Layne Christensen: Water Works

11/29/2013 7:00 am EST


George Putnam

Editor, The Turnaround Letter

We believe that water-related issues will continue to grow in importance around the globe, and we think this bodes well for our latest turnaround candidate, forecasts George Putnam, editor of The Turnaround Letter.

Over its 130-year history Layne Christensen (LAYN) has evolved from a domestic water company into a global provider of services to the water infrastructure, mining, and oil and gas industries; its clients include both governmental and private entities.

The company has encountered a variety of headwinds. Its Heavy Civil division bid too aggressively on several large projects a couple of years ago, and the company has been losing money on those projects ever since.

In addition, its Mining division has suffered from the global slowdown in the mining sector, as commodity prices have fallen. As a result, the company has reported sizable losses for two years.

While the red ink may continue to flow for a few more quarters, Layne has a number of the features that we like to see in a turnaround: a strong market position, a new CEO, a catalyst for change, a decent balance sheet, and exposure to a growing market.

With its long history, Layne is a major player in most of its lines of business. For example, in the water sector in the US, it is the largest driller of wells, number two in trenchless pipeline rehabilitation, and one of the top five in sewer repair and construction. In the mining sector, it is the third largest provider of drilling services.

In 2011, the company brought in a new CEO, Rene Robichaud, who has a strong resume as a turnaround leader. In a previous post, he turned around a maker of tubular steel products, eventually selling the company for about ten times its market value, from when he took over six years earlier.

At Layne, Robichaud has taken a number of steps, including realigning business units to make executives more accountable, divesting non-core assets, and creating a culture of more disciplined budgeting.

The most immediate catalyst for improved results is the completion of most of the poorly bid, unprofitable projects. In the latest quarter, the Heavy Civil division reported “essentially break-even results,” after several periods of large losses, and it is expected to be profitable later in the fiscal year.

The balance sheet is decent, with a manageable debt load of about $100 million. Cash flow is improving, with many of the recent losses coming from non-cash write-downs.

In addition to improved prospects in its traditional business lines, Layne has strong growth potential in the newer parts of the oil and gas services sector. Layne's water management expertise is likely to be in high-demand in the fast-growing and water-intensive hydraulic fracturing (or “fracking”) area.

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