Sizing Up Layne Christensen's Turnaround

| About: Layne Christensen (LAYN)

Summary

Green shoots are appearing over at Layne Christensen.

Layne Christensen is a turnaround story that we believe is just starting to get traction after a few horrible years.

CEO Michael Caliel was hired at the end of 2014 and has worked to streamline Layne Christensen’s sprawling industrial operations into a more focused company.

Green shoots are appearing over at Layne Christensen (NASDAQ:LAYN). Last week the company announced fourth-quarter and full-year fiscal 2016 earnings (ended January 31), followed up by an analyst day in New York. The equity market liked what it heard, and the stock jumped from around $7.00 per share where it has been trading for a couple of months to close the week at $7.74. Layne Christensen is a turnaround story that we believe is just starting to get traction after a few horrible years. CEO Michael Caliel was hired at the end of 2014 and has worked to streamline Layne Christensen's sprawling industrial operations into a more focused company.

The Business

Layne Christensen currently operates in four main business segments:

Water Resources: The Company provides water drilling and equipment services to municipal and industrial customers.

Inliner:Through its proprietary cured-in-place pipe technology, Layne Christensen provides piping network rehabilitation services for wastewater, storm water and process sewer systems.

Heavy Civil: Undertakes design and construction services for water and waste water pipelines and plants.

Mineral Services: Undertakes sample drilling for the minerals industry.

In 2015, Layne Christensen began the task of reorganizing. It sold its geoconstruction business for $34.5 million. The business specialized in the construction of geotechnical foundations for the heavy civil, industrial and commercial industries. The company also folded its energy services segment into its water resources segment. Energy services focus mainly on the water needs of the oil and gas industry in addition to pipe vibration services. Streamlining the business segments made sense in what previously was a sprawling corporate structure for a company with less than $800 million in revenue. The new structure offers opportunity for cost savings and improves focus on the company's existing businesses.

A look at Layne Christensen's revenue by segment highlights where progress has been made and where more work needs to be done.

Revenue by Business Segment ($ thousands)

2016

2015

2014

Revenues

Water Resources

227,534

216,452

182,211

Inliner

193,704

175,001

148,384

Heavy Civil

175,773

207,036

267,192

Mineral Services

85,922

120,217

172,960

Other

17,682

19,178

19,935

Intersegment Eliminations

(17,605)

(17,316)

(18,580)

Total revenues

683,010

720,568

772,102

2016

2015

2014

Income/Loss from Continuing Operations by Business Segment

Water Resources

5,372

10,695

(2,196)

Inliner

24,461

22,870

17,650

Heavy Civil

(4,633)

(21,502)

(7,781)

Mineral Services

(28,043)

(14,909)

(9,534)

Other

(132)

(55)

193

Source: SEC Filings

The Water Resources and Inline businesses are profitable and growing. Management sees continued growth in the Water Resources segment as water markets, particularly California, work through water shortages and drought. The Inliner business is also expected to perform well given the aging municipal and private water infrastructure in the United States.

Meanwhile, everyone is waiting for the bottom in the mineral industry and no one seems willing to put a stake in the ground as to the timing. Layne Christensen management believes their mineral services segment will be a viable business once the industry troughs, but is also unwilling to make that timing call. Management is focused on making the business profitable regardless of industry outlook.

The Heavy Civil segment has been a headache for Layne Christensen for many years as the company took on fixed revenue projects that were plagued with cost overruns. The business should see gradual improvement as management seeks to enter into contracts with more flexible pricing.

Financial Results

Financial operations are improving for the company. Fourth quarter adjusted EBITDA rose to $3.6 million compared to results of ($5.8) million in the fourth quarter 2015. Full year 2016 adjusted EBITDA was $20.4 million versus ($1.4) million in 2015. Net loss per share in Q4 2016 was ($0.84) versus ($1.16) in Q4 2015. While not stellar numbers, they are headed in the right direction.

As the company has streamlined its business and the mineral segment remains locked in recession, backlog has fallen from $386.4 million at the end of fiscal 2015 to the current $346.3 million. While a lower number, overall the mix should prove to be more profitable than in years past.

Current cash equivalents are $65.6 million versus total debt of $159.1 million. Total liquidity including the undrawn portion of the revolving credit facility stands at $131.7 million.

The company's two convertible bonds represent almost all of Layne Christensen's long-term debt. That includes the $100 million 8.00% 2019 bond and the $70 million 4.25% 2018 bond.

Conclusions

Layne Christensen remains in the early stages of its turnaround, although analysts are giving the company the benefit of the doubt. Consensus estimates call for a loss of ($0.53) per share on revenues of $680 million this year followed up by net income of $0.31 per share on revenues of $737 million in 2017.

No measure can be all things to all bonds, and HOCS is unlikely to join in the fun any time soon. The current HOCS score on the 2019 bond is 48 overall/60 growth/24 safety, but the growth score is encouraging. The safety score is depressed because of the tiny market capitalization even after the latest run-up.

For the really bullish, consider Layne Christensen a gold play. Its Mineral Services segment is heavily weighted toward gold and copper. If the gold rally continues, the minerals business should at least begin to stabilize.

While the convertibles offer intriguing profiles, the fly in the ointment is the lack of outstanding paper. For those interested in the company, we would suggest a "Texas Hedge", buying the common stock (especially alongside the 2018 convertible) to boost returns if the turnaround story continues to play out.

Disclosure

An affiliate of Hillside Advisors has a position in Layne Christensen securities.

Disclosure: I am/we are long LAYN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Originally published 4/18/16 in Hybrid Vigor, a Hillside Advisors LLC publication.

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