now you've had a chance to review our results for the fourth quarter of fiscal 2012. We had strong performances in our Mineral Exploration, Geoconstruction and Inliner business segments. This was offset by poor results in our Heavy Civil and Water Resources division due to persistent weakness in the municipal markets and various execution issues. We were also weak in our Energy division, which continue to be impacted by very low natural gas prices. The significant non-cash charges we incurred in the fourth quarter should not mask the considerable progress we are making in our efforts to reorganize, rebrand and refocus Layne. We've spent a significant amount of resources, human, capital and technological, in creating a new operating paradigm we call One Layne. This new strategy and focus will allow us to operate across divisions and throughout our organization with the goal of providing one-stop solution to our clients' most challenging water management, construction and drilling projects. I will provide a brief overview of our results and then turn things over to Jerry.
[indiscernible] led by increased revenues at Water Resources, Inliner and Mineral Exploration. Annual revenues rose to $1.1 billion. We recorded $84.6 million net of income tax of non-cash impairment charges in the fourth quarter to reduce the carrying value of goodwill and other intangible assets at our Water Resources, Inliner, Heavy Civil, Energy and Other divisions. These charges were associated with the lingering weakness in the municipal water market and the general economy, as well as our recent corporate initiative to refocus Layne's operations on more traditional water services and the cessation of the use of a number of trade names as we emphasize the Layne name for our services worldwide. Excluding the impact of the impairment charges, the net loss in the fiscal fourth quarter was $3.9 million or $0.20 per share, while net income for all of fiscal 2012 was $28.6 million or $1.45 per share.
Included in the $3.9 million loss in the fourth quarter was the $3.7 million expense, representing our initial, and I emphasize initial, estimates of disgorgement of benefits and related interest associated with the FCPA matter. I encourage you to read very carefully the language associated with this figure in our press release this morning and our soon-to-be-filed 10-K.
The SEC and DOJ have asked us to perform additional analysis, which we are doing. I also want to emphasize that this figure should not be relied upon as a final settlement as the government may not accept it. The amount does not include fines and penalties, which may be part of the settlement, and we cannot, at this time, reasonably estimate these amounts.
As we disclosed in late March, effective in the fourth quarter, we began to separately report 4 business segments that previously comprised the Water Infrastructure Group; Water Resources, Inliner, Heavy Civil and Geoconstruction. Prior year periods will also reflect this change. I will briefly discuss the performance of these segments, excluding the impact of any non-cash charges and comment on trends within each.
Water Resources posted higher revenues across all product lines, most notably, water supply, repair and installation services. We reported a pretax loss in the fourth quarter due in large part to operating losses associated with the restructuring of our water treatment initiatives. Our Water Resources division provides our customers with every aspect of water supply, system development and technology, including hydrologic design and construction, source of supply, water well drilling, specialty drilling, specialty drilling including injection well, and the repair and installation of pumps and related equipment. The division also brings new technologies to the water and wastewater markets and offers water treatment equipment engineering services.
There are several important trends and initiatives underway in Water Resources that you should know about. Our municipal hard-bid business will likely remain soft for at least the next year. While we will always support our municipal customers, we are focused on higher margin negotiated business, industrial opportunities in the exploration and production industry, the mining industry, food and beverage, and the power sectors in addition to targeted international expansion. We expect Water Resources performance in fiscal year '13 to be similar to fiscal year '12.
Our Inliner division provides a diverse range of wastewater pipeline and structure rehabilitation services to our clients. We focus on our proprietary Inliner cured-in-place pipe, or CIPP, which allows us to rehabilitate aging sanitary sewer, storm water and processed water infrastructure to provide structural rebuilding as well as infiltration and inflow reduction. For the quarter, Inliner posted higher revenues and pretax income compared to the prior-year period and for the year, set revenue and profit record. Our Inliner team is incredibly busy juggling people and crews. We have 30 crews working hard and plan on adding one more soon. This business is nicely profitable but still highly competitive. We expect another record year for Inliner.
Our Heavy Civil recorded lower revenues and a pretax loss as competition, margin pressures and project delays created strong headwinds for this municipal-customer based services business. Our Heavy Civil division [indiscernible] agencies and industrial clients by providing integrated solutions for the design and construction of water and wastewater treatment plants, as well as pipeline installation. These solutions include unique water supply capabilities such as horizontal collector well, often referred to as Ranney Well, surface water intake and infiltration gallery. We also design and construct biogas facilities or anaerobic digesters for the purpose of generating and capturing methane gas and emerging renewable energy resources.
Like our Water Resources division, Heavy Civil business outlook is soft for the hard-bid municipal sector over the next year. Our backlog is at $303 million as of March 31, and that includes about $60 million of business that was previously in our Water Resource division and a biogas project.
On average, the quality of our backlog has improved from a year ago, leading us to project breakeven earnings for fiscal year 2013, although first quarter results will likely be negative. We are seeing increasing activity in the sector, but the competition is still tough. Our Heavy Civil, our Water Resources and our water treatment are actively collaborating on a bid for a very large emergency drought project in the Southwest. We expect to see much more collaboration like this going forward.
Our Geoconstruction group provides specialized foundation construction services to the heavy civil, industrial and commercial construction markets that are focused primarily on soil stabilization and subterranean structural support during the construction of dams and 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 pile, vibratory ground improvement and installation of ground anchors. For the fourth quarter, this segment generated lower revenues and pretax income from the prior year, but like Inliner, set revenue and profit record for the full year.
Geoconstruction is a profitable and growing division within Layne. Its results are lumpy and this will likely be the nature of its financial performance in the future. Our Geo business has partnered with our Heavy Civil division to jointly bid on large municipal projects, and we expect this collaboration to continue and provide significant opportunities for Layne. Our Geo business has also partnered with our Water Resources division to bid on the project to help minimize the environmental damage done by the Costa Concordia cruise ship that sunk off the coast of Italy. Our Brazilian partner, Costa Fortuna, has a backlog of roughly $75 million and is doing great. Our Italy-based manufacturing group, Tecniwell, remains the leader in high-pressure pumping and specialty drilling equipment, providing innovative support for our services businesses worldwide. We expect another record year for Geo, but it won't likely get going until May.
Mineral Exploration. While we had a record performance in fiscal year 2012, we had strong activity levels within each of our primary markets for fiscal year '12. Approximately 55% of our revenues from our wholly-owned business were derived from gold exploration and 30% from copper exploration, with the balance from other base metals. This business benefiting from improved pricing and operating efficiencies, which will carry over into fiscal year '13. Macroeconomic tailwinds today are very positive. Commodity prices, demand, record exploration budget, we expect another record year for fiscal year '13.
Just last week, Reuters ran a story that mining investment in Chile should reach $100 billion by the year 2020. Chile is expected to produce 7.5 million tons of copper annually within the next 8 years, and that's up from 5.2 million tons last year.
In the Energy Division, our revenues in pretax income were impacted by low natural gas prices, which are down significantly from fiscal year 2011. In response, we increased oil production and reduced overhead expenses. We are focused on alternatives for our E&P business, including the sale. Our emerging Energy Services business will provide integrated water management solutions to leading oil and gas operators.
I'll now turn the call over to Jerry Fanska, who will review our results for the fourth quarter. After that, I will provide additional details with respect to the changes in our corporate strategy and the associated initiative. Jerry?
Jerry W. Fanska
Thank you, Rene, and thanks to each of you for participating in the call today. Rene touched on a few of our metrics for the quarter, so let me begin with a discussion of the non-cash impairment charges recorded in the fourth quarter. The total charges were $97.5 million pretax or $84.6 million net of income tax. Including these charges is a net loss for the fourth quarter was $88.5 million or $4.55 per share compared to net income of $8.8 million or $0.45 per diluted share last year. The net loss for the full year was $56.1 million or $2.88 per share compared to net income of $30 million or $1.53 per diluted share in 2011. Excluding these charges, the net loss for Q4 would have been $3.9 million or $0.20 per share compared to net income of $8.8 million or $0.45 per diluted share for the fourth quarter of 2011, and net income for the full year of 2012 would have been $28.6 million or $1.45 per diluted share compared to $30 million or $1.53 per diluted share in fiscal 2011. The net loss, excluding the impairment charges, for Q4 of $3.9 million compared to what we anticipated to be breakeven and disclosed in our pre-release includes the $3.7 million in expenses associated with the FCPA matter, as Rene discussed, and certain income tax adjustments booked after the pre-release.
Revenues increased by $4 million or 1.5% to $275.8 million for the fourth quarter in 2012 and by $107.5 million or 10.5% to $1.1 billion for the full year. Higher revenues in the fourth quarter were primarily due to strong activity across all Mineral Exploration division locations, with the largest increases in Africa, the Western U.S. and Mexico, as well as higher sewer rehabilitation revenues from our Inliner division. For fiscal 2012, the revenues increased primarily due to the Mineral Exploration performance and the impact of recently acquired operations.
Higher cost of revenues on a percentage of revenue basis for the fourth quarter and the full year were primarily due to cost overruns and project delays in our Heavy Civil division in the second half of the year and by margin pressures in our Heavy Civil and Water Resources division due to continuing weakness in municipal spending.
SG&A rose to $45.4 million in the fourth quarter from $39.7 million last year. In addition to the FCPA expense of $3.7 million taken in the fourth quarter, higher SG&A was primarily the result of increased compensation expenses of $1 million, $1.6 million associated with the executive transition cost and added expenses from acquired operations of $0.5 million. These increases were partially offset by reductions in incentive compensation requirements of $1.7 million in the fourth quarter.
Depreciation, depreciation and amortization increased to $17.8 million in the fourth quarter from $14.4 million last year, reflecting increases in assets from acquisitions and property additions. Equity in earnings of affiliates increased to $5.6 million for the fourth quarter from $5.4 million last year, primarily attributable to the $1.3 million increase in earnings from our Geoconstruction affiliate in Brazil, offset by a $0.5 million decrease in earnings from our Latin American affiliates in Mineral Exploration. Our Mineral Exploration affiliates' result in the fourth quarter were impacted by certain project start-up expenses and other project delays. The increase for fiscal 2012 reflects the impact of an improved Mineral Exploration market in Latin America, primarily for copper and gold in Chile and Peru, as well as a full year of operations from our Geoconstruction affiliate in Brazil.
Higher interest expense was due primarily to higher borrowings under the revolving credit facility to fund operations. Other income net for fiscal 2012 was $9.6 million compared to $500,000 last year and consisted primarily of a gain of $5.4 million on the sale of our Fontana property in California in anticipation of relocating these existing operations, a gain of $1 million on the sale of certain investment securities in Australia and gains of $2.9 million on the sale of other equipment. Income tax benefit was $12.8 million in the fourth quarter compared to an income tax expense of $5 million in last year's fourth quarter. Excluding the impact of the impairment charges in the fourth quarter, we would have recorded income tax expense of $100,000. The adjusted effective rates for the current period were lower than the effective rates for the comparable prior quarters periods due to continued increase in forecasted equity earnings of affiliates as a percentage of forecasted income before income taxes. As a substantial part of the non-dividend portion of these earnings is considered indefinitely re-investment, it tends to lower our effective tax rate overall.
For our fiscal 2013, we expect our effective rate to be approximately 43%. I do want to reiterate that the non-cash charges we incurred in the fourth quarter of fiscal 2012 do not affect our -- the company's liquidity, cash flows from operations or the calculation of financial ratios under our credit facility. We have been in touch with a number of our lenders, and I believe they are very supportive of Layne's current strategic moves. Our cash position at the end of the year was $45.2 million, we had working capital of $136.4 million. Long-term debt less current maturities was $52.7 million and our stockholders' equity was $448.7 million (sic) [$448.6 million] or about $22.78 per share. With that, I will turn it back over to Rene. Rene?
Rene J. Robichaud
Thanks, Jerry. I want to thank all of you for your patience and continuing interest in Layne, as we have devoted ourselves to re-imagining and re-making the company as a total solutions provider. The attributes that set Layne apart from the competition are creating the foundation that is bringing us together as an organization. We have a 130-year history of locating, sourcing, delivering and managing the world's essential natural resources. Our library of hydrological mass is unparalleled. No company has drilled more water wells approximately 50,000 than Layne, and our wholly-owned mineral rig count at year end was 186.
Layne's technical competency has allowed us to complete some of the most complex projects ever attempted, including those that involve saving the most precious of resources, people. What we have not done well is position ourselves as a one-stop shop. Instead, we have focused, quite successfully I may add, on providing individual services. This is changing. Over the last several months, management and employees have worked together to create an operating paradigm in which we share one vision: to be the leading sustainable solutions provider to the world of essential natural resources, water, mineral, energy; and to commit to one purpose, to enhance the lives of people by providing and protecting the world's essential resources; also that we may operate as One Layne. By doing so, we believe that we can provide sustainable growth and the income that creates long-term value for the stakeholders of Layne.
We have 4 fundamental values: safety, sustainability, integrity and excellence, that set high standards for Layne employees worldwide, as well as 8 foundational beliefs that guide our attitude, behavior and decision-making. These values and beliefs have resulted in new daily habits for planning our businesses, collaborating across divisional and functional lines and following up on our objectives and goals, so that we may maximize our performance over the long term.
We have the assets in place so this process will be evolutionary. It will not happen overnight, but it is happening. I've mentioned some examples of our teams working collaboratively on large projects for the benefit of our clients and Layne. You will hear more about this in the months and years ahead.
During fiscal 2013, we will focus on increasing our international Water Resources business and seeking out clients whose calculus for choosing their service provider include something in addition to price, people, knowledge and experience. We will continue to migrate towards higher margin work derived from our industrial and energy clients who value our differentiated services.
This has impacted our Heavy Civil backlog, which declined to $308 million at January 31 from $358 million at January 31, 2011. Although we do not expect to return to fiscal 2011 backlog levels this year, our shift in strategy to larger, more complex projects that our smaller, less-experienced competitors are unable to manage should lead to better profit. We see a significant strategic opportunity to create and build the Water Services business that addresses the energy industry. We do not expect to be in the oil and gas business for the long term. However, we do intend to be in the oil and gas services business for quite some time. Because of this shift in strategy, we are currently exploring strategic alternatives for the E&P business, including a potential sale. We are developing our total water solutions business under the energy services banner. Building this new business over the next 3 to 5 years will require coordinated entry strategy in this sector with our Water Resources, Water Treatment and Heavy Civil division committing their vast resources.
At Inliner, we'll manage growth and adapt to market changes in order to deliver quality solutions, products and services, with continual attention to meeting or exceeding revenue and margin expectations. We'll focus on and promote our devotion to safe practices, the One Layne integration strategy, new product development and expansion in new markets. The overall plan for Heavy Civil is to strategically grow revenue and income over the next 5 years by focusing on the following: positioning ourselves to take advantage of a rebounding infrastructure market; creating new and expanded synergies and cross-fertilization opportunities as part of our One Layne initiative; increasing market share created by the attrition of weaker competitors; expanding our business development culture to effectively shift our mix of projects to those allowing higher anticipated margins; upgrading our management team where appropriate to meet future challenges and goals and actively managing our cost across the organization.
At Geo group, we will remain at the leading edge of the state-of-the-art practice in our industry educating, training and mentoring the next generation of field and management personnel, focusing on research and development both internally and in partnership with selected leading specialized equipment designers and manufacturers, increase our focus and efforts in selected international markets to reduce our dependence on the highly competitive U.S. market while leveraging existing relationships where market and competitive positions are more favorable.
At Mineral Exploration. We expect modest increases in rig count with an associated focus on higher average rig utilization. We'll strive to differentiate our services to advance technology, sustainable business practices and industry-leading safety practices.
Deliberately, methodically and passionately, we're evolving into an organization that provides responsible solutions to the world's water, mineral and energy challenges. We are holding ourselves accountable every day for the safety of our employees, the sustainability of the environment in which we work, the integrity of our employees and the excellence of our work. We are creating an environment based on collaboration, long-term relationship and total solution. We are grateful for your continuing interest, and we're devoted to championing your investments in our company. Thank you for your attendance today, and we're now happy to answer your questions.
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Fund Letters
