XNAS:LAYN Layne Christensen Co Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2012
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

_______________________________

Commission File Number 001-34195
 
Logo

Layne Christensen Company
(Exact name of registrant as specified in its charter)
 
 
Delaware   48-0920712
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
1900 Shawnee Mission Parkway, Mission Woods, Kansas   66205
(Address of principal executive offices)   (Zip Code)
 
(Registrant's telephone number, includeing area code) (913) 362-0510
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_____________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [ ]

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]   No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]   No [X]

There were 19,845,876 shares of common stock, $.01 par value per share, outstanding on August 31, 2012.
 
 
 

 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2012
INDEX

 
 
 
 
2

 
 
 
 
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
   
July 31,
   
January 31,
 
(in thousands)
 
2012
   
2012
 
ASSETS
 
(unaudited)
   
(unaudited)
 
             
Current assets:
           
Cash and cash equivalents
  $ 36,321     $ 41,916  
Customer receivables, less allowance of $7,555 and $8,141, respectively
    171,882       162,043  
Costs and estimated earnings in excess of billings on uncompleted contracts
    108,356       107,295  
Inventories
    45,561       35,392  
Deferred income taxes
    25,275       21,895  
Income taxes receivable
    8,407       4,137  
Restricted deposits-current
    3,026       3,143  
Assets of discontinued operations, held for sale
    16,731       -  
Other
    15,768       16,968  
Total current assets
    431,327       392,789  
                 
Property and equipment:
               
Land
    15,169       17,155  
Buildings
    44,220       41,159  
Machinery and equipment
    528,994       478,896  
Gas transportation facilities and equipment
    -       40,995  
Oil and gas properties
    -       102,251  
Mineral interests in oil and gas properties
    -       21,374  
      588,383       701,830  
Less - Accumulated depreciation and depletion
    (324,108 )     (424,473 )
Net property and equipment
    264,275       277,357  
                 
Other assets:
               
Investment in affiliates
    75,562       88,297  
Goodwill
    24,091       19,536  
Other intangible assets, net
    11,590       12,266  
Restricted deposits-long term
    2,860       443  
Deferred income taxes
    70       -  
Other
    21,892       15,148  
Total other assets
    136,065       135,690  
                 
Total assets
  $ 831,667     $ 805,836  
 
See Notes to Consolidated Financial Statements.
- Continued -
 
 
3

 
 
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
 
   
July 31,
   
January 31,
 
(in thousands, except per share data)
 
2012
   
2012
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
(unaudited)
   
(unaudited)
 
             
Current liabilities:
           
Accounts payable
  $ 95,072     $ 104,261  
Current maturities of long term debt
    10,678       7,450  
Accrued compensation
    45,265       48,573  
Accrued insurance expense
    12,871       12,596  
Other accrued expenses
    37,560       29,120  
Acquisition escrow obligation-current
    3,004       3,143  
Liabilities of discontinued operations, held for sale
    2,461       -  
Income taxes payable
    12,101       19,328  
Billings in excess of costs and estimated earnings on uncompleted contracts
    28,812       31,914  
Total current liabilities
    247,824       256,385  
                 
Noncurrent and deferred liabilities:
               
Long-term debt
    109,040       52,716  
Accrued insurance expense
    14,592       14,018  
Deferred income taxes
    -       9,883  
Acquisition escrow obligation-long term
    2,860       443  
Other
    27,520       20,510  
Total noncurrent and deferred liabilities
    154,012       97,570  
Contingencies
               
                 
Stockholders' equity:
               
Common stock, par value $.01 per share, 30,000 shares authorized, 19,810 and 19,669
         
shares issued and outstanding, respectively
    198       197  
Capital in excess of par value
    350,475       351,057  
Retained earnings
    83,359       103,634  
Accumulated other comprehensive loss
    (6,732 )     (6,223 )
Total Layne Christensen Company stockholders' equity
    427,300       448,665  
Noncontrolling interests
    2,531       3,216  
Total equity
    429,831       451,881  
                 
Total liabilities and stockholders' equity
  $ 831,667     $ 805,836  

See Notes to Consolidated Financial Statements.
 
 
 
4

 
 
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
Three Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
 
   
(unaudited)
   
(unaudited)
 
(in thousands, except per share data)
 
2012
   
2011
   
2012
   
2011
 
Revenues
  $ 289,560     $ 289,310     $ 563,003     $ 551,021  
Cost of revenues (exclusive of depreciation, depletion,
                               
and amortization, shown below)
    (230,458 )     (228,572 )     (449,774 )     (426,403 )
Selling, general and administrative expenses
    (41,924 )     (37,478 )     (82,089 )     (76,944 )
Depreciation, depletion and amortization
    (15,984 )     (12,847 )     (29,857 )     (26,238 )
Loss on remeasurement of equity investment
    (7,705 )     -       (7,705 )     -  
Equity in earnings of affiliates
    6,360       7,836       14,122       12,505  
Interest expense
    (841 )     (717 )     (1,416 )     (1,061 )
Other income, net
    1,870       1,266       2,979       8,182  
Income from continuing operations before income taxes
    878       18,798       9,263       41,062  
Income tax expense
    (3,639 )     (7,892 )     (7,127 )     (17,151 )
Net income (loss) from continuing operations
    (2,761 )     10,906       2,136       23,911  
Net income (loss) from discontinued operations
    (21,105 )     272       (22,011 )     899  
Net income (loss)
    (23,866 )     11,178       (19,875 )     24,810  
Net income attributable to noncontrolling interests
    (159 )     (568 )     (400 )     (1,134 )
Net income (loss) attributable to Layne Christensen Company
  $ (24,025 )   $ 10,610     $ (20,275 )   $ 23,676  
                                 
Earnings per share information attributable to
                               
Layne Christensen shareholders:
                               
Basic income (loss) per share - continuing operations
    (0.15 )     0.54       0.09       1.17  
Basic income (loss) per share - discontinued operations
    (1.08 )     0.01       (1.13 )     0.05  
Basic income (loss) per share
  $ (1.23 )   $ 0.55     $ (1.04 )   $ 1.22  
                                 
Diluted income (loss) per share - continuing operations
    (0.15 )     0.53       0.09       1.16  
Diluted income (loss) per share - discontinued operations
    (1.08 )     0.01       (1.11 )     0.04  
Diluted income (loss) per share
  $ (1.23 )   $ 0.54     $ (1.02 )   $ 1.20  
                                 
Weighted average shares outstanding - basic
    19,473       19,453       19,473       19,449  
Dilutive stock options and nonvested shares
    -       204       313       223  
Weighted average shares outstanding  - dilutive
    19,473       19,657       19,786       19,672  

See Notes to Consolidated Financial Statements.
 
 
5

 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
   
Three Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
 
   
(unaudited)
   
(unaudited)
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ (23,866 )   $ 11,178     $ (19,875 )   $ 24,810  
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
                               
(net of tax of $184, $9, $263 and $369, respectively)
    (904 )     310       (509 )     1,743  
Other comprehensive income (loss)
    (904 )     310       (509 )     1,743  
Comprehensive income (loss)
    (24,770 )     11,488       (20,384 )     26,553  
Comprehensive income attributable to noncontrolling
                               
interests (all attributable to net income)
    (159 )     (568 )     (400 )     (1,134 )
Comprehensive income (loss) attributable to Layne
                               
Christensen Company
  $ (24,929 )   $ 10,920     $ (20,784 )   $ 25,419  
See Notes to Consolidated Financial Statements.
 
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
                                 
Total Layne
             
                           
Accumulated
   
Christensen
             
               
Capital In
         
Other
   
Company
             
   
Common Stock
   
Excess of
   
Retained
   
Comprehensive
   
Stockholders'
   
Noncontrolling
 
 
 
(in thousands, except per share data)
 
Shares
   
Amount
   
Par Value
   
Earnings
   
Income (Loss)
   
Equity
   
Interest
   
Total
 
Balance January 31, 2011
    19,540,033     $ 195     $ 347,307     $ 159,709     $ (5,809 )   $ 501,402     $ 2,522     $ 503,924  
Net income
                            23,676               23,676       1,134       24,810  
Other comprehensive income
                                    1,743       1,743               1,743  
Issuance of nonvested shares
    193,188       2       (2 )                     -               -  
Treasury stock purchased and subsequently
                                                         
  cancelled
    (5,220 )             (147 )                     (147 )             (147 )
Expiration of performance contingent
                                                               
  nonvested shares
    (33,251 )                                     -               -  
Issuance of stock upon exercise of options
    9,000               191                       191               191  
Income tax benefit on exercise of options
                    16                       16               16  
Income tax deficiency upon vesting of
                                            -               -  
  restricted shares
                    (83 )                     (83 )             (83 )
Share-based compensation
                    2,228                       2,228               2,228  
Balance July 31, 2011
    19,703,750     $ 197     $ 349,510     $ 183,385     $ (4,066 )   $ 529,026     $ 3,656     $ 532,682  
                                                                 
Balance January 31, 2012
    19,699,272     $ 197     $ 351,057     $ 103,634     $ (6,223 )   $ 448,665     $ 3,216     $ 451,881  
Net income (loss)
                            (20,275 )             (20,275 )     400       (19,875 )
Other comprehensive income (loss)
                                    (509 )     (509 )             (509 )
Issuance of nonvested shares
    110,958       1       (1 )                     -               -  
Income tax deficiency on forfeiture of options
              (202 )                     (202 )             (202 )
Acquisition of noncontrolling interest
                    (2,656 )                     (2,656 )     (87 )     (2,743 )
Distribution to noncontrolling interest
                                            -       (998 )     (998 )
Share-based compensation
                    2,277                       2,277               2,277  
Balance July 31, 2012
    19,810,230     $ 198     $ 350,475     $ 83,359     $ (6,732 )   $ 427,300     $ 2,531     $ 429,831  

See Notes to Consolidated Financial Statements.
 
 
6

 
 
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
 
   
Six Months
 
   
Ended July 31,
 
   
(unaudited)
 
(in thousands)
 
2012
   
2011
 
Cash flow from operating activities:
           
Net income (loss)
  $ (19,875 )   $ 24,810  
Adjustments to reconcile net income (loss) to cash from operating activities:
               
Depreciation, depletion and amortization
    33,540       29,788  
Loss on change in discontinued operations
    32,589       -  
Loss on remeasurement of equity investment
    7,705       -  
Deferred income taxes
    (14,749 )     3,802  
Share-based compensation
    2,277       2,228  
Share-based compensation excess tax benefit
    -       (16 )
Equity in earnings of affiliates
    (14,122 )     (12,505 )
Dividends received from affiliates
    3,358       2,524  
Gain from disposal of property and equipment
    (1,292 )     (8,080 )
Changes in current assets and liabilities, net of effects of acquisitions:
               
Decrease (increase) in customer receivables
    54       (11,369 )
Decrease (increase) in costs and estimated earnings in excess
               
of billings on uncompleted contracts
    1,873       (35,563 )
Increase in inventories
    (8,038 )     (5,676 )
(Increase) decrease in other current assets
    (865 )     3,074  
Decrease in accounts payable and accrued expenses
    (22,111 )     (916 )
Decrease in billings in excess of costs and
               
estimated earnings on uncompleted contracts
    (4,472 )     (9,450 )
Other, net
    1,768       (2,003 )
Cash used in operating activities
    (2,360 )     (19,352 )
Cash flow from investing activities:
               
Additions to property and equipment
    (40,130 )     (30,083 )
Additions to gas transportation facilities and equipment
    (58 )     (29 )
Additions to oil and gas properties
    (1,511 )     (1,526 )
Additions to mineral interests in oil and gas properties
    (102 )     (95 )
Acquisition of businesses, net of cash acquired
    (15,224 )     (8,855 )
Proceeds from disposal of property and equipment
    2,357       12,496  
Deposit of cash into restricted accounts
    -       (9,000 )
Release of cash from restricted accounts
    140       -  
Distribution of restricted cash for prior year acquisitions
    (140 )     -  
Cash used in investing activities
    (54,668 )     (37,092 )
Cash flow from financing activities:
               
Borrowing under revolving loan facilities
    59,500       63,284  
Repayments under revolving loan facilities
    (5,000 )     (20,500 )
Net decrease in notes payable
    (3,101 )     -  
Principal payments under capital lease obligation
    (63 )     -  
Acquisition of noncontrolling interest
    (2,743 )     -  
Distribution to noncontrolling interests
    (998 )     -  
Issuance of common stock upon exercise of stock options
    -       191  
Excess tax benefit on exercise of share-based instruments
    -       16  
Purchases and retirement of treasury stock
    -       (147 )
Cash provided by financing activities
    47,595       42,844  
Effects of exchange rate changes on cash
    3,838       1,879  
Net decrease in cash and cash equivalents
    (5,595 )     (11,721 )
Cash and cash equivalents at beginning of period
    41,916       44,985  
Cash and cash equivalents at end of period
  $ 36,321     $ 33,264  

See Notes to Consolidated Financial Statements.
 
 
7

 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  Accounting Policies and Basis of Presentation
 
Principles of Consolidation - The consolidated financial statements include the accounts of Layne Christensen Company and its subsidiaries (together, the "Company"). Intercompany transactions have been eliminated. Investments in affiliates (20% to 50% owned) in which the Company exercises influence over operating and financial policies are accounted for by the equity method.  The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended January 31, 2012, as filed in its Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. The Company has evaluated subsequent events through the time of the filing of these consolidated financial statements.

Presentation - The Company changed its method of presenting comprehensive income due to the adoption of Financial Accounting Standards Board Accounting Standards Update 2011-05, “Presentation of Comprehensive Income”, during fiscal 2012. The change in presentation has been applied retrospectively to all periods presented.

As discussed further in Note 11, during the second quarter of fiscal 2013, the Company reclassified its Energy Division as a discontinued operation pending its sale, which is expected by the end of the fiscal year.

Use of Estimates in Preparing Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition - Revenues are recognized on large, long-term construction contracts meeting the criteria of Accounting Standards Codification (“ASC”) Topic 605-35 “Construction-Type and Production-Type Contracts” (“ASC Topic 605-35”), using the percentage-of-completion method based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues in the reporting period when such estimates are revised. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, change orders and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Contracts for the Company’s mineral exploration drilling services are billable based on the quantity of drilling performed and revenues for these drilling contracts are recognized on the basis of actual footage or meterage drilled.
As allowed by ASC Topic 605-35, revenue is recognized on smaller, short-term construction contracts using the completed contract method. Provisions for estimated losses on uncompleted construction contracts are made in the period in which such losses are determined.
Revenues for direct sales of equipment and other ancillary products not provided in conjunction with the performance of construction contracts are recognized at the date of delivery to, and acceptance by, the customer. Provisions for estimated warranty obligations are made in the period in which the sales occur.
Revenues for the sale of oil and gas by the Company’s Energy Division are recognized on the basis of volumes sold at the time of delivery to an end user or an interstate pipeline, net of amounts attributable to royalty or working interest holders.
The Company’s revenues are presented net of taxes imposed on revenue-producing transactions with its customers, such as, but not limited to, sales, use, value-added and some excise taxes.

Oil and Gas Properties and Mineral Interests – The Company has followed the full-cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, and salaries, benefits and other internal salary-related costs directly attributable to these activities. Costs associated with production and general corporate activities are expensed in the period incurred. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized. Depletion expense was $2,160,000 and $2,070,000 for the six months ended July 31, 2012 and 2011, respectively. In accordance with the guidance in ASC Subtopic 360-10, the Company will no longer record depletion or depreciation of these assets as they are held for sale.
The Company was  required to review the carrying value of its oil and gas properties under the full cost accounting rules of the SEC (the “Ceiling Test”). The ceiling limitation is the estimated after-tax future net revenues from proved oil and gas properties discounted at 10%, plus the cost of properties not subject to amortization. If our net book value of oil and gas properties, less related deferred income taxes, is in excess of the calculated ceiling, the excess must be written off as an expense. Application of the Ceiling Test requires pricing future revenues at the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of reporting period, unless prices are defined by contractual arrangements, such as fixed-price physical delivery forward sales contracts, when held. Unproved oil and gas properties are not amortized, but are assessed for impairment either individually or on an aggregated basis using a comparison of the carrying values of the unproved properties to net future cash flows.
 
 
8

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

Goodwill - The Company’s impairment evaluation for goodwill is conducted annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. The process of evaluating goodwill for impairment involves the determination of the fair value of the Company’s reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to its operations. The Company believes at this time that the carrying value of the remaining goodwill is appropriate, although to the extent additional information arises or the Company’s strategies change, it is possible that the Company’s conclusions regarding impairment of the remaining goodwill could change and result in a material effect on its financial position and results of operations.
 
Intangible Assets - Other intangible assets primarily consist of trademarks, customer-related intangible assets and patents obtained through business acquisitions. Amortizable intangible assets are being amortized using the straight-line method over their estimated useful lives, which range from 2 to 35 years. The impairment evaluation of the carrying amount of intangible assets with indefinite lives is conducted annually or more frequently if events or changes in circumstances indicate that an asset might be impaired.

Other Long-lived Assets - Long-lived assets, including amortizable intangible assets and the Company’s gas transportation facilities and equipment, are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include but are not limited to the following:
 
significant underperformance of our assets;
 
significant changes in the use of the assets; and
 
significant negative industry or economic trends.
 
The Company believes at this time that the carrying values and useful lives of its long-lived assets continue to be appropriate.

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

Restricted Deposits - Restricted deposits consist of escrow funds associated with acquisitions.

Allowance for Uncollectible Accounts Receivable - The Company makes ongoing estimates relating to the collectability of its accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the allowance, the Company makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and also considers a review of accounts receivable aging, industry trends, customer financial strength, credit standing and payment history to assess the probability of collection.
 
 
9

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

Accrued Insurance Expense - The Company maintains insurance programs where it is responsible for a certain amount of each claim up to a self-insured limit. Estimates are recorded for health and welfare, property and casualty insurance costs that are associated with these programs. These costs are estimated based in part on actuarially determined projections of future payments under these programs. Should a greater amount of claims occur compared to what was estimated or costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.
Costs estimated to be incurred in the future for employee medical benefits, property, workers’ compensation and casualty insurance programs resulting from claims which have occurred are accrued currently. Under the terms of the Company's agreement with the various insurance carriers administering these claims, the Company is not required to remit the total premium until the claims are actually paid by the insurance companies. These costs are not expected to significantly impact liquidity in future periods.

Fair Value of Financial Instruments - The carrying amounts of financial instruments, including cash and cash equivalents, customer receivables and accounts payable, approximate fair value at July 31, 2012 and January 31, 2012, because of the relatively short maturity of those instruments. See Note 4 for disclosure regarding the fair value of indebtedness of the Company, Note 5 for disclosure regarding the fair value of derivative instruments and Note 7 for other fair value disclosures.

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

Derivatives - The Company periodically enters into hedge contracts, which are recorded at fair value, related to certain forecasted foreign currency costs which are accounted for as cash flow hedges, such that changes in fair value for the effective portion of hedge contracts are recorded in accumulated other comprehensive income (loss) in stockholders’ equity, until the hedged item is recognized in operations. The ineffective portion of the derivatives’ change in fair value, if any, is immediately recognized in operations. In addition, the Company may enter into fixed-price natural gas contracts to manage fluctuations in the price of natural gas. These contracts would result in the Company physically delivering gas, and as a result, are exempt from the requirements of ASC Topic 815 under the normal purchases and sales exception. When in place, the contracts are not reflected in the balance sheet at fair value and revenues from the contracts are recognized as the natural gas is delivered under the terms of the contracts (see Note 5 for disclosure regarding the fair value of derivative instruments). The Company does not enter into derivative financial instruments for speculative or trading purposes.

Share-based Compensation - The Company recognizes all share-based instruments in the financial statements and utilizes a fair-value measurement of the associated costs. As of July 31, 2012, the Company had unrecognized compensation expense of $6,280,000 to be recognized over a weighted average period of 2.4 years. For all share-based awards granted after February 1, 2012, the Company determines the fair value of share-based compensation granted in the form of stock options using a lattice valuation model.  Previously, the Black-Scholes model was used.  The Company believes the lattice valuation model will produce a more accurate valuation of its compensation grants as it incorporates additional parameters of grants.  The change did not have a material effect on the consolidated financial statements.
Unearned compensation expense associated with the issuance of nonvested shares is amortized on a straight-line basis as the restrictions on the stock expire, subject to achievement of certain contingencies.

Income Taxes - Income taxes are provided using the asset/liability method, in which deferred taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and affiliates is made only on those amounts in excess of funds considered to be invested indefinitely. In general, the Company records income tax expense during interim periods based on its best estimate of the full year’s effective tax rate. However, income tax expense relating to adjustments to the Company’s liabilities for uncertainty in income tax positions is accounted for discretely in the interim period in which it occurs.
The Company’s estimate of uncertainty in income taxes is based on the framework established in the accounting for income taxes guidance. This guidance addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. For tax positions that meet this recognition threshold, the Company applies judgment, taking into account applicable tax laws and experience in managing tax audits and relevant accounting guidance, to determine the amount of tax benefits to recognize in the financial statements. For each position, the difference between the benefit realized on our tax return and the benefit reflected in the financial statements is recorded as a liability in the consolidated balance sheet. This liability is updated at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with taxing authorities.
 
 
10

 
 
As of July 31 and January 31, 2012, the total amount of unrecognized tax benefits recorded was $15,904,000 and $13,322,000, respectively, of which substantially all would affect the effective tax rate if recognized. The Company does not expect the unrecognized tax benefits to change materially within the next 12 months. The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company reports income tax-related interest and penalties as a component of income tax expense. As of July 31 and January 31, 2012, the total amount of accrued income tax-related interest and penalties included in the balance sheet (recorded in other accrued expenses) was $9,147,000 and $6,810,000, respectively.

Earnings Per Share - Earnings per share are based upon the weighted average number of common and dilutive equivalent shares outstanding. Options to purchase common stock and nonvested shares are included based on the treasury stock method for dilutive earnings per share, except when their effect is antidilutive. Options to purchase 1,400,216 and 1,108,766 shares have been excluded from weighted average shares in the three and six months ended July 31, 2012, respectively, as their effect was antidilutive. A total of 661,091 and 329,977 nonvested shares have been excluded from weighted average shares in the three and six months ended July 31, 2012, respectively, as their effect was antidilutive. Options to purchase 370,433 and 290,433 shares have been excluded from weighted average shares in the three and six months ended July 31, 2011, respectively, as their effect was antidilutive. A total of 193,688 nonvested shares have been excluded from weighted average shares in the three and six months ended July 31, 2011, as their effect was antidilutive.

Supplemental Cash Flow Information - The amounts paid for income taxes, interest and noncash investing and financing activities were as follows:
 
   
Six Months
 
   
Ended July 31,
 
(in thousands)
 
2012
   
2011
 
Income taxes
  $ 8,599     $ 11,695  
Interest
    1,259       772  
Noncash investing and financing activities:
               
Accrued capital additions
    70       3,883  
    Accrued purchase price adjustment     2,323       -  
Deferred debt issuance costs
    -       1,700  

During the six months ended July 31, 2011, the Company deferred $1,700,000 debt issuance costs against the borrowing capacity of its $300,000,000 credit facility. These costs will be amortized over the life of the credit facility agreement. See Note 4 for further discussion of the Company’s credit facility agreement.

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

2.  Acquisitions
Fiscal Year 2013
 
On May 30, 2012, the Company acquired the remaining 50% of Diberil Sociedad Anónima (“Diberil”), a Uruguayan company and parent company to Costa Fortuna (Brazil and Uruguay). We expect Diberil to expand our geoconstruction capabilities into the Brazil market as well as serve as a platform for further expansion into South America. The aggregate purchase price for the remaining 50% of Diberil of  $16,150,000 was comprised of cash  ($2,422,000 of which was placed in escrow to secure certain representations, warranties and indemnifications). The Company acquired the initial 50% interest in Diberil on July 15, 2010. In accordance with accounting guidance in moving Diberil to a fully consolidated basis, the Company remeasured the previously held equity investment to fair value and recognized a loss of $7,705,000 during the period. The fair value of the 50% noncontrolling interest was estimated to be $15,794,000 at the time of the adjustment. The fair value assessment was determined based on various valuation techniques, including our current transaction, adjusted for an assumed control premium.
Acquisition related costs of $228,000 were recorded as an expense in the periods in which the costs were incurred. The preliminary purchase price allocation was based on an assessment of the fair value of the assets and liabilities acquired, using the Company’s internal operational assessments and other analyses, which are Level 3 measurements. The purchase price allocation is provisional pending completion of further valuation analyses. Revisions will be recorded by the Company as adjustments to the purchase price allocation.
 
 
11

 
 
Based on the Company’s preliminary allocations of the purchase price, the acquisition had the following effect on the Company’s consolidated financial position as of the closing date:
 
(in thousands)
 
Diberil
 
Working capital
  $ (3,557 )
Property and equipment
    33,000  
Goodwill
    4,555  
Other intangible assets
    1,400  
Other assets
    9,697  
Other noncurrent liabilities
    (10,828 )
Total purchase price
  $ 34,267  
 
The $4,555,000 of goodwill was assigned to the Geoconstruction Division at the time of acquisition. The purchase price in excess of the value of Diberil’s net assets reflects the strategic value the Company placed on the business. The Company believes it will benefit from synergies as these acquired operations are integrated with the Company’s existing operations. Goodwill associated with the acquisition is expected to be deductible for tax purposes.
The Diberil purchase agreement also provided for a purchase price adjustment based on the levels of working capital and debt at closing.  The adjustment resulted in an additional purchase price of $2,323,000, which will be paid during the quarter ending October 31, 2012.
The total purchase price above consists of the $16,150,000 cash purchase price, the $2,323,000 purchase price adjustment, and the $15,794,000 adjusted basis of our existing investment in Diberil.
The results of operations of Diberil have been included in the Company’s consolidated statements of operations commencing on the closing date.  Including its consolidated and equity basis results, Diberil contributed $2,258,000 and $4,190,000 of income before income taxes during the three and six months ended July 31, 2012, respectively, compared to $799,000 and $925,000 for the three and six months ended July 31, 2011, respectively.
Assuming the remaining 50% of Diberil had been acquired at the beginning of each period, the unaudited pro forma consolidated revenues, net income (loss), and net income (loss) per share of the Company would be as follows:
 
   
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
   
Ended July 31,
   
Ended July 31,
 
(in thousands, except per share data)
 
2012
   
2011
   
2012
   
2011
 
Revenues
  $ 303,194     $ 300,542     $ 593,207     $ 572,270  
                                 
Net income (loss)
    (22,305 )     11,696       (16,379 )     25,178  
                                 
Basic income (loss) per share
  $ (1.15 )   $ 0.60     $ (0.84 )   $ 1.29  
Diluted income (loss) per share
  $ (1.15 )   $ 0.60     $ (0.83 )   $ 1.28  
 
On March 5, 2012, the Company acquired the remaining shares in Layne do Brazil, which were previously held by noncontrolling interests. The shares were acquired for cash payments totaling $2,743,000. In conjunction with the acquisition, the Company eliminated noncontrolling interests of $87,000 and recorded an adjustment to equity of $2,656,000 in accordance with ASC Topic 810.
 
Fiscal Year 2012
 
On February 28, 2011, the Company acquired the Kansas and Colorado cured-in-place pipe (“CIPP”) operations of Wildcat Civil Services (“Wildcat”), a sewer rehabilitation contractor. The acquisition furthered the Company’s expansion and geographic reach of its Inliner group westward. The aggregate purchase price for Wildcat of $8,855,000 was comprised of cash ($442,000 of which was placed in escrow to secure certain representations, warranties and indemnifications).
The purchase price allocation was based on an assessment of the fair value of the assets and liabilities acquired, using the Company’s internal operational assessments and other analyses, which are Level 3 measurements.
Based on the Company’s allocations of the purchase price, the acquisition had the following effect on the Company’s consolidated financial position as of the respective closing date:
 
 
12

 
 

(in thousands)
 
Wildcat
 
Working capital
  $ 293  
Property and equipment
    6,244  
Goodwill
    2,318  
Total purchase price
  $ 8,855  
         
 
The $2,318,000 of goodwill was assigned to the Water Infrastructure Division at the time of acquisition. The purchase price in excess of the value of Wildcat’s net assets reflects the strategic value the Company placed on the business. The Company believed it would benefit from synergies as these acquired operations were integrated with the Company’s existing operations. Goodwill associated with the acquisition is expected to be deductible for tax purposes.
The results of operations for the acquired entity have been included in the Company’s consolidated statements of operations commencing on the closing date. Revenue and income before income taxes for Wildcat since its respective closing date were not significant. Pro forma amounts related to Wildcat for prior periods have not been presented since the acquisition would not have had a significant effect on the Company’s consolidated revenues or net income.
In fiscal year 2011, we acquired certain assets of Intevras Technologies, LLC (“Intevras”).  In addition to the Intevras cash purchase price, there is contingent consideration up to a maximum of $10,000,000 (the “Intevras Earnout Amount”), which is based on a percentage of revenues earned on Intevras products and fixed amounts per barrel of water treated by Intevras products during the 60 months following the acquisition. In accordance with accounting guidance, the Company treated the Intevras Earnout Amount as contingent consideration and estimated the liability at fair value as of the acquisition date and included such consideration as a component of total purchase price. The potential undiscounted amount of all future payments that the Company could be required to make under the agreement is between $0 and $10,000,000. The fair value of the contingent consideration arrangement was estimated by applying a market approach. That measure is based on significant inputs that are not observable in the market, also referred to as Level 3 inputs. Key assumptions include a discount rate of 41.2% and an estimated level of annual revenues of Intevras ranging from $1,500,000 to $6,100,000. As of July 31, 2012, the Intevras Earnout Amount was reassessed and, based on our estimates of the likelihood of future revenues subject to the earnout provisions, assigned no value.

3.  Goodwill and Other Intangible Assets
 
Other intangible assets consist of the following:

   
July 31, 2012
   
January 31, 2012
 
(in thousands)
 
Gross
Carrying
Amount
   
Accumulated Amortization
   
Weighted
Average
Amortization
Period in
Years
   
Gross
Carrying
Amount
   
Accumulated Amortization
   
Weighted
Average
Amortization
Period in
Years
 
Amortizable intangible assets:
                               
Tradenames
  $ 9,250     $ (3,482 )    14     $ 10,950     $ (4,855 )    14  
Customer/contract-related
    3,740       (2,137 )    2       2,340       (1,526 )    2  
Patents
    4,616       (2,685 )    15       4,616       (1,372 )    12  
Non-competition agreements
    680       (198 )    6       705       (165 )    6  
Other
    2,949       (1,143 )    12       2,449       (876 )    13  
Total intangible assets
  $ 21,235     $ (9,645 )           $ 21,060     $ (8,794 )        
                                                 
                                                 

Total amortization expense for other intangible assets was $1,865,000 and $874,000 for the three months ended July 31, 2012 and 2011, respectively and $2,577,000 and $2,456,000 for the six months ended July 31, 2012 and 2011, respectively.

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

(in thousands)
 
Water
Resources
   
Inliner
   
Heavy Civil
   
Geoconstruction
   
Mineral Exploration
   
Energy
   
Other
   
Total
 
Balance January 31, 2012
  $ -     $ 8,915     $ -     $ 10,621     $ -     $ -     $ -     $ 19,536  
Additions
    -       -       -       4,555       -       -       -       4,555  
Balance July 31, 2012
  $ -     $ 8,915     $ -     $ 15,176     $ -     $ -     $ -     $ 24,091  
Accumulated goodwill
                                                               
impairment losses
  $ (17,084 )   $ (23,130 )   $ (44,551 )   $ -     $ (20,225 )   $ (950 )   $ (445 )   $ (106,385 )
 
 
13

 
 
4.   Indebtedness
 
On July 8, 2011, the Company entered into a private shelf agreement (the “Shelf Agreement”) whereby it can issue $150,000,000 in unsecured notes before July 8, 2021.  No unsecured notes have been issued under the Shelf Agreement as of July 31, 2012. The Company issued $20,000,000 of notes under a previous shelf agreement in October 2004 (“Series B Senior Notes”). The Series B Senior Notes had a fixed interest rate of 5.40% and the final payment of $6,667,000 was made on September 29, 2011.
On March 25, 2011, the Company entered into a new revolving credit facility (the “Credit Agreement”) which contains a revolving loan commitment of $300,000,000, less any outstanding letter of credit commitments (which are subject to a $100,000,000 sublimit). The unsecured $300,000,000 facility extends to March 25, 2016, and replaces the Company’s prior credit agreement, which was terminated. The Credit Agreement was entered into to extend the expiration period of the Company’s debt facilities and increase borrowing capacity. The Company funded $1,700,000 of debt issuance costs through borrowings under its Credit Agreement. These costs will be amortized over the life of the agreement.
The Credit Agreement provides for interest at variable rates equal to, at the Company’s option, a LIBOR rate plus 1.25% to 2.25%, or a base rate as defined in the Credit Agreement, plus up to 1.25%, each depending on the Company’s leverage ratio. On July 31, 2012, there were letters of credit of $22,713,000 and borrowings of $107,000,000 outstanding on the Credit Agreement resulting in available capacity of $170,287,000.
The Shelf Agreement and the Credit Agreement contain certain covenants including restrictions on the incurrence of additional indebtedness and liens, investments, acquisitions, transfer or sale of assets, transactions with affiliates, payment of dividends and certain financial maintenance covenants, including among others, fixed charge coverage and leverage ratio. Additionally, the Company must maintain a minimum tangible net worth under the Shelf Agreement. The Company was in compliance with its covenants as of July 31, 2012, and expects to remain in compliance through the term of the agreements.
 
Debt outstanding as of July 31, 2012, and January 31, 2012, whose carrying value approximates fair value, was as follows:

   
July 31,
   
January 31,
 
(in thousands)
 
2012
   
2012
 
Credit agreement
  $ 107,000     $ 52,500  
Capital lease obligations
    2,124       300  
Short-term notes payable
    10,594       7,366  
Total debt
    119,718       60,166  
Less notes payable and current maturities of long-term debt
    (10,678 )     (7,450 )
Total long-term debt
  $ 109,040     $ 52,716  
 
5.  Derivatives
 
The Company’s Energy Division is exposed to fluctuations in the price of natural gas and periodically enters into fixed-price physical delivery contracts to manage natural gas price risk for a portion of its production, if available at attractive prices. As of July 31, 2012 and January 31, 2012 the Company held no such contracts.
The Company has entered into physical delivery contracts in order to facilitate normal recurring sales with our natural gas purchasing counterparty. As of July 31, 2012, the Company had committed to deliver a total of 1,104,000 million British Thermal Units (“MMBtu”) of natural gas through October 2012. The contract price resets daily based on a weighted average price of the reported trades for deliveries on the following day.
Additionally, the Company has foreign operations that have significant costs denominated in foreign currencies, and thus is exposed to risks associated with changes in foreign currency exchange rates. At any point in time, the Company might use various hedge instruments, primarily foreign currency option contracts, to manage the exposures associated with forecasted expatriate labor costs and purchases of operating supplies. As of July 31, 2012 and January 31, 2012 the Company held no such contracts.

6.  Other Income, Net
 
Other income, net consisted of the following for the three and six months ended July 31, 2012 and 2011:

 
   
Three Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Gain from disposal of property and equipment
  $ 863     $ 2,438     $ 1,210     $ 8,080  
Gain on sale of investment securities
    -       -       -       996  
Interest income
    73       36       123       58  
Currency exchange gain (loss)
    374       (793 )     960       (593 )
Other
    560       (415 )     686       (359 )
Total
  $ 1,870     $ 1,266     $ 2,979     $ 8,182  
                                 
 
 
 
14

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

7.  Fair Value Measurements
 
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in the valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The three levels of inputs used to measure fair value are listed below:
 
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets. 
 
Level 3 — Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.
 
The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. The Company’s financial instruments held at fair value are presented below as of July 31, 2012 and January 31, 2012:
 
         
Fair Value Measurements
 
(in thousands)
 
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
July 31, 2012
                       
Financial Assets:
                       
Restricted deposits held at fair value
  $ 5,886     $ 5,886     $ -     $ -  
Net assets of discontinued operations, held for sale(1)
  $ 14,270     $ -     $ -     $ 15,000  
                                 
January 31, 2012
                               
Financial Assets:
                               
Restricted deposits held at fair value
  $ 3,586     $ 3,586     $ -     $ -  
                                 
Financial Liabilities:
                               
Contingent earnout of acquired businesses(2)
  $ 541     $ -     $ -     $ 541  
(1)
In accordance with Subtopic 360-10, long-lived net assets held for sale with a carrying amount of $46,859,000 were written down to their fair value of $15,000,000, less costs to sell of $730,000, resulting in a loss of $32,589,000, which was included in discontinued operations for the period. In accordance with ASC 820, these net assets are measured at fair value on a nonrecurring basis, but are subject to fair value adjustments under certain circumstances (e.g. when a potential impairment event is indicated).
(2)
The fair value of the contingent earnout of acquired businesses is determined using a mark-to-market modeling technique based on significant unobservable inputs calculated using a discounted future cash flows approach. Key assumptions include a discount rate of 41.2% and annual revenues of acquired businesses ranging from $1,500,000 to $6,100,000 over the life of the earnout. As of July 31, 2012, the contingent earnout was reassessed and, based on our estimates of the likelihood of future revenues subject to the earnout provisions, assigned no value.
 
8.  Stock and Stock Option Plans
 
The Company has stock option and employee incentive plans that provide for the granting of options to purchase or the issuance of shares of common stock at a price fixed by the Board of Directors or a committee. As of July 31, 2012, there were 464,740 shares which remain available to be granted under the plans as stock options. The Company has the ability to issue shares under the plans either from new issuances or from treasury, although it has previously always issued new shares and expects to continue to issue new shares in the future. For the six months ended July 31, 2012, the Company granted 110,958 restricted shares which, in general, ratably vest over periods of one to four years from the grant date.
The Company recognized $2,277,000 and $2,228,000 of compensation cost for these share-based plans during the six months ended July 31, 2012 and 2011, respectively. Of these amounts, $953,000 and $685,000, respectively, related to nonvested stock. The total income tax benefit recognized for share-based compensation arrangements was $888,000 and $869,000 for the six months ended July 31, 2012 and 2011, respectively.
A summary of nonvested share activity for the six months ended July 31, 2012, is as follows:
 
 
15

 
 

   
Number of
Shares
   
Average
Grant Date
Fair Value
   
Intrinsic Value
(in thousands)
 
Nonvested stock at January 31, 2012
    226,919     $ 29.94        
Granted
    110,958       23.81        
Vested
    (7,900 )     21.35        
Canceled
    -       -        
Nonvested stock at July 31, 2012
    329,977       28.27     $ 6,623  
                         
 
Significant option groups outstanding at July 31, 2012, related exercise price and remaining contractual term were as follows:

Grant Date
 
Options
Outstanding
   
Options
Exercisable
   
Exercise
Price
   
Remaining
Contractual
Term
(Months)
 
6/04
    20,000       20,000     $ 16.60       23  
6/04
    60,076       60,076       16.65       23  
6/05
    10,000       10,000       17.54       35  
9/05
    104,707       104,707       23.05       38  
1/06
    173,981       173,981       27.87       42  
6/06
    80,000       80,000       29.29       47  
6/07
    65,625       65,625       42.26       59  
7/07
    25,500       25,500       42.76       60  
2/08
    72,439       72,439       35.71       66  
1/09
    6,000       6,000       24.01       77  
2/09
    196,794       196,791       15.78       78  
2/09
    4,580       4,580       15.78       78  
6/09
    106,146       106,146       21.99       82  
6/09
    2,472       2,472       21.99       82  
2/10
    80,149       53,429       27.79       90  
2/10
    2,721       2,721       25.44       90  
2/11
    96,732       32,233       33.10       102  
3/11
    1,312       437       34.50       104  
6/11
    2,096       698       28.71       106  
7/11
    17,893       5,963       29.31       108  
2/12
    180,344       10,140       24.32       114  
4/12
    74,172       -       21.77       116  
7/12
    16,477       -       20.89       119  
      1,400,216       1,033,938                  
                                 
 
All options were granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The weighted average fair value at the date of grant for the options granted was $10.98  and $18.70 for the six months ended July 31, 2012 and 2011, respectively. The fair value was based on an expected life of approximately six years, no dividend yield, an average risk-free rate of 1.31% and 1.84%, respectively, and assumed volatility of all options outstanding are expected to be 55%. The options have terms of ten years from the date of grant and generally vest ratably over periods of one month to five years. Transactions for stock options for the six months ended July 31, 2012, were as follows:

 
 
16

 

 
   
Number of
Shares
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining
Contractual
Term
(Years)
   
Intrinsic Value
(in thousands)
 
Outstanding at January 31, 2012
    1,133,211     $ 26.12       5.8     $ 2,244  
Granted
    270,993       23.41               -  
Forfeited
    (3,988 )     50.06               -  
Outstanding at July 31, 2012
    1,400,216       25.53       6.1       1,468  
                                 
Exercisable at January 31, 2012
    860,756       26.11       5.0       1,710  
Exercisable at July 31, 2012
    1,033,938       25.49       5.1       1,464  
                                 
 
The aggregate intrinsic value was calculated using the difference between the current market price and the exercise price for only those options that have an exercise price less than the current market price.
 
9.  Investment in Affiliates
 
The Company’s investments in affiliates are carried at the fair value of the investment consideration at the date acquired, plus the Company’s equity in undistributed earnings from that date. These affiliates are engaged in mineral exploration drilling, infrastructural construction and the manufacture and supply of drilling equipment, parts and supplies.

     
Percentage
Owned
Christensen Chile, S.A. (Chile)
   
50.00
%
Christensen Commercial, S.A. (Chile)
   
50.00
 
Geotec Boyles Bros., S.A. (Chile)
   
50.00
 
Boytec, S.A. (Panama)
   
50.00
 
Plantel Industrial S.A. (Chile)
   
50.00
 
Boytec Sondajes de Mexico, S.A. de C.V. (Mexico)
   
50.00
 
Geoductos Chile, S.A. (Chile)
   
50.00
 
Boytec, S.A. (Colombia)
   
50.00
 
Centro Internacional de Formacion S.A. (Chile)
   
50.00
 
Diamantina Christensen Trading (Panama)
   
42.69
 
Boyles Bros. do Brasil Ltd. (Brazil)
   
40.00
 
Christensen Commercial, S.A. (Peru)
   
35.38
 
Geotec, S.A. (Peru)
   
35.38
 
Boyles Bros., Diamantina, S.A. (Peru)
   
29.49
 
Mining Drilling Fluids (Panama)
   
25.00
 
Geoestrella S.A. (Chile)
   
25.00
 
 
Financial information of the affiliates is reported with a one-month lag in the reporting period. The impacts of the lag on the Company’s investment and results of operations are not significant. Summarized financial information of the affiliates, including Diberil and its subsidiaries up to the date of acquisition of the remaining 50% equity interest, was as follows:

 
   
Three Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Income statement data:
                       
Revenues
  $ 146,748     $ 137,822     $ 259,898     $ 246,507  
Gross Profit
    30,977       32,982       65,373       57,060  
Operating Income
    18,706       22,735       40,237       38,195  
Net Income
    14,013       17,205       30,814       27,716  
                                 

 
 
17

 
 
10.  Operating Segments
 
The Company is a global solutions provider to the world of essential natural resources – water, minerals and energy. Management defines the Company’s operational organizational structure into discrete divisions based on its primary product lines. Each division comprises a combination of individual district offices, which primarily offer similar types of services and serve similar types of markets. Although individual offices within a division may periodically perform services normally provided by another division, the results of those services are recorded in the offices’ own division. For example, if a Mineral Exploration Division office performed water well drilling services, the revenues would be recorded in the Mineral Exploration Division rather than the Water Resources Division.
 
During fiscal year 2012, the Company changed its reporting segments in connection with the transition to new leadership, reporting relationships and our new One Layne strategy. The Company previously reported segment information under three reporting segments including the Water Infrastructure Group, Mineral Exploration Division and Energy Division. The Company’s  reporting segments now include the Water Resources Division, Inliner Division, Heavy Civil Division, Geoconstruction Division, Mineral Exploration Division and Energy Division. The reporting segment information for prior periods has been recast to match the new reporting segment structure. As discussed in Note 11, the Energy division is now considered a discontinued operation and excluded from the Company’s segment disclosures. The Company’s segments are defined as follows:

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

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

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

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

Mineral Exploration Division
 
The Mineral Exploration Division conducts primarily aboveground drilling activities, including all phases of core drilling, reverse circulation, dual tube, hammer and rotary air-blast methods. Our service offerings include both exploratory and definitional drilling. Global mining companies hire us to extract samples from sites that the mining companies analyze for mineral content before investing heavily in development. We help them determine if there is a minable mineral deposit on the site, assess whether it will be economical to mine and to assist in mapping the mine layout. Our primary markets are in the western U.S., Mexico, Australia, Brazil and Africa. We also have ownership interests in foreign affiliates operating in Latin America that form our primary presence in this market.
 
 
 
18

 
 
Other
 
Other includes our Layne Energy Services initiative of expanding water related services to the energy markets and any other specialty operations not included in one of the other divisions.

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

   
Three Months
   
Six Months
 
   
Ended July 31,
   
Ended July 31,
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Water Resources
  $ 70,633     $ 72,424     $ 140,620     $ 136,776  
Inliner
    35,199       31,593       69,567       60,648  
Heavy Civil
    76,380       92,116       149,251       176,772  
Geoconstruction
    35,187       23,290       59,392       43,114  
Water Infrastructure Group
    217,399       219,423       418,830       417,310  
Mineral Exploration
    70,424       68,997       140,991       131,764  
Other
    1,737       890       3,182       1,947  
Total revenues
  $ 289,560     $ 289,310     $ 563,003     $ 551,021  
                                 
Equity in earnings of affiliates
                               
Geoconstruction
  $ 1,556     $ 799     $ 3,488     $ 925  
Mineral Exploration
    4,804       7,037       10,634       11,580  
Total equity in earnings of affiliates
  $ 6,360     $ 7,836     $ 14,122     $ 12,505  
                                 
Income (loss) from continuing operations before income taxes
                               
Water Resources
  $ 3,194