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EX-32 - EXHIBIT 32 - BakerCorp International, Inc. | bakercorpexhibit32-1031201.htm |
EX-31.2 - EXHIBIT 31.2 - BakerCorp International, Inc. | bakercorpexhibit312-103120.htm |
EX-31.1 - EXHIBIT 31.1 - BakerCorp International, Inc. | bakercorpexhibit3111031201.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 31, 2017
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: 333-181780
___________________________________________________
BAKERCORP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware | 13-4315148 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7800 N. Dallas Parkway, Suite 500, Plano, Texas | 75024 | |
(Address of principal executive offices) | (Zip Code) |
(888) 882-4895
(Registrant’s telephone number, including area code)
___________________________________________________
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 ¨ No ý*
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.
Indicate 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
There is no public market for the registrant’s common stock. There were 100 shares of the registrant’s common stock, par value $0.01 per share, outstanding on December 12, 2017.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
October 31, 2017 | January 31, 2017 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 28,565 | $ | 44,563 | |||
Accounts receivable, net of allowance for doubtful accounts of $5,914 and $5,152, respectively | 69,240 | 52,478 | |||||
Inventories, net | 4,326 | 3,721 | |||||
Prepaid expenses and other assets | 3,047 | 4,145 | |||||
Total current assets | 105,178 | 104,907 | |||||
Property and equipment, net | 313,570 | 320,707 | |||||
Goodwill | 54,251 | 49,918 | |||||
Other intangible assets, net | 343,103 | 354,418 | |||||
Other assets | 1,295 | 590 | |||||
Total assets | $ | 817,397 | $ | 830,540 | |||
Liabilities and shareholder’s equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 20,049 | $ | 17,697 | |||
Accrued expenses | 24,983 | 21,855 | |||||
Current portion of long-term debt (net of deferred financing costs of $3,210 and $3,080, respectively) | 953 | 1,082 | |||||
Total current liabilities | 45,985 | 40,634 | |||||
Long-term debt, net of current portion (net of deferred financing costs of $1,768 and $4,183, respectively) | 633,687 | 634,395 | |||||
Deferred tax liabilities, net | 98,687 | 110,114 | |||||
Share-based compensation liability | 35 | 66 | |||||
Other long-term liabilities | 2,492 | 2,936 | |||||
Total liabilities | 780,886 | 788,145 | |||||
Commitments and contingencies | |||||||
Shareholder’s equity: | |||||||
Common stock, $0.01 par value; 100,000 shares authorized; 100 shares issued and outstanding as of October 31, 2017 and January 31, 2017 | — | — | |||||
Additional paid-in capital | 393,534 | 393,094 | |||||
Accumulated other comprehensive loss | (30,277 | ) | (41,537 | ) | |||
Accumulated deficit | (326,746 | ) | (309,162 | ) | |||
Total shareholder’s equity | 36,511 | 42,395 | |||||
Total liabilities and shareholder’s equity | $ | 817,397 | $ | 830,540 |
See Accompanying Notes
1
BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(In thousands)
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue: | |||||||||||||||
Rental revenue | $ | 60,042 | $ | 55,592 | $ | 165,508 | $ | 159,357 | |||||||
Sales revenue | 4,468 | 4,327 | 14,396 | 13,023 | |||||||||||
Service revenue | 9,279 | 8,393 | 25,225 | 24,164 | |||||||||||
Total revenue | 73,789 | 68,312 | 205,129 | 196,544 | |||||||||||
Operating expenses: | |||||||||||||||
Employee related expenses | 24,620 | 23,458 | 73,593 | 72,415 | |||||||||||
Rental expenses | 9,827 | 9,032 | 27,396 | 23,382 | |||||||||||
Repair and maintenance | 3,691 | 2,973 | 10,300 | 8,160 | |||||||||||
Cost of goods sold | 2,492 | 2,431 | 9,051 | 7,793 | |||||||||||
Facility expenses | 7,203 | 6,417 | 20,886 | 20,022 | |||||||||||
Professional fees | 3,208 | 758 | 5,256 | 2,976 | |||||||||||
Other operating expenses | 4,537 | 3,519 | 12,125 | 10,501 | |||||||||||
Depreciation and amortization | 15,000 | 15,018 | 44,469 | 45,202 | |||||||||||
Gain on sale of equipment | (964 | ) | (1,003 | ) | (2,690 | ) | (2,637 | ) | |||||||
Impairment of goodwill and other intangible assets | — | — | 1,000 | 84,046 | |||||||||||
Impairment of long-lived assets | 859 | 3,933 | 1,155 | 4,372 | |||||||||||
Total operating expenses | 70,473 | 66,536 | 202,541 | 276,232 | |||||||||||
Income (loss) from operations | 3,316 | 1,776 | 2,588 | (79,688 | ) | ||||||||||
Other expenses: | |||||||||||||||
Interest expense, net | 10,281 | 10,121 | 30,473 | 31,270 | |||||||||||
Foreign currency exchange gain, net | 167 | 720 | 24 | 958 | |||||||||||
Other income, net | (5 | ) | (5 | ) | (15 | ) | (17 | ) | |||||||
Total other expenses, net | 10,443 | 10,836 | 30,482 | 32,211 | |||||||||||
Loss before income tax benefit | (7,127 | ) | (9,060 | ) | (27,894 | ) | (111,899 | ) | |||||||
Income tax benefit | (2,703 | ) | (2,604 | ) | (10,310 | ) | (25,745 | ) | |||||||
Net loss | $ | (4,424 | ) | $ | (6,456 | ) | $ | (17,584 | ) | $ | (86,154 | ) |
See Accompanying Notes
2
BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (loss) (unaudited)
(In thousands)
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net loss | $ | (4,424 | ) | $ | (6,456 | ) | $ | (17,584 | ) | $ | (86,154 | ) | |||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $365 for the nine months ended October 31, 2016 | — | — | — | 586 | |||||||||||
Foreign currency translation adjustments | (1,732 | ) | (2,553 | ) | 11,260 | 667 | |||||||||
Other comprehensive income (loss) | (1,732 | ) | (2,553 | ) | 11,260 | 1,253 | |||||||||
Total comprehensive loss | $ | (6,156 | ) | $ | (9,009 | ) | $ | (6,324 | ) | $ | (84,901 | ) |
See Accompanying Notes
3
BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine Months Ended October 31, | |||||||
2017 | 2016 | ||||||
Operating activities | |||||||
Net loss | $ | (17,584 | ) | $ | (86,154 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Provision for doubtful accounts | 914 | 887 | |||||
Provision for excess and obsolete inventory, net | 74 | — | |||||
Share-based compensation | 446 | 135 | |||||
Gain on sale of equipment | (2,690 | ) | (2,637 | ) | |||
Depreciation and amortization | 44,469 | 45,202 | |||||
Amortization of deferred financing costs | 2,285 | 2,168 | |||||
Deferred income taxes | (11,960 | ) | (27,426 | ) | |||
Amortization of above-market lease | (114 | ) | (114 | ) | |||
Impairment of goodwill and other intangible assets | 1,000 | 84,046 | |||||
Impairment of long-lived assets | 1,155 | 4,372 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (16,828 | ) | 1,378 | ||||
Inventories | (676 | ) | 3,517 | ||||
Prepaid expenses and other assets | 1,133 | (573 | ) | ||||
Accounts payable and other liabilities | 4,661 | 612 | |||||
Net cash provided by operating activities | 6,285 | 25,413 | |||||
Investing activities | |||||||
Purchases of property and equipment | (24,149 | ) | (29,771 | ) | |||
Proceeds from sale of equipment | 3,898 | 3,784 | |||||
Changes in restricted cash | — | (1,096 | ) | ||||
Net cash used in investing activities | (20,251 | ) | (27,083 | ) | |||
Financing activities | |||||||
Repayment of long-term debt | (3,122 | ) | (3,122 | ) | |||
Return of capital to BakerCorp International Holdings, Inc. | — | (15 | ) | ||||
Net cash used in financing activities | (3,122 | ) | (3,137 | ) | |||
Effect of foreign currency translation on cash | 1,090 | 586 | |||||
Net decrease in cash and cash equivalents | (15,998 | ) | (4,221 | ) | |||
Cash and cash equivalents, beginning of period | 44,563 | 44,754 | |||||
Cash and cash equivalents, end of period | $ | 28,565 | $ | 40,533 | |||
Supplemental disclosure of cash flow information | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 23,182 | $ | 24,333 | |||
Income taxes | $ | 2,585 | $ | 1,889 | |||
Non-cash financing and investing activities: | |||||||
Return of capital to BakerCorp International Holdings, Inc. related to a settlement of options for shares of common stock in BakerCorp International Holdings Inc. | $ | — | $ | 8 |
See Accompanying Notes
4
BakerCorp International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1. Organization, Description of Business, and Basis of Presentation
We are a provider of liquid and solid containment solutions, operating within a specialty sector of the broader industrial services industry. Our revenue is generated by providing rental equipment, customized solutions, and services to our customers. We provide a wide variety of steel and polyethylene temporary storage tanks, roll-off containers, pumps, filtration, pipes, hoses and fittings, shoring, and related products to a broad range of customers for a number of applications. Tank and roll-off container applications include the storage of water, chemicals, waste streams, and solid waste. Pump applications include the pumping of groundwater, municipal waste, and other fluids. Filtration applications include the separation of various solids from liquids. We serve a variety of industries, including industrial and environmental remediation, refining, environmental services, construction, chemicals, transportation, power, municipal works, and oil and gas. We have branches within 23 states in the United States as well as branches in Canada, France, Germany, the Netherlands and the United Kingdom. As used herein, the terms “Company,” “we,” “us,” and “our” refer to BakerCorp International, Inc. and its subsidiaries, unless the context indicates to the contrary.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended January 31, 2017, included in our 2017 Annual Report on Form 10-K filed with the SEC on April 26, 2017. Certain amounts previously reported have been reclassified to conform to the current year financial presentation.
The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary for a fair statement of our results of operations and financial position for the interim periods. The results of operations for the three and nine months ended October 31, 2017 are not necessarily indicative of the results to be expected for future quarters or the full year.
Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions with our subsidiaries have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, judgments and assumptions including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, customer rebates, sales returns and allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, depreciation and amortization, contingencies, income taxes, share-based compensation (expense and liability), and derivatives. Our estimates, judgments, and assumptions are based on historical experience, future expectations, and other factors which we believe to be reasonable. Actual results could materially differ from those estimates.
5
Note 2. Accounting Pronouncements
Recently Issued Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities”. ASU No. 2017-12 amends the current hedge accounting model and requires certain new or modified disclosures to enable entities to better portray the economics of their risk management activities in their financial statements. For public business entities, the amendments in ASU No. 2017-12 are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments in ASU No. 2017-12 are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. We are currently assessing the impact the adoption of ASU No. 2017-12 will have on our condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718)”. The guidance clarifies how an entity should account for effects of a modification of a share-based payment. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. We are currently assessing the impact the adoption of ASU No. 2017-09 will have on our condensed consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 23), Restricted Cash". The guidance will require restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. We expect to adopt this guidance when effective, and do not expect the guidance to have a significant impact on our condensed consolidated financial statements based upon our current procedures for tracking restricted cash and cash equivalents.
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets other than Inventory". The guidance will require companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which the transfer occurs. The new guidance will be effective for fiscal years and interim periods beginning after December 15, 2017 and early adoption is permitted. The guidance requires modified retrospective adoption. We expect to adopt this guidance when effective, and do not expect the guidance to have a significant impact on our condensed consolidated financial statements based upon our current procedures for tracking the transfer and sale of intra-entity assets.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The standard is effective for non-public entities for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2016-15 will have on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”). ASU No. 2016-09 simplifies several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either liability or equity, and classification on the statement of cash flows. The standard is effective for non-public entities for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2016-09 will have on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). This amendment requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases” and increases the disclosure requirements surrounding these leases. For non-public business entities, ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements.
6
During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). ASU No. 2014-09 will require companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU No. 2014-09 allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. A decision about which method to use will affect a company’s implementation plans. The standard and multiple clarifying standard updates are effective for non-public entities for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2014-09 will have on our condensed consolidated financial statements.
Note 3. Changes in Accumulated Other Comprehensive Loss
The following table includes the change in foreign currency translation adjustments to the components of accumulated other comprehensive loss:
Three Months Ended October 31, | |||||||
(In thousands) | 2017 | 2016 | |||||
Balance, beginning of period | $(28,545) | $ | (35,861 | ) | |||
Other comprehensive loss before reclassifications | (1,732) | (2,553 | ) | ||||
Net other comprehensive income | (1,732) | (2,553 | ) | ||||
Balance, end of period | $ | (30,277 | ) | $ | (38,414 | ) |
The following table includes the change in foreign currency translation adjustments to the components of accumulated
other comprehensive loss, for the nine months ended October 31, 2017:
(In thousands) | ||||
Balance as of January 31, 2017 | $ | (41,537 | ) | |
Other comprehensive income before reclassifications | 11,260 | |||
Net other comprehensive income | 11,260 | |||
Balance as of October 31, 2017 | $ | (30,277 | ) |
The following table includes the components of accumulated other comprehensive loss, net of tax, for the nine months ended October 31, 2016:
(In thousands) | Unrealized (Loss) Gain on Interest Rate Swap Agreements (1) | Change in Foreign Currency Translation Adjustments | Total | ||||||||
Balance as of January 31, 2016 | $ | (586 | ) | $ | (39,081 | ) | $ | (39,667 | ) | ||
Other comprehensive income before reclassifications | 586 | 667 | 1,253 | ||||||||
Net other comprehensive income | 586 | 667 | 1,253 | ||||||||
Balance as of October 31, 2016 | $ | — | $ | (38,414 | ) | $ | (38,414 | ) |
(1) Unrealized income on interest rate swap agreements is net of tax expense of $365 for the nine months ended October 31, 2016.
7
Note 4. Inventories
Inventories, net consists of the following:
(In thousands) | October 31, 2017 | January 31, 2017 | |||||
Components | $ | 1,289 | $ | 1,237 | |||
Work-in-process | 211 | 627 | |||||
Finished goods | 3,805 | 2,845 | |||||
Less: inventory reserve | (979 | ) | (988 | ) | |||
Inventories, net | $ | 4,326 | $ | 3,721 |
Note 5. Property and Equipment, Net
Property and equipment, net consisted of the following as of October 31, 2017:
(In thousands) | Cost | Accumulated Depreciation | Net Carrying Amount | ||||||||
Assets held for rent: | |||||||||||
Spill protection berms | $ | 3,563 | $ | (2,474 | ) | $ | 1,089 | ||||
Boxes | 31,752 | (16,223 | ) | 15,529 | |||||||
Filtration | 16,281 | (8,364 | ) | 7,917 | |||||||
Generators and light towers | 529 | (259 | ) | 270 | |||||||
Pipes, hoses and fittings | 8,736 | (5,853 | ) | 2,883 | |||||||
Non-steel containment | 11,806 | (5,435 | ) | 6,371 | |||||||
Pumps | 64,014 | (40,564 | ) | 23,450 | |||||||
Shoring | 5,696 | (4,101 | ) | 1,595 | |||||||
Steel containment | 327,727 | (97,795 | ) | 229,932 | |||||||
Tank trailers | 1,870 | (1,757 | ) | 113 | |||||||
Construction in progress | 3,211 | — | 3,211 | ||||||||
Total assets held for rent | 475,185 | (182,825 | ) | 292,360 | |||||||
Assets held for use: | |||||||||||
Leasehold improvements | 4,415 | (2,849 | ) | 1,566 | |||||||
Machinery and equipment | 45,967 | (33,133 | ) | 12,834 | |||||||
Office furniture and equipment | 6,165 | (4,623 | ) | 1,542 | |||||||
Software | 14,745 | (10,257 | ) | 4,488 | |||||||
Construction in progress | 780 | — | 780 | ||||||||
Total assets held for use | 72,072 | (50,862 | ) | 21,210 | |||||||
Total | $ | 547,257 | $ | (233,687 | ) | $ | 313,570 |
8
Property and equipment, net consisted of the following as of January 31, 2017:
(In thousands) | Cost | Accumulated Depreciation | Net Carrying Amount | ||||||||
Assets held for rent: | |||||||||||
Spill protection berms | $ | 3,487 | $ | (2,497 | ) | $ | 990 | ||||
Boxes | 31,128 | (14,357 | ) | 16,771 | |||||||
Filtration | 14,303 | (6,820 | ) | 7,483 | |||||||
Generators and light towers | 518 | (235 | ) | 283 | |||||||
Pipes, hoses and fittings | 11,196 | (8,479 | ) | 2,717 | |||||||
Non-steel containment | 10,309 | (5,031 | ) | 5,278 | |||||||
Pumps | 58,021 | (35,761 | ) | 22,260 | |||||||
Shoring | 4,681 | (3,444 | ) | 1,237 | |||||||
Steel containment | 324,267 | (88,996 | ) | 235,271 | |||||||
Tank trailers | 1,881 | (1,685 | ) | 196 | |||||||
Construction in progress | 2,081 | — | 2,081 | ||||||||
Total assets held for rent | 461,872 | (167,305 | ) | 294,567 | |||||||
Assets held for use: | |||||||||||
Leasehold improvements | 3,949 | (2,572 | ) | 1,377 | |||||||
Machinery and equipment | 44,379 | (29,673 | ) | 14,706 | |||||||
Office furniture and equipment | 5,937 | (4,071 | ) | 1,866 | |||||||
Software | 13,889 | (8,324 | ) | 5,565 | |||||||
Construction in progress | 2,626 | — | 2,626 | ||||||||
Total assets held for use | 70,780 | (44,640 | ) | 26,140 | |||||||
Total | $ | 532,652 | $ | (211,945 | ) | $ | 320,707 |
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the related carrying value of the asset to its estimated fair value.
During the nine months ended October 31, 2017, we identified certain assets within our North American segment that were on long-term rentals and returned in a condition beyond repair. We determined that the net book value of these assets exceeded the assets’ estimated fair value. The fair value was determined utilizing the discounted cash flow method income approach (a non-recurring Level 3 fair value measurement). As a result, during the nine months ended October 31, 2017, we recorded an impairment charge of $1.2 million. Additionally, during three months ended October 31, 2017, we determined that the limited sales volume for certain aged property and equipment was a potential indicator of impairment. We determined that the net book value of these assets exceeded the assets’ estimated value. As a result, during three months ended October 31, 2017, we recorded an impairment charge of $0.9 million in our North American segment.
During the nine months ended October 31, 2016, we determined that the limited sales volume for certain aged property and equipment was a potential indicator of impairment. We determined that the net book value of these assets exceeded the assets’ estimated fair value. As a result, during the nine months ended October 31, 2016, we recorded an impairment charge of $3.9 million in our North American segment. Additionally, certain assets that were on long-term rentals were returned in a condition beyond repair. We determined that the net book value of these assets exceeded the assets’ estimated fair value. As a result, during the nine months ended October 31, 2016, we recorded an impairment charge of $0.4 million in our North American segment.
Included in machinery and equipment are assets under capital leases with a cost of $5.1 million and $4.7 million as of October 31, 2017 and January 31, 2017, respectively, and accumulated depreciation of $1.8 million and $1.2 million as of October 31, 2017 and January 31, 2017, respectively.
Depreciation expense related to property and equipment for the three months ended October 31, 2017 and 2016 was $10.9 million and $11.0 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended October 31, 2017 and 2016 was $32.3 million and $33.1 million, respectively.
9
Note 6. Goodwill and Other Intangible Assets, Net
Goodwill
Changes in the carrying amount of the European reporting unit goodwill was as follows:
(In thousands) | Total | ||
Balance as of January 31, 2017 | $ | 49,918 | |
Foreign currency translation | 4,333 | ||
Balance as of October 31, 2017 | $ | 54,251 |
For the nine months ended October 31, 2017
We evaluate the carrying value of goodwill annually during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. We elected to early adopt ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment. The standard removes Step 2 of the goodwill impairment test. Instead we perform our annual, or interim goodwill impairment test by comparing the estimated fair value of a reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount. We will record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We estimate the fair value of our reporting units based on income and market approaches.
The North American goodwill was written down to zero as of January 31, 2017 and there were no indicators of impairment to our European reporting unit as of October 31, 2017.
For the nine months ended October 31, 2016,
During the quarter ended April 30, 2016, we encountered a reduction in our operating results in comparison to our forecast, primarily due to greater weakness in upstream oil and gas than anticipated, slower recovery in our construction business, and the delay of capital projects by refinery and power plants which can be seen through our lower volume of work with industrial service customers. As a result of the decline in demand for our products and services, we re-assessed our revenue and EBITDA forecast beginning with the fiscal year ended January 31, 2017 using a bottoms-up approach, having conversations with our key customers, and performing an analysis on current market conditions and industry spending behavior. Based on our assessment, we noted that despite the recent stabilization of oil prices, there will be continued uncertainty in the energy market resulting in a slow-down in capital spend. As a result, we updated our projections to reflect the decline in activity, adjusted our forecast for the outer years to maintain similar growth rates as our previous forecast, and performed the first step of the goodwill impairment test.
Under the first step of the impairment test, we determined the carrying value of the North American reporting unit exceeded fair value. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. Based on our analysis, we recorded a non-cash goodwill impairment charge of $65.7 million in our North American reporting unit. This impairment charge, which is included under the caption “Impairment of goodwill and other intangible assets” in our condensed consolidated statements of operations for the nine months ended October 31, 2016, did not impact our operations, compliance with our debt covenants or our cash flows. For the European reporting unit, the fair value exceeded the carrying value, suggesting no indication of potential goodwill impairment.
In calculating the fair value of our North American reporting unit under the first step, we gave equal weight to the income approach, which analyzed projected discounted cash flows, and the market approach, which considered comparable public companies as well as comparable industry transactions.
Under the income approach, we estimate future capital expenditures required to maintain our rental fleet under normalized operations and utilize the following Level 3 estimates and assumptions in the discounted cash flow analysis:
• | Long-term EBITDA margin range of 25.8% to 30.5% , reflecting our historical and forecasted profit margins; |
• | Long-term revenue growth rate range of 3.0% to 8.0%, based on long-term nominal growth rate potential; |
• | A discount rate of 10%, based on our weighted average cost of capital; |
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Under the market approach, we used other significant observable market inputs including various peer company comparisons and industry transaction data, which resulted in revenue and EBITDA market multiples of 1.75x to 2.00x and 6.00x to 7.50x, respectively. In evaluating our market multiples, we placed higher consideration on peer companies that were experiencing similar oil and gas pressures. Changes in the estimates utilized under the income and market approaches could materially affect the determination of fair value and the conclusions of the step one analysis for the reporting unit.
Other Intangible Assets, Net
The components of other intangible assets, net were the following as of:
October 31, 2017 | January 31, 2017 | |||||||||||||||||||||||
(In thousands) | Gross (1) | Accumulated Amortization | Net | Gross (1) | Accumulated Amortization | Net | ||||||||||||||||||
Carrying amount: | ||||||||||||||||||||||||
Customer relationships (25 years) | $ | 401,954 | $ | (103,168 | ) | $ | 298,786 | $ | 400,455 | $ | (90,770 | ) | $ | 309,685 | ||||||||||
Customer backlog (2 years) | 200 | (200 | ) | — | 200 | (200 | ) | — | ||||||||||||||||
Developed technology (11 years) | 1,654 | (586 | ) | 1,068 | 1,634 | (467 | ) | 1,167 | ||||||||||||||||
Trade name (Indefinite)(1) | 43,249 | — | 43,249 | 43,566 | — | 43,566 | ||||||||||||||||||
Total carrying amount | $ | 447,057 | $ | (103,954 | ) | $ | 343,103 | $ | 445,855 | $ | (91,437 | ) | $ | 354,418 |
We evaluate the carrying value of our indefinite-lived intangible asset (trade name) annually during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. To test our indefinite-lived intangible asset for impairment, we compare the fair value of our indefinite-lived intangible asset to its carrying value. We estimate the fair value using an income approach and using the asset’s projected discounted cash flows. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than the carrying value.
We assess the impairment of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The asset is impaired if its carrying value exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors. The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we must make assumptions regarding estimated future cash flows, discount rates and other factors. During the three months ended July 31, 2017, an indicator of impairment to our indefinite-lived intangible asset (trade name) was identified in our North American reporting unit due to a reduction in our forecast due to a slower than expected recovery in our maintenance and oil and gas customers. Based on our analysis, we concluded that the carrying value of our trade name indefinite-lived intangible asset exceeded its fair value and we recorded an impairment charge of $1.0 million. No indicators of impairment existed to our North American trade name during the three months ended October 31, 2017.
Due to certain indicators of impairment identified during our April 30, 2016 interim impairment test of goodwill, we assessed our indefinite and definite-lived intangible assets for impairment. Based on our analysis, we concluded that the carrying value of our indefinite-lived intangible asset (trade name) exceeded its fair value and recorded an impairment charge of $18.3 million in our North American reporting unit. This impairment charge, which is included under the caption “Impairment of goodwill and other intangible assets” in our condensed consolidated statements of operations for the nine months ended October 31, 2016, does not impact our operations, compliance with our debt covenants or our cash flows. We estimated the fair value of our trade name using the relief-from-royalty method, which uses several significant assumptions, including an estimate of useful life and revenue projections that consider historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were also used in the relief-from-royalty method:
• | Royalty rate of 1.5% based on market observed royalty rates; and |
• | A discount rate of 12.0% based on the required rate of return for the trade name asset. |
As of October 31, 2017 there was no impairment recorded of our definite-lived intangible assets.
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Amortization expense related to intangible assets for the three months ended October 31, 2017 and 2016 was $4.1 million and $4.0 million, respectively. Amortization expense related to intangible assets for the nine months ended October 31, 2017 and 2016 was $12.2 million and $12.1 million, respectively. Estimated amortization expense for the fiscal periods ending January 31 is as follows:
(In thousands) | |||
Remainder of the fiscal year ending January 31, 2018 | $ | 4,057 | |
2019 | 16,228 | ||
2020 | 16,228 | ||
2021 | 16,228 | ||
2022 | 16,228 | ||
Thereafter | 230,885 | ||
Total | $ | 299,854 |
Note 7. Accrued Expenses
Accrued expenses consists of the following as of:
(In thousands) | October 31, 2017 | January 31, 2017 | |||||
Accrued compensation | $ | 8,756 | $ | 11,488 | |||
Accrued insurance | 763 | 793 | |||||
Accrued interest | 8,281 | 3,257 | |||||
Accrued professional fees | 344 | 459 | |||||
Accrued taxes | 5,560 | 3,852 | |||||
Capital lease - current | 687 | 545 | |||||
Other accrued expenses | 592 | 1,461 | |||||
Total accrued expenses | $ | 24,983 | $ | 21,855 |
Note 8. Debt
Debt consists of the following:
(In thousands) | October 31, 2017 | January 31, 2017 | |||||
Senior term loan (LIBOR margin of 3.0%, and interest rate of 4.31% and 4.25%, respectively) | $ | 399,618 | $ | 402,740 | |||
Senior unsecured notes | 240,000 | 240,000 | |||||
Total debt | 639,618 | 642,740 | |||||
Less: deferred financing costs | (4,978 | ) | (7,263 | ) | |||
Total debt less deferred financing costs | 634,640 | 635,477 | |||||
Less: current portion (net of current portion of deferred financing costs of $3,210 and $3,080, respectively) | (953 | ) | (1,082 | ) | |||
Long-term debt, net of current portion (net of long-term portion of deferred financing costs of $1,768 and $4,183, respectively) | $ | 633,687 | $ | 634,395 |
On June 1, 2011, we (i) entered into a $435.0 million senior secured credit facility (the “Credit Facility”), consisting of a $390.0 million term loan facility (the “Senior Term Loan”) and a $45.0 million revolving credit facility (the “Revolving Credit Facility”) and (ii) issued $240.0 million in aggregate principal amount of fixed rate 8.25% senior unsecured notes due June 1, 2019 (the “Notes”).
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Credit Facility
On February 7, 2013, we entered into a first amendment to refinance our Credit Facility (the “First Amendment”), to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Notes are not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to our ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to our Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term Loan”), which may be used for general corporate purposes, including to finance permitted acquisitions. The terms applicable to the Incremental Term Loans are the same as those applicable to the term loans under the Credit Facility.
On November 3, 2016, we entered into a third amendment to our Credit Facility (the “Third Amendment”) to amend the Revolving Credit Facility. The amendment (i) extends the Revolving Credit Facility maturity date from February 7, 2018 to November 7, 2019 (provided that such maturity date will be accelerated to January 30, 2019 unless the Notes are repaid in full or extended or refinanced on or prior to January 30, 2019) and (ii) reduces the revolver commitment from $45.0 million to $40.0 million in addition to certain other amendments to the original terms.
The Credit Facility, as amended, in February 2013, November 2013 and November 2016, places certain limitations on our (and all of our U.S. subsidiaries’) ability to incur additional indebtedness, pay dividends or make other distributions, repurchase capital stock, make certain investments, enter into certain types of transactions with affiliates, utilize assets as security in other transactions, and sell certain assets or merge with or into other companies. In addition, we may be required to satisfy and maintain a total leverage ratio if there is an outstanding balance on the Revolving Credit Facility of 25% or more of the committed amount on any quarter end.
The Third Amendment was accounted for as a debt modification. Costs incurred in connection with the Third Amendment have been deferred and are being amortized over the term of the amended Revolving Credit Facility. In addition, any unamortized deferred costs related to the old arrangement were written off in proportion to the decrease in borrowing capacity. During the fiscal year ended January 31, 2017, we recorded $0.5 million of deferred costs related to the Third Amendment.
As of October 31, 2017, we did not have an outstanding balance on the revolving loan; and therefore, we were not subject to a leverage test. Additionally, as of October 31, 2017, we were in compliance with all of our requirements and covenant tests under the Credit Facility, as amended.
Senior Unsecured Notes Due 2019
On June 1, 2011, we issued the Notes. We may redeem all or any portion of the Notes at the redemption prices set forth in the applicable indenture, plus accrued and unpaid interest. Upon a change of control, we are required to make an offer to redeem all of the Notes from the holders at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of the repurchase. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our direct and indirect existing and future wholly-owned domestic restricted subsidiaries.
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Interest and Fees
Costs related to debt financing are deferred and amortized to interest expense over the term of the underlying debt instruments utilizing the straight-line method for our revolving credit facility and the effective interest method for our senior term and incremental term loan facilities. As of October 31, 2017 and January 31, 2017, deferred financing costs of $5.0 million and $7.3 million, respectively, are reflected as a reduction of the underlying debt. We amortized $0.8 million of deferred financing costs during each of the three months ended October 31, 2017 and 2016, respectively. We amortized $2.3 million and $2.2 million of deferred financing costs during the nine months ended October 31, 2017 and 2016, respectively.
Interest and fees related to our Credit Facility and the Notes are as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Credit Facility interest and fees | $ | 4,821 | $ | 4,859 | $ | 14,457 | $ | 14,496 | |||||||
Notes interest and fees (1) | 5,312 | 5,281 | 15,912 | 15,822 | |||||||||||
Total interest and fees | $ | 10,133 | $ | 10,140 | $ | 30,369 | $ | 30,318 | |||||||
Credit Facility interest rate | 4.31 | % | 4.25 | % | 4.25 | % | 4.25 | % |
(1) Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.
Principal Payments on Debt
As of October 31, 2017, the schedule of minimum required principal payments on our debt for each of the fiscal years ending January 31 are due according to the table below:
(In thousands) | |||
Remainder of the fiscal year ending January 31, 2018 | $ | 1,041 | |
2019 | 4,163 | ||
2020 | 634,414 | ||
Total | $ | 639,618 |
Note 9. Income Taxes
The income tax benefit for the three and nine months ended October 31, 2017 and 2016 is based on the estimated effective tax rate for the entire fiscal year. The estimated effective tax rate is subject to adjustment in subsequent quarterly periods as our estimates of pre-tax income and loss for the year fluctuate, including changes in the geographic mix of pre-tax income and loss.
The effective income tax rates for the three and nine months ended October 31, 2017 were a benefit of 37.9% and 36.9%, respectively compared to a benefit for the three and nine months ended October 31, 2016 of 28.7% and 23.0%, respectively. The effective tax rate differs from the U.S. federal statutory rate primarily due to income taxed in foreign jurisdictions, state taxes, non-deductible meals and entertainment expenses, non-deductible goodwill impairment, and discrete items. The difference in effective income tax rates for the nine months ended October 31, 2017 and 2016 primarily relates to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction, which includes an impairment of non-deductible goodwill recorded during the nine months ended October 31, 2016. Discrete items related primarily to excess shortfalls associated with the cancellation and expiration of stock options recorded during the nine months ended October 31, 2017.
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized. Our deferred tax assets primarily relate to federal net operating loss carry-forwards. Management believes we will realize the benefit of existing deferred tax assets based on the scheduled reversal of U.S. deferred tax liabilities, related to depreciation and amortization expenses not deductible for tax purposes, which is ordinary income and therefore of the same character as the temporary differences giving rise to the deferred tax assets. This reversal will occur in substantially similar time periods and in the same jurisdictions as the deferred tax assets.
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As such, the deferred tax liabilities are considered a source of income sufficient to support our U.S. deferred tax assets; therefore, a valuation allowance is not required as of October 31, 2017.
We recognize a 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. Tax benefits recognized from such a position are measured based on whether the benefit has a greater than 50% likelihood of being realized upon ultimate resolution. It is reasonably possible that an additional $0.9 million of uncertain tax positions will decrease within the next 12 months due to the expiration of the net operating loss carryforwards associated with such positions.
We believe our income tax contingencies are adequate for all outstanding issues in all jurisdictions and all open years. However, due to the risk that audit outcomes and the timing of audit settlements are subject to significant uncertainty and as we continue to evaluate such uncertainties in light of current facts and circumstances, our current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open tax years.
Note 10. Shareholder’s Equity
Share-Based Compensation
During June 2011, BCI Holdings adopted a share-based compensation plan, The BakerCorp International Holdings, Inc. 2011 Equity Incentive Plan (the “2011 Plan”). Subsequent to the adoption of the 2011 Plan, on September 12, 2013, the BCI Holdings’ Board of Directors amended the 2011 Plan by resolution to increase the number of shares of BCI Holdings common stock authorized for issuance under the 2011 Plan to 1,001,339 shares. As of October 31, 2017, there were 260,170 shares available for grant. The amended 2011 Plan permits the granting of BCI Holdings stock options, nonqualified stock options and restricted stock to eligible employees and non-employee directors and consultants.
The following table summarizes stock option activity during the nine months ended October 31, 2017:
Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands)(1) | Weighted Average Term Remaining (in years) | Weighted Average Grant Date Fair Value | ||||||||||||
Outstanding, January 31, 2017 | 766,348 | $ | 83.47 | $ | — | 6.5 | ||||||||||
Granted | — | $ | — | $ | — | |||||||||||
Exercised | — | $ | — | $ | — | |||||||||||
Forfeited/canceled/expired | (33,328 | ) | $ | 39.12 | ||||||||||||
Outstanding, October 31, 2017 | 733,020 | $ | 83.92 | $ | — | 5.8 | ||||||||||
Vested and expected to vest, October 31, 2017 | 78,344 | $ | 74.90 | $ | — | 3.2 | ||||||||||
Exercisable, October 31, 2017 | 78,344 | $ | 74.90 | $ | — | 1.7 |
(1) | Aggregate intrinsic value in the table above represents the total pre-tax value that option holders would have received had all stock option holders exercised their options as of October 31, 2017. The aggregate intrinsic value is the difference between the estimated fair market value of the BCI Holdings common stock at the end of the period and the stock option exercise price, multiplied by the number of in-the-money options. This amount will change based on the fair market value of the BCI Holdings common stock. |
As of October 31, 2017, there was $16.4 million of unrecognized pre-tax share-based compensation expense related to non-vested stock options of which $0.5 million we expect to recognize over a weighted average period of 0.6 years. We expect to recognize the remaining $15.9 million, which includes $8.1 million of unrecognized share-based compensation expense for the CEO’s options, upon a Change in Control or initial public offering (“IPO”) as defined in the 2011 Plan. During the nine months ended October 31, 2017, we did not recognize any share-based compensation expense related to the CEO’s options.
No options vested during the three and nine months ended October 31, 2017. The total fair value of options vested during the three and nine months ended October 31, 2016 was zero and $0.1 million, respectively.
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The share-based compensation expense included within employee related expenses in our condensed consolidated statement of operations was the following:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Non-cash share-based compensation expense (1) | $ | 141 | $ | 174 | $ | 446 | $ | 135 |
(1) | We remeasured certain options classified as liability awards and recorded decreases to non-cash share-based compensation expense of $0.0 million and $0.7 million during the three and nine months ended October 31, 2016, respectively. |
The fair value of BCI Holdings stock options issued and classified as equity awards was determined using the Black-Scholes options pricing model utilizing the following weighted-average assumptions for each respective period:
Nine Months Ended October 31, | |||||
2017 | 2016 | ||||
Expected volatility | 56 | % | 56 | % | |
Expected dividends | — | % | — | % | |
Expected term | 7.2 years | 7.2 years | |||
Risk-free interest rate | 1.5 | % | 1.5 | % |
Liability Awards
We account for certain option awards as liability awards, as we determined cash settlement upon exercise is probable. The expiration of certain options classified as liability awards resulted in a decrease to non-cash share-based compensation expense of $0.03 million during the nine months ended October 31, 2017. We remeasured the fair value of these options during the fiscal year ended January 31, 2017, resulting in a decrease to our non-cash share-based compensation expense of $0.7 million. As of October 31, 2017 and January 31, 2017 the fair value of our share-based compensation liability awards totaled $35,000 and $66,000, respectively. Our share-based compensation liability is fair valued using level 3 inputs which are based on internal valuations and considering input from third parties and utilizing the following assumptions:
Nine Months Ended October 31, | |||||
2017 | 2016 | ||||
Expected volatility | 60 | % | 60 | % | |
Expected dividends | — | % | — | % | |
Expected term | 0.8 years | 1.1 years | |||
Risk-free interest rate | 0.5 | % | 0.5 | % |
Note 11. Segment Reporting
We conduct our operations through entities located in the United States, Canada, France, Germany, the United Kingdom and the Netherlands. We transact business using the local currency within each country where we perform the service or provide the rental equipment.
Our operating and reportable segments are North America and Europe. Within each operating segment, there are common customers, common pricing structures, the ability and history of sharing equipment and resources, operational compatibility, commonality among regulatory environments, and relative geographic proximity. Our operating segments consist of the following:
• | the North American segment, consisting of branches located in the United States and Canada that provide equipment and services suitable across these North American countries. |
• | the European segment, consisting of branches located in France, Germany, the United Kingdom and the Netherlands that provide equipment and services to customers in a number of European countries. |
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Selected statement of operations information for our reportable segments are the following:
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue | ||||||||||||||||
North America | 63,017 | 59,314 | 174,468 | 168,525 | ||||||||||||
Europe | 10,772 | 8,998 | 30,661 | 28,019 | ||||||||||||
Total revenue | $ | 73,789 | $ | 68,312 | $ | 205,129 | $ | 196,544 | ||||||||
Depreciation and amortization | ||||||||||||||||
North America | $ | 13,446 | $ | 13,784 | $ | 40,120 | $ | 41,545 | ||||||||
Europe | 1,554 | 1,234 | 4,349 | 3,657 | ||||||||||||
Total depreciation and amortization | $ | 15,000 | $ | 15,018 | $ | 44,469 | $ | 45,202 | ||||||||
Interest expense, net | ||||||||||||||||
North America | $ | 10,267 | $ | 10,112 | $ | 30,470 | $ | 31,255 | ||||||||
Europe | 14 | 9 | 3 | 15 | ||||||||||||
Total interest expense, net | $ | 10,281 | $ | 10,121 | $ | 30,473 | $ | 31,270 | ||||||||
Income tax (benefit) expense | ||||||||||||||||
North America | $ | (3,660 | ) | $ | (3,002 | ) | $ | (12,390 | ) | $ | (27,419 | ) | ||||
Europe | 957 | 398 | 2,080 | 1,674 | ||||||||||||
Total income tax benefit | $ | (2,703 | ) | $ | (2,604 | ) | $ | (10,310 | ) | $ | (25,745 | ) | ||||
Net (loss) income | ||||||||||||||||
North America (1) | $ | (9,301 | ) | $ | (7,285 | ) | $ | (24,930 | ) | $ | (90,060 | ) | ||||
Europe (1) | 4,877 | 829 | 7,346 | 3,906 | ||||||||||||
Total net loss | $ | (4,424 | ) | $ | (6,456 | ) | $ | (17,584 | ) | $ | (86,154 | ) |
(1) | During the three and nine months ended October 31, 2017 and October 31, 2016, we included $0.9 million and $1.2 million, respectively, and $2.7 million and $2.6 million of intersegment expense allocations from North America to Europe. |
Total assets and property and equipment, net information by reportable segment consists of the following:
(In thousands) | October 31, 2017 | January 31, 2017 | |||||
Total assets | |||||||
United States | $ | 680,597 | $ | 707,701 | |||
Canada | 9,405 | 8,939 | |||||
North America | 690,002 | 716,640 | |||||
Europe | 127,395 | 113,900 | |||||
Total assets | $ | 817,397 | $ | 830,540 | |||
Property and Equipment, net | |||||||
United States | $ | 253,269 | $ | 264,194 | |||
Canada | 12,535 | 11,942 | |||||
North America | 265,804 | 276,136 | |||||
Europe | 47,766 | 44,571 | |||||
Total property and equipment, net | $ | 313,570 | $ | 320,707 |
Note 12. Related Party Transactions
From time to time, we enter into transactions in the normal course of business with related parties. The accounting policies that we apply to our transactions with related parties are consistent with those applied in transactions with independent third parties.
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Pursuant to a professional services agreement between us and Permira Advisers L.L.C. (the “Sponsor”), we agreed to pay the Sponsor an annual management fee of $0.5 million, payable quarterly, plus reasonable out-of-pocket expenses, in connection with the planning, strategy, and oversight support provided to management. We recorded $0.1 million for each of three months ended October 31, 2017 and 2016, and $0.4 million for each of the nine months ended October 31, 2017 and 2016 in aggregate management fees and expenses to the Sponsor. Management fees payable to the Sponsor totaled $0.04 million as of October 31, 2017 and January 31, 2017. Management fees are included in professional fees in the condensed consolidated statement of operations.
Note 13. Commitments and Contingencies
Litigation
We are involved in various legal actions arising in the ordinary course of conducting our business. These include claims relating to (i) personal injury or property damage involving equipment rented or sold by us, (ii) motor vehicle accidents involving our vehicles and our employees, (iii) employment-related matters, and (iv) environmental matters. We do not believe that the ultimate disposition of these matters will have a material adverse effect on our condensed consolidated financial position, results of operations, or cash flow. We expense legal fees in the period in which they are incurred.
Note 14. Condensed Consolidating Financial Information
Our Notes are guaranteed by all of our U.S. subsidiaries (the “guarantor subsidiaries”). This indebtedness is not guaranteed by BCI Holdings or our foreign subsidiaries (together, the “non-guarantor subsidiaries”). The guarantor subsidiaries are all one hundred percent owned, and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to customary release provisions and a standard limitation, which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). The following condensed consolidating financial information presents the financial position, results of operations, and cash flows of the parent, guarantors, and non-guarantor subsidiaries of the Company and the eliminations necessary to arrive at the information on a consolidated basis for the periods indicated. The parent referenced in the condensed consolidating financial statements is BakerCorp International, Inc., the issuer.
We conduct substantially all of our business through our subsidiaries. To make the required payments on our Notes and other indebtedness, and to satisfy other liquidity requirements, we will rely, in large part, on cash flows from these subsidiaries, mainly in the form of dividends, royalties, and advances, or payments of intercompany loan arrangements. The ability of these subsidiaries to make dividend payments to us will be affected by, among other factors, the obligations of these entities to their creditors, requirements of corporate and other law, and restrictions contained in agreements entered into by or relating to these entities.
The parent and the guarantor subsidiaries have each reflected investments in their respective subsidiaries under the equity method of accounting. There are no restrictions limiting the transfer of cash from guarantor subsidiaries and non-guarantor subsidiaries to the parent.
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Condensed Consolidating Balance Sheet
October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 11,333 | $ | 17,232 | $ | — | $ | 28,565 | |||||||||
Accounts receivable, net | — | 54,271 | 14,969 | — | 69,240 | ||||||||||||||
Inventories, net | — | 4,212 | 114 | — | 4,326 | ||||||||||||||
Prepaid expenses and other assets | 49 | 2,105 | 893 | — | 3,047 | ||||||||||||||
Total current assets | 49 | 71,921 | 33,208 | — | 105,178 | ||||||||||||||
Property and equipment, net | — | 253,269 | 60,301 | — | 313,570 | ||||||||||||||
Goodwill | — | — | 54,251 | — | 54,251 | ||||||||||||||
Other intangible assets, net | — | 320,442 | 22,661 | — | 343,103 | ||||||||||||||
Other assets | — | 1,071 | 224 | — | 1,295 | ||||||||||||||
Investment in subsidiaries | 301,148 | 122,551 | — | (423,699 | ) | — | |||||||||||||
Total assets | $ | 301,197 | $ | 769,254 | $ | 170,645 | $ | (423,699 | ) | $ | 817,397 | ||||||||
Liabilities and shareholder’s equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 38 | $ | 17,683 | $ | 2,328 | $ | — | $ | 20,049 | |||||||||
Accrued expenses | 8,281 | 13,090 | 3,612 | — | 24,983 | ||||||||||||||
Current portion of long-term debt (net of deferred financing costs of $3,210) | 953 | — | — | — | 953 | ||||||||||||||
Intercompany balances | (333,116 | ) | 298,565 | 34,551 | — | — | |||||||||||||
Total current liabilities | (323,844 | ) | 329,338 | 40,491 | — | 45,985 | |||||||||||||
Long-term debt, net of current portion (net of deferred financing costs of $1,768) | 633,687 | — | — | — | 633,687 | ||||||||||||||
Deferred tax liabilities, net | (45,157 | ) | 136,334 | 7,510 | — | 98,687 | |||||||||||||
Share-based compensation liability | — | 35 | — | — | 35 | ||||||||||||||
Other long-term liabilities | — | 2,399 | 93 | — | 2,492 | ||||||||||||||
Total liabilities | 264,686 | 468,106 | 48,094 | — | 780,886 | ||||||||||||||
Total shareholder’s equity | 36,511 | 301,148 | 122,551 | (423,699 | ) | 36,511 | |||||||||||||
Total liabilities and shareholder’s equity | $ | 301,197 | $ | 769,254 | $ | 170,645 | $ | (423,699 | ) | $ | 817,397 |
19
Condensed Consolidating Balance Sheet
January 31, 2017
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 30,607 | $ | 13,956 | $ | — | $ | 44,563 | |||||||||
Accounts receivable, net | — | 41,902 | 10,576 | — | 52,478 | ||||||||||||||
Inventories, net | — | 3,622 | 99 | — | 3,721 | ||||||||||||||
Prepaid expenses and other current assets | 35 | 3,201 | 909 | — | 4,145 | ||||||||||||||
Total current assets | 35 | 79,332 | 25,540 | — | 104,907 | ||||||||||||||
Property and equipment, net | — | 264,194 | 56,513 | — | 320,707 | ||||||||||||||
Goodwill | — | — | 49,918 | — | 49,918 | ||||||||||||||
Other intangible assets, net | — | 333,033 | 21,385 | — | 354,418 | ||||||||||||||
Other long-term assets | — | 452 | 138 | — | 590 | ||||||||||||||
Investment in subsidiaries | 297,137 | 109,766 | — | (406,903 | ) | — | |||||||||||||
Total assets | $ | 297,172 | $ | 786,777 | $ | 153,494 | $ | (406,903 | ) | $ | 830,540 | ||||||||
Liabilities and shareholder’s equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 56 | $ | 15,839 | $ | 1,802 | $ | — | $ | 17,697 | |||||||||
Accrued expenses | 3,258 | 14,377 | 4,220 | — | 21,855 | ||||||||||||||
Current portion of long-term debt (net of deferred financing costs of $3,080) | 1,082 | — | — | — | 1,082 | ||||||||||||||
Intercompany balances | (341,847 | ) | 310,812 | 31,035 | — | — | |||||||||||||
Total current liabilities | (337,451 | ) | 341,028 | 37,057 | — | 40,634 | |||||||||||||
Long-term debt, net of current portion (net of deferred financing costs of $4,183) | 634,395 | — | — | — | 634,395 | ||||||||||||||
Deferred tax liabilities, net | (42,166 | ) | 145,806 | 6,474 | — | 110,114 | |||||||||||||
Share-based compensation liability | — | 66 | — | — | 66 | ||||||||||||||
Other long-term liabilities | — | 2,739 | 197 | — | 2,936 | ||||||||||||||
Total liabilities | 254,778 | 489,639 | 43,728 | — | 788,145 | ||||||||||||||
Total shareholder’s equity | 42,394 | 297,138 | 109,766 | (406,903 | ) | 42,395 | |||||||||||||
Total liabilities and shareholder’s equity | $ | 297,172 | $ | 786,777 | $ | 153,494 | $ | (406,903 | ) | $ | 830,540 |
20
Condensed Consolidating Statement of Operations
For the Three Months Ended October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 61,034 | $ | 12,755 | $ | — | $ | 73,789 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 3 | 21,083 | 3,534 | — | 24,620 | ||||||||||||||
Rental expense | — | 8,436 | 1,391 | — | 9,827 | ||||||||||||||
Repair and maintenance | — | 3,320 | 371 | — | 3,691 | ||||||||||||||
Cost of goods sold | — | 2,409 | 83 | — | 2,492 | ||||||||||||||
Facility expense | 2 | 6,148 | 1,053 | — | 7,203 | ||||||||||||||
Professional fees | 7 | 3,104 | 97 | — | 3,208 | ||||||||||||||
Other operating expenses | 153 | 2,530 | 1,854 | — | 4,537 | ||||||||||||||
Depreciation and amortization | — | 13,099 | 1,901 | — | 15,000 | ||||||||||||||
Gain on sale of equipment | — | (889 | ) | (75 | ) | — | (964 | ) | |||||||||||
Impairment of goodwill and other intangible assets | — | — | — | — | — | ||||||||||||||
Impairment of long-lived assets | — | 846 | 13 | — | 859 | ||||||||||||||
Total operating expenses | 165 | 60,086 | 10,222 | — | 70,473 | ||||||||||||||
(Loss) income from operations | (165 | ) | 948 | 2,533 | — | 3,316 | |||||||||||||
Other expenses (income): | |||||||||||||||||||
Interest expense, net | 10,226 | 39 | 16 | — | 10,281 | ||||||||||||||
Foreign currency exchange loss (gain), net | — | 225 | (58 | ) | — | 167 | |||||||||||||
Other income, net | — | (5 | ) | — | — | (5 | ) | ||||||||||||
Total other expenses (income), net | 10,226 | 259 | (42 | ) | — | 10,443 | |||||||||||||
(Loss) income before income tax (benefit) expense | (10,391 | ) | 689 | 2,575 | — | (7,127 | ) | ||||||||||||
Income tax (benefit) expense | (1,022 | ) | (2,647 | ) | 966 | — | (2,703 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (9,369 | ) | 3,336 | 1,609 | — | (4,424 | ) | ||||||||||||
Equity in net earnings of subsidiaries | 4,945 | 1,609 | — | (6,554 | ) | — | |||||||||||||
Net (loss) income | $ | (4,424 | ) | $ | 4,945 | $ | 1,609 | $ | (6,554 | ) | $ | (4,424 | ) |
21
Condensed Consolidating Statement of Operations
For the Three Months Ended October 31, 2016 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 56,785 | $ | 11,527 | $ | — | $ | 68,312 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 4 | 20,297 | 3,157 | — | 23,458 | ||||||||||||||
Rental expense | — | 7,741 | 1,291 | — | 9,032 | ||||||||||||||
Repair and maintenance | — | 2,732 | 241 | — | 2,973 | ||||||||||||||
Cost of goods sold | — | 1,747 | 684 | — | 2,431 | ||||||||||||||
Facility expense | 9 | 5,705 | 703 | — | 6,417 | ||||||||||||||
Professional fees | 10 | 610 | 138 | — | 758 | ||||||||||||||
Other operating expenses | 169 | 1,751 | 1,599 | — | 3,519 | ||||||||||||||
Depreciation and amortization | — | 13,499 | 1,519 | — | 15,018 | ||||||||||||||
Gain on sale of equipment | — | (1,014 | ) | 11 | — | (1,003 | ) | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | — | — | — | ||||||||||||||
Impairment of long-lived assets | — | 3,829 | 104 | — | 3,933 | ||||||||||||||
Total operating expenses | 192 | 56,897 | 9,447 | — | 66,536 | ||||||||||||||
(Loss) income from operations | (192 | ) | (112 | ) | 2,080 | — | 1,776 | ||||||||||||
Other expenses: | |||||||||||||||||||
Interest expense, net | 10,092 | 19 | 10 | — | 10,121 | ||||||||||||||
Foreign currency exchange loss | — | 147 | 573 | — | 720 | ||||||||||||||
Other income, net | — | (5 | ) | — | — | (5 | ) | ||||||||||||
Total other expenses | 10,092 | 161 | 583 | — | 10,836 | ||||||||||||||
(Loss) income before income tax (benefit) expense | (10,284 | ) | (273 | ) | 1,497 | — | (9,060 | ) | |||||||||||
Income tax (benefit) expense | (976 | ) | (2,023 | ) | 395 | — | (2,604 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (9,308 | ) | 1,750 | 1,102 | — | (6,456 | ) | ||||||||||||
Equity in net earnings of subsidiaries | 2,852 | 1,102 | — | (3,954 | ) | — | |||||||||||||
Net (loss) income | $ | (6,456 | ) | $ | 2,852 | $ | 1,102 | $ | (3,954 | ) | $ | (6,456 | ) |
22
Condensed Consolidating Statement of Operations
For the Nine Months Ended October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 169,069 | $ | 36,060 | $ | — | $ | 205,129 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 10 | 63,420 | 10,163 | — | 73,593 | ||||||||||||||
Rental expense | — | 23,521 | 3,875 | — | 27,396 | ||||||||||||||
Repair and maintenance | — | 9,388 | 912 | — | 10,300 | ||||||||||||||
Cost of goods sold | — | 8,473 | 578 | — | 9,051 | ||||||||||||||
Facility expense | 11 | 18,336 | 2,539 | — | 20,886 | ||||||||||||||
Professional fees | 32 | 4,869 | 355 | — | 5,256 | ||||||||||||||
Other operating expenses | 463 | 6,460 | 5,202 | — | 12,125 | ||||||||||||||
Depreciation and amortization | — | 39,166 | 5,303 | — | 44,469 | ||||||||||||||
Gain on sale of equipment | — | (2,584 | ) | (106 | ) | — | (2,690 | ) | |||||||||||
Impairment of goodwill and other intangible assets | — | 1,000 | — | — | 1,000 | ||||||||||||||
Impairment of long-lived assets | — | 1,133 | 22 | — | 1,155 | ||||||||||||||
Total operating expenses | 516 | 173,182 | 28,843 | — | 202,541 | ||||||||||||||
(Loss) income from operations | (516 | ) | (4,113 | ) | 7,217 | — | 2,588 | ||||||||||||
Other expenses (income): | |||||||||||||||||||
Interest expense, net | 30,370 | 94 | 9 | — | 30,473 | ||||||||||||||
Foreign currency exchange loss (gain), net | — | (89 | ) | 113 | — | 24 | |||||||||||||
Other income, net | — | (15 | ) | — | — | (15 | ) | ||||||||||||
Total other expenses (income), net | 30,370 | (10 | ) | 122 | — | 30,482 | |||||||||||||
(Loss) income before income tax (benefit) expense | (30,886 | ) | (4,103 | ) | 7,095 | — | (27,894 | ) | |||||||||||
Income tax (benefit) expense | (2,991 | ) | (9,461 | ) | 2,142 | — | (10,310 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (27,895 | ) | 5,358 | 4,953 | — | (17,584 | ) | ||||||||||||
Equity in net earnings of subsidiaries | 10,311 | 4,953 | — | (15,264 | ) | — | |||||||||||||
Net (loss) income | $ | (17,584 | ) | $ | 10,311 | $ | 4,953 | $ | (15,264 | ) | $ | (17,584 | ) |
23
Condensed Consolidating Statement of Operations
For the Nine Months Ended October 31, 2016 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 162,954 | $ | 33,590 | $ | — | $ | 196,544 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 50 | 62,850 | 9,515 | — | 72,415 | ||||||||||||||
Rental expense | — | 20,277 | 3,105 | — | 23,382 | ||||||||||||||
Repair and maintenance | — | 7,506 | 654 | — | 8,160 | ||||||||||||||
Cost of goods sold | — | 6,835 | 958 | — | 7,793 | ||||||||||||||
Facility expense | 20 | 17,931 | 2,071 | — | 20,022 | ||||||||||||||
Professional fees | 71 | 2,438 | 467 | — | 2,976 | ||||||||||||||
Other operating expenses | 463 | 5,302 | 4,736 | — | 10,501 | ||||||||||||||
Depreciation and amortization | — | 40,693 | 4,509 | — | 45,202 | ||||||||||||||
Gain on sale of equipment | — | (2,631 | ) | (6 | ) | — | (2,637 | ) | |||||||||||
Impairment of goodwill and other intangible assets | — | 84,046 | — | — | 84,046 | ||||||||||||||
Impairment of long-lived assets | — | 4,268 | 104 | — | 4,372 | ||||||||||||||
Total operating expenses | 604 | 249,515 | 26,113 | — | 276,232 | ||||||||||||||
(Loss) income from operations | (604 | ) | (86,561 | ) | 7,477 | — | (79,688 | ) | |||||||||||
Other expenses (income): | |||||||||||||||||||
Interest expense, net | 31,223 | 31 | 16 | — | 31,270 | ||||||||||||||
Foreign currency exchange loss (gain), net | — | (257 | ) | 1,215 | — | 958 | |||||||||||||
Other income, net | — | (17 | ) | — | — | (17 | ) | ||||||||||||
Total other expenses (income), net | 31,223 | (243 | ) | 1,231 | — | 32,211 | |||||||||||||
(Loss) income before income tax (benefit) expense | (31,827 | ) | (86,318 | ) | 6,246 | — | (111,899 | ) | |||||||||||
Income tax (benefit) expense | (3,129 | ) | (24,195 | ) | 1,579 | — | (25,745 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (28,698 | ) | (62,123 | ) | 4,667 | — | (86,154 | ) | |||||||||||
Equity in net earnings of subsidiaries | (57,456 | ) | 4,667 | — | 52,789 | — | |||||||||||||
Net (loss) income | $ | (86,154 | ) | $ | (57,456 | ) | $ | 4,667 | $ | 52,789 | $ | (86,154 | ) |
24
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Three Months Ended October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (4,424 | ) | $ | 4,945 | $ | 1,609 | $ | (6,554 | ) | $ | (4,424 | ) | ||||||
Other comprehensive income: | |||||||||||||||||||
Foreign currency translation adjustments | — | — | (1,732 | ) | — | (1,732 | ) | ||||||||||||
Other comprehensive income | — | — | (1,732 | ) | — | (1,732 | ) | ||||||||||||
Total comprehensive (loss) income | $ | (4,424 | ) | $ | 4,945 | $ | (123 | ) | $ | (6,554 | ) | $ | (6,156 | ) |
25
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Three Months Ended October 31, 2016 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (6,456 | ) | $ | 2,852 | $ | 1,102 | $ | (3,954 | ) | $ | (6,456 | ) | ||||||
Other comprehensive income, net of tax: | |||||||||||||||||||
Foreign currency translation adjustments | — | — | (2,553 | ) | — | (2,553 | ) | ||||||||||||
Other comprehensive income, net of tax | — | — | (2,553 | ) | — | (2,553 | ) | ||||||||||||
Total comprehensive (loss) income | $ | (6,456 | ) | $ | 2,852 | $ | (1,451 | ) | $ | (3,954 | ) | $ | (9,009 | ) |
26
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Nine Months Ended October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (17,584 | ) | $ | 10,311 | $ | 4,953 | $ | (15,264 | ) | $ | (17,584 | ) | ||||||
Other comprehensive income: | |||||||||||||||||||
Foreign currency translation adjustments | — | — | 11,260 | — | 11,260 | ||||||||||||||
Other comprehensive income | — | — | 11,260 | — | 11,260 | ||||||||||||||
Total comprehensive (loss) income | $ | (17,584 | ) | $ | 10,311 | $ | 16,213 | $ | (15,264 | ) | $ | (6,324 | ) |
27
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Nine Months Ended October 31, 2016 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (86,154 | ) | $ | (57,456 | ) | $ | 4,667 | $ | 52,789 | $ | (86,154 | ) | ||||||
Other comprehensive income, net of tax: | |||||||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $365 | 586 | — | — | — | 586 | ||||||||||||||
Foreign currency translation adjustments | — | — | 667 | — | 667 | ||||||||||||||
Other comprehensive income, net of tax | 586 | — | 667 | — | 1,253 | ||||||||||||||
Total comprehensive (loss) income | $ | (85,568 | ) | $ | (57,456 | ) | $ | 5,334 | $ | 52,789 | $ | (84,901 | ) |
28
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended October 31, 2017 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Operating activities | |||||||||||||||||||
Net (loss) income | $ | (17,584 | ) | $ | 10,311 | $ | 4,953 | $ | (15,264 | ) | $ | (17,584 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||||
Provision for doubtful accounts | — | 851 | 63 | — | 914 | ||||||||||||||
Provision for excess and obsolete inventory | — | 74 | — | — | 74 | ||||||||||||||
Share-based compensation expense | 10 | 436 | — | — | 446 | ||||||||||||||
Gain on sale of equipment | — | (2,584 | ) | (106 | ) | — | (2,690 | ) | |||||||||||
Depreciation and amortization | — | 39,166 | 5,303 | — | 44,469 | ||||||||||||||
Amortization of deferred financing costs | 2,285 | — | — | — | 2,285 | ||||||||||||||
Deferred income taxes | (2,991 | ) | (9,472 | ) | 503 | — | (11,960 | ) | |||||||||||
Amortization of above market lease | — | (114 | ) | — | — | (114 | ) | ||||||||||||
Impairment of goodwill and other intangible assets | — | 1,000 | — | — | 1,000 | ||||||||||||||
Impairment of long-lived assets | — | 1,133 | 22 | — | 1,155 | ||||||||||||||
Equity in net earnings of subsidiaries, net of taxes | (10,311 | ) | (4,953 | ) | — | 15,264 | — | ||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Accounts receivable | — | (13,220 | ) | (3,608 | ) | — | (16,828 | ) | |||||||||||
Inventories | — | (664 | ) | (12 | ) | — | (676 | ) | |||||||||||
Prepaid expenses and other assets | (14 | ) | 1,175 | (28 | ) | — | 1,133 | ||||||||||||
Accounts payable and other liabilities | 5,006 | 290 | (635 | ) | — | 4,661 | |||||||||||||
Net cash (used in) provided by operating activities | (23,599 | ) | 23,429 | 6,455 | — | 6,285 | |||||||||||||
Investing activities | |||||||||||||||||||
Purchases of property and equipment | — | (20,539 | ) | (3,610 | ) | — | (24,149 | ) | |||||||||||
Proceeds from sale of equipment | — | 3,543 | 355 | — | 3,898 | ||||||||||||||
Net cash used in investing activities | — | (16,996 | ) | (3,255 | ) | — | (20,251 | ) | |||||||||||
Financing activities | |||||||||||||||||||
Intercompany investments and loans | 26,721 | (25,707 | ) | 1,151 | (2,165 | ) | — | ||||||||||||
Repayments of long-term debt | (3,122 | ) | — | — | — | (3,122 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 23,599 | (25,707 | ) | 1,151 | (2,165 | ) | (3,122 | ) | |||||||||||
Effect of foreign currency translation on cash | — | — | (1,075 | ) | 2,165 | 1,090 | |||||||||||||
Net (decrease) increase in cash and cash equivalents | — | (19,274 | ) | 3,276 | — | (15,998 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | 30,607 | 13,956 | — | 44,563 | ||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 11,333 | $ | 17,232 | $ | — | $ | 28,565 |
29
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended October 31, 2016 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Operating activities | |||||||||||||||||||
Net (loss) income | $ | (86,154 | ) | $ | (57,456 | ) | $ | 4,667 | $ | 52,789 | $ | (86,154 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||||
Provision for doubtful accounts, net | — | 981 | (94 | ) | — | 887 | |||||||||||||
Share-based compensation expense | 50 | 85 | — | — | 135 | ||||||||||||||
Gain on sale of equipment | — | (2,631 | ) | (6 | ) | — | (2,637 | ) | |||||||||||
Depreciation and amortization | — | 40,693 | 4,509 | — | 45,202 | ||||||||||||||
Amortization of deferred financing costs | 2,168 | — | — | — | 2,168 | ||||||||||||||
Deferred income taxes | (3,129 | ) | (24,200 | ) | (97 | ) | — | (27,426 | ) | ||||||||||
Amortization of above market lease | — | (114 | ) | — | — | (114 | ) | ||||||||||||
Impairment of goodwill and other intangible assets | — | 84,046 | — | — | 84,046 | ||||||||||||||
Impairment of long-lived assets | — | 4,268 | 104 | — | 4,372 | ||||||||||||||
Equity in net earnings of subsidiaries, net of taxes | 57,456 | (4,667 | ) | — | (52,789 | ) | — | ||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Accounts receivable | — | 4,017 | (2,639 | ) | — | 1,378 | |||||||||||||
Inventories | — | 3,682 | (165 | ) | — | 3,517 | |||||||||||||
Prepaid expenses and other current assets | (16 | ) | (149 | ) | (408 | ) | — | (573 | ) | ||||||||||
Accounts payable and other liabilities | 4,769 | (6,134 | ) | 1,977 | — | 612 | |||||||||||||
Net cash (used in) provided by operating activities | (24,856 | ) | 42,421 | 7,848 | — | 25,413 | |||||||||||||
Investing activities | |||||||||||||||||||
Purchases of property and equipment | — | (26,491 | ) | (3,280 | ) | — | (29,771 | ) | |||||||||||
Proceeds from sale of equipment | — | 3,811 | (27 | ) | — | 3,784 | |||||||||||||
Changes in restricted cash | — | — | (1,096 | ) | — | (1,096 | ) | ||||||||||||
Net cash used in investing activities | — | (22,680 | ) | (4,403 | ) | — | (27,083 | ) | |||||||||||
Financing activities | |||||||||||||||||||
Intercompany investments and loans | 27,993 | (27,904 | ) | 60 | (149 | ) | — | ||||||||||||
Repayment of long-term debt | (3,122 | ) | — | — | — | (3,122 | ) | ||||||||||||
Return of capital to BakerCorp International Holdings, Inc. | (15 | ) | — | — | — | (15 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 24,856 | (27,904 | ) | 60 | (149 | ) | (3,137 | ) | |||||||||||
Effect of foreign currency translation on cash | — | — | 437 | 149 | 586 | ||||||||||||||
Net (decrease) increase in cash and cash equivalents | — | (8,163 | ) | 3,942 | — | (4,221 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | 34,014 | 10,740 | — | 44,754 | ||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 25,851 | $ | 14,682 | $ | — | $ | 40,533 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis includes historical and forward-looking information that should be read in conjunction with the accompanying condensed consolidated financial statements included in this quarterly report and our consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2017. The following tables show our selected condensed consolidated historical financial data for the stated periods. The financial information presented may not be indicative of our future performance. The following discussion and analysis provides information we believe is relevant to assess and understand our condensed consolidated results of operations and financial condition. The discussion includes the following:
• | Overview; |
• | Critical Accounting Policies, Estimates, and Judgments; |
• | Results of Operations; and |
• | Liquidity and Capital Resources. |
Overview
Business
We are a provider of liquid and solid containment solutions operating within the specialty sector of the broader industrial services industry. We provide equipment rental, services and sales to our customers through a solution-oriented approach often involving multiple products. We provide our containment solutions within the United States through a national network with the capability to serve customers in all 50 states as well as a growing number of international locations in Europe and Canada. We maintain one of the largest and most diverse liquid and solid containment rental fleets in the industry consisting of more than 25,600 units, including steel tanks, polyethylene tanks, modular tanks, roll-off boxes, pumps, pipes, hoses and fittings, filtration, tank trailers, berms, and trench shoring equipment.
We serve customers in over 15 industries, including construction, refinery, industrial and environmental services, chemicals, and oil, gas and power. During the nine months ended October 31, 2017, no single customer accounted for more than 10% of our total revenue.
The demand for our services in the upstream segment of the oil and gas industry, which comprised approximately 9.1% and 8.4% of our total revenue for the three and nine months ended October 31, 2017, respectively, depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile and the substantial reductions in crude oil prices that began in October 2014 and has continued through July 31, 2017, have resulted in a decline in the level of drilling and production activity, reducing the demand for containment solutions in the basins in which we operate. During the nine months ended October 31, 2017 and during the fiscal year ended January 31, 2017, we recorded charges totaling $1.0 million and $116.3 million, respectively, associated with the impairment of all of our goodwill and a portion of our other intangible assets within our North American segment as a result of the sustained decline in oil prices, together with the projected market expectations of a slow recovery of such prices, making it more likely than not that the fair value of these assets had decreased below their respective carrying values. A further reduction in crude oil and natural gas prices could lead to continued declines in the level of production activity and demand for our services, which could result in the recognition of additional impairment charges on our intangible assets and property and equipment associated with our North American operations.
We have the opportunity to capitalize on a number of growth initiatives to increase the breadth of the services we offer and differentiate our capabilities with respect to our people, products and solutions. Certain key elements of our long-term strategy include:
• | Commit to safety. We focus on ensuring a safe and healthy working environment for our employees, customers and communities where we live and work. We execute this through a program called BakerZero. Through this program, we develop and implement policies and procedures to govern and promote workplace safety, including regular management safety reviews, daily branch safety training sessions and a disciplinary action program for incidents that result from non-compliance with our safety programs. |
• | Increase our Penetration in Key Industries and Evaluate Opportunities for End Market Expansion. Our low customer concentration, diversity of end markets, and long-standing relationships allow us to capitalize on market and macroeconomic trends while providing a hedge against more volatile industries. |
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• | Maintain Commercial Excellence Through Comprehensive Equipment Rental Solutions. As the premier global specialty rental company in our market, we have one of the largest branch networks with a broad equipment and service offering. We distinguish ourselves from our competitors and build customer loyalty by leveraging our extensive network to provide integrated and differentiated rental solutions. |
• | Achieve Operational Excellence by Continuously Developing our Systems and Processes. We are focused on company-wide process improvements such as cost leverage initiatives, equipment rent ready optimization for the branch network, fleet optimization through our newly developed Asset Management System (“AMS”) and advanced Quality Management System (“QMS”). |
• | Expand Geographically. Historically, we have increased penetration in new geographic regions and generated profitable growth by opening new branches within North America and Europe and introducing our products and services. We believe there is an opportunity to continue to open new branches in Europe and in certain under-served regions of North America. |
• | Retain the Most Talented Employees in the Industry. Through our best in class training programs and new annual goal-setting and performance management process, we ensure that our workforce is aligned to deliver the highest value to our shareholders, customers, and employees. |
• | Pursue Selected Acquisitions. Our markets remain fragmented and have historically presented numerous attractive acquisition candidates. We intend to pursue potential acquisitions that offer complementary products and services or expand our geographic footprint. |
Geographic Operations
Our branches and employees by reportable segment were as follows:
October 31, | ||||||||
2017 | 2016 | Change | ||||||
Branches: | ||||||||
Number of branches-North American Segment | 46 | 48 | (2 | ) | ||||
Number of branches-European Segment | 11 | 11 | — | |||||
Total branches | 57 | 59 | (2 | ) | ||||
Employees: | ||||||||
Number of employees-North American Segment | 780 | 748 | 32 | |||||
Number of employees-European Segment | 149 | 126 | 23 | |||||
Total employees | 929 | 874 | 55 |
Our operations are managed from our corporate headquarters, which is located in Plano, Texas. The majority of our operations, resources, property, and equipment are located in North America, and predominantly in the United States. The United States and Canada comprise our North American segment. Our equipment has the capability to be utilized for multiple applications within North America. We incentivize our local managers to maximize return on assets under their control and we have well developed systems to enable equipment and resource sharing. As a result, equipment in the U.S. and Canada is readily transferable and shared by the local branch managers. The process of equipment and resource sharing within our reportable segments enables us to maximize our efficiency and respond to shifts in customer demand.
We serve customers in our European segment from branches located in the Netherlands, Germany, France and the United Kingdom. Our European operations are headquartered in the Netherlands. Our equipment is transferred when demand dictates, between European locations to serve our customers.
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Rental Revenue Metrics
We evaluate rental revenue, the largest portion of our revenue, utilizing the following metrics:
• | Rental Activity – The change in rental activity is measured by the impact of several items, including the utilization of rental equipment that we individually track which reflects the demand for our products in relation to the level of equipment, volume of rental revenue on bulk items not individually tracked (which includes pipes, hoses, fittings, and shoring), and volume of re-rent revenue, resulting from the rental of equipment which we do not own. |
• | Pricing – The impact of changes in pricing is measured by the increase or decline in the average daily, weekly or monthly rental rates on the serialized rental equipment that we specifically track. |
• | Available Rental Fleet – The available rental fleet, as we define it, is the average number of equipment items within our fleet that we individually track. |
Seasonality
Demand from our customers has historically been higher during the second half of our fiscal year compared to the first half of the year. The peak demand period for our products and services typically occurs during the months of August through November. This peak demand period is driven by certain customers that need to complete maintenance work and other specific projects before the onset of colder weather. Because much of our revenue is derived from storing or moving liquids, the impact of weather may hinder the ability of our customers to fully utilize our equipment. This is particularly the case for customers with project locations in regions that are subject to freezing temperatures during winter.
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Critical Accounting Policies, Estimates, and Judgments
The preparation and presentation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to establish policies and make estimates, judgements and assumptions that affect (i) the amounts of assets and liabilities as of the dates presented on the accompanying condensed consolidated balance sheet, and (ii) the amounts of revenues and expenses during the reporting period in the accompanying condensed consolidated statements of operations. On an ongoing basis, we evaluate our estimates, judgments and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, customer rebates, sales returns and allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, depreciation, contingencies, income taxes, share-based compensation (expense and liability), and derivatives. We believe our estimates, judgments and assumptions are reasonable; however, actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the nine months ended October 31, 2017 to the items that we disclosed as our critical accounting policies, estimates, and judgments included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2017.
Recent Accounting Pronouncements
Refer to Note 2, “Accounting Pronouncements” of the notes to the condensed consolidated financial statements for a discussion of new accounting guidance.
Forward-Looking Statements
This quarterly report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our expectations, beliefs, and projections are expressed in good faith, and we believe we have a reasonable basis to make these statements through our management’s examination of historical operating trends, data contained in our records, and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs, or projections will be achieved.
The discussions of our financial condition and results of operations may include various forward-looking statements about future costs and prices of commodities, production volumes, industry trends, demand for our products and services, and projected results of operations and our projected capital resources and liquidity. Statements that are not historical in nature are considered to be forward-looking statements. They include statements regarding our expectations, hopes, beliefs, estimates, intentions, or strategies regarding the future. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to,” and similar expressions are intended to identify forward-looking statements.
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The forward-looking statements set forth in this quarterly report regarding, among other things, achievement of revenue, profitability and net income in future quarters, future prices and demand for our products and services, estimated fair value for purposes of write-down of goodwill, and estimated cash flows and sufficiency of cash flows to fund capital expenditures, reflect only our expectations regarding these matters. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following.
• | Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations. |
• | Our debt agreements contain restrictions that limit our flexibility in operating our business. |
• | Our business is subject to the general health of the economy, and accordingly any slowdown in the current economy or decrease in general economic activity could materially adversely affect our revenue and operating results. |
• | Continuing or sustained decline in oil prices and/or natural gas prices at or below current levels could have a negative impact on our operating results. |
• | Ongoing government review of hydraulic fracturing and its environmental impact could lead to changes to this activity or its substantial curtailment, which could materially adversely affect our revenue and results of operations. |
• | We intend to expand our business into new geographic markets, and this expansion may be costly and may not be successful. |
• | Our growth strategy includes evaluating selective acquisitions, which entails certain risks to our business and financial performance. |
• | We intend to expand into new product lines, which may be costly and may not ultimately be successful. |
• | We depend on our suppliers for the equipment we rent to customers. |
• | As our rental equipment ages, we may face increased costs to maintain, repair, and replace that equipment and new equipment could become more expensive. |
• | The short term nature of our rental arrangements exposes us to redeployment risks and means that we could experience rapid fluctuations in revenue in response to market conditions. |
• | Our customers may decide to begin providing their own liquid and solid containment solutions rather than sourcing those products from us. |
• | Our industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in the prices that we may charge. |
• | We lease all of our branch locations, and accordingly are subject to the risk of substantial changes to the real estate rental markets and our relationships with our landlords. |
• | Our business is subject to numerous environmental and safety regulations. If we are required to incur significant compliance or remediation costs, our liquidity and operating results could be materially adversely affected. |
• | Changes in the many laws and regulations to which we are subject in the United States, Europe and Canada, or our failure to comply with them, could materially adversely affect our business. |
• | We have operations outside the United States. As a result, we may incur losses from currency fluctuations. |
• | Turnover of our management and our ability to attract and retain other key personnel may affect our ability to efficiently manage our business and execute our strategy. |
• | If our employees should unionize, this could impact our costs and ability to administer our business. |
• | We are exposed to a variety of claims relating to our business, and our insurance may not fully cover them. |
• | Disruptions in our information technology systems could materially adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and provide effective services to our customers. |
• | Fluctuations in fuel costs or reduced supplies of fuel could harm our business. |
• | If we are unable to collect on contracts with customers, our operating results would be materially adversely affected. |
• | Climate change, climate change regulations, and greenhouse effects may materially adversely impact our operations and markets. |
• | Existing trucking regulations and changes in trucking regulations may increase our costs and negatively impact our results of operations. |
• | We may be required to recognize additional impairment charges in the future which could have an adverse effect on our financial condition and results of operations. |
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For a more complete description of these and other possible risks and uncertainties, please refer to our Annual Report on Form 10-K for the year ended January 31, 2017. Our forward-looking statements herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect events, circumstances or changes in expectations.
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Condensed Consolidated Statements of Operations (unaudited)
The following table presents our results of operations as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
(In thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Rental revenue | $ | 60,042 | 81.4 | % | $ | 55,592 | 81.4 | % | $ | 165,508 | 80.7 | % | $ | 159,357 | 81.1 | % | ||||||||||||
Sales revenue | 4,468 | 6.1 | % | 4,327 | 6.3 | % | 14,396 | 7.0 | % | 13,023 | 6.6 | % | ||||||||||||||||
Service revenue | 9,279 | 12.6 | % | 8,393 | 12.3 | % | 25,225 | 12.3 | % | 24,164 | 12.3 | % | ||||||||||||||||
Total revenue | 73,789 | 100.1 | % | 68,312 | 100.0 | % | 205,129 | 100.0 | % | 196,544 | 100.0 | % | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Employee related expenses | 24,620 | 33.4 | % | 23,458 | 34.3 | % | 73,593 | 35.9 | % | 72,415 | 36.8 | % | ||||||||||||||||
Rental expenses | 9,827 | 13.3 | % | 9,032 | 13.2 | % | 27,396 | 13.4 | % | 23,382 | 11.9 | % | ||||||||||||||||
Repair and maintenance | 3,691 | 5.0 | % | 2,973 | 4.4 | % | 10,300 | 5.0 | % | 8,160 | 4.2 | % | ||||||||||||||||
Cost of goods sold | 2,492 | 3.4 | % | 2,431 | 3.6 | % | 9,051 | 4.4 | % | 7,793 | 4.0 | % | ||||||||||||||||
Facility expenses | 7,203 | 9.8 | % | 6,417 | 9.4 | % | 20,886 | 10.2 | % | 20,022 | 10.2 | % | ||||||||||||||||
Professional fees | 3,208 | 4.3 | % | 758 | 1.1 | % | 5,256 | 2.6 | % | 2,976 | 1.5 | % | ||||||||||||||||
Other operating expenses | 4,537 | 6.1 | % | 3,519 | 5.2 | % | 12,125 | 5.9 | % | 10,501 | 5.3 | % | ||||||||||||||||
Depreciation and amortization | 15,000 | 20.3 | % | 15,018 | 22.0 | % | 44,469 | 21.7 | % | 45,202 | 23.0 | % | ||||||||||||||||
Gain on sale of equipment | (964 | ) | (1.3 | )% | (1,003 | ) | (1.5 | )% | (2,690 | ) | (1.3 | )% | (2,637 | ) | (1.3 | )% | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | % | — | — | % | 1,000 | 0.5 | % | 84,046 | 42.8 | % | ||||||||||||||||
Impairment of long-lived assets | 859 | 1.2 | % | 3,933 | 5.8 | % | 1,155 | 0.6 | % | 4,372 | 2.2 | % | ||||||||||||||||
Total operating expenses | 70,473 | 95.5 | % | 66,536 | 97.5 | % | 202,541 | 98.9 | % | 276,232 | 140.6 | % | ||||||||||||||||
Income (loss) from operations | 3,316 | 4.6 | % | 1,776 | 2.5 | % | 2,588 | 1.1 | % | (79,688 | ) | (40.6 | )% | |||||||||||||||
Other expense: | ||||||||||||||||||||||||||||
Interest expense, net | 10,281 | 13.9 | % | 10,121 | 14.8 | % | 30,473 | 14.9 | % | 31,270 | 15.9 | % | ||||||||||||||||
Foreign currency exchange loss, net | 167 | 0.2 | % | 720 | 1.1 | % | 24 | — | % | 958 | 0.5 | % | ||||||||||||||||
Other income, net | (5 | ) | — | % | (5 | ) | — | % | (15 | ) | — | % | (17 | ) | — | % | ||||||||||||
Total other expenses, net | 10,443 | 14.1 | % | 10,836 | 15.9 | % | 30,482 | 14.9 | % | 32,211 | 16.4 | % | ||||||||||||||||
Loss before income taxes | (7,127 | ) | (9.5 | )% | (9,060 | ) | (13.4 | )% | (27,894 | ) | (13.8 | )% | (111,899 | ) | (57.0 | )% | ||||||||||||
Income tax benefit | (2,703 | ) | (3.7 | )% | (2,604 | ) | (3.8 | )% | (10,310 | ) | (5.0 | )% | (25,745 | ) | (13.1 | )% | ||||||||||||
Net loss | $ | (4,424 | ) | (5.8 | )% | $ | (6,456 | ) | (9.6 | )% | $ | (17,584 | ) | (8.8 | )% | $ | (86,154 | ) | (43.9 | )% |
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Non-U.S. GAAP Financial Measures
The following is a reconciliation of our net loss to EBITDA and Adjusted EBITDA as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net loss | $ | (4,424 | ) | $ | (6,456 | ) | $ | (17,584 | ) | $ | (86,154 | ) | |||
Interest expense, net | 10,281 | 10,121 | 30,473 | 31,270 | |||||||||||
Income tax benefit | (2,703 | ) | (2,604 | ) | (10,310 | ) | (25,745 | ) | |||||||
Depreciation and amortization | 15,000 | 15,018 | 44,469 | 45,202 | |||||||||||
EBITDA | $ | 18,154 | $ | 16,079 | $ | 47,048 | $ | (35,427 | ) | ||||||
Foreign currency exchange loss (gain), net | 167 | 720 | 24 | 958 | |||||||||||
Financing related costs | 2,548 | 36 | 2,620 | 102 | |||||||||||
Severance related costs | 107 | 50 | 153 | 634 | |||||||||||
Sponsor management fees | 202 | 146 | 460 | 425 | |||||||||||
Share-based compensation expense | 142 | 174 | 446 | 135 | |||||||||||
Impairment of goodwill and other intangible assets | — | — | 1,000 | 84,046 | |||||||||||
Impairment of long-lived assets | 859 | 3,933 | 1,155 | 4,372 | |||||||||||
Branch closure and consolidation | 298 | 85 | 376 | 170 | |||||||||||
Rent ready optimization concept | 125 | — | 451 | ||||||||||||
Accounting and tax related fees | 105 | — | 392 | — | |||||||||||
Capital conversion | 18 | — | 580 | — | |||||||||||
Other | 139 | 118 | 441 | 426 | |||||||||||
Adjusted EBITDA | $ | 22,864 | $ | 21,341 | $ | 55,146 | $ | 55,841 | |||||||
Adjusted EBITDA margin | 31.0 | % | 31.2 | % | 26.9 | % | 28.4 | % |
EBITDA represents the sum of net loss, interest expense, income taxes and depreciation of rental equipment and non-rental depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding certain expenses detailed within the net loss to Adjusted EBITDA reconciliation above. EBITDA and Adjusted EBITDA, which are used by management to measure performance, are non-GAAP financial measures. Management believes that EBITDA and Adjusted EBITDA are useful to investors. EBITDA is commonly utilized in our industry to evaluate operating performance, and Adjusted EBITDA is used to determine our compliance with financial covenants related to our debt instruments and is a key metric used to determine incentive compensation for certain of our employees, including members of our executive management team. Both EBITDA and Adjusted EBITDA are included as a supplemental measure of our operating performance because in the opinion of management they eliminate items that have less bearing on our operating performance and highlight trends in our core business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures. In addition, Adjusted EBITDA is one of the primary measures management uses for the planning and budgeting processes and to monitor and evaluate our operating results. EBITDA and Adjusted EBITDA are not recognized items under U.S. GAAP and do not purport to be alternatives to measures of our financial performance as determined in accordance with U.S. GAAP, such as net loss. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA may not be, and Adjusted EBITDA as presented herein is not, comparable to similarly titled measures reported by other companies.
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Results of Operations
Three Months Ended October 31, 2017 Compared to October 31, 2016
Three Months Ended October 31, | ||||||||||||||
(In thousands, except Operating Data) | 2017 | 2016 | $ Change | % Change | ||||||||||
North America | ||||||||||||||
Rental revenue | $ | 50,212 | $ | 47,404 | $ | 2,808 | 5.9 | % | ||||||
Sales revenue | 4,404 | 4,323 | 81 | 1.9 | % | |||||||||
Service revenue | 8,401 | 7,587 | 814 | 10.7 | % | |||||||||
Total North America revenue | 63,017 | 59,314 | 3,703 | 6.2 | % | |||||||||
Total operating expenses(3) | 63,057 | 60,390 | 2,667 | 4.4 | % | |||||||||
Loss from operations | $ | (40 | ) | $ | (1,076 | ) | $ | 1,036 | 96.3 | % | ||||
Europe | ||||||||||||||
Rental revenue | $ | 9,828 | $ | 8,188 | $ | 1,640 | 20.0 | % | ||||||
Sales revenue | 65 | 4 | 61 | 100.0 | % | |||||||||
Service revenue | 879 | 806 | 73 | 9.1 | % | |||||||||
Total European revenue | 10,772 | 8,998 | 1,774 | 19.7 | % | |||||||||
Total operating expenses(3) | 7,416 | 6,146 | 1,270 | 20.7 | % | |||||||||
Income from operations | $ | 3,356 | $ | 2,852 | $ | 504 | 17.7 | % | ||||||
Consolidated | ||||||||||||||
Total revenue | $ | 73,789 | $ | 68,312 | $ | 5,477 | 8.0 | % | ||||||
Total operating expenses | 70,473 | 66,536 | 3,937 | 5.9 | % | |||||||||
Total income from operations | $ | 3,316 | $ | 1,776 | $ | 1,540 | (86.7 | )% | ||||||
Operating Data: | ||||||||||||||
North America | ||||||||||||||
Average utilization (1) | 53.4 | % | 45.6 | % | 780 | bps | ||||||||
Average daily rental rate (2) | $ | 28.80 | $ | 29.79 | $ | (0.99 | ) | (3.3 | )% | |||||
Average number of rental units | 22,678 | 23,651 | (973) | (4.1 | )% | |||||||||
Europe | ||||||||||||||
Average utilization (1) | 40.5 | % | 42.3 | % | (180 | ) bps | ||||||||
Average daily rental rate (2) | $ | 87.60 | $ | 88.09 | $ | (0.49 | ) | (0.6 | )% | |||||
Average number of rental units | 2,166 | 1,705 | 461 | 27.0 | % | |||||||||
Consolidated | ||||||||||||||
Average utilization (1) | 52.3 | % | 45.4 | % | 690 | bps | ||||||||
Average daily rental rate (2) | $ | 32.77 | $ | 33.44 | $ | (0.67 | ) | (2.0 | )% | |||||
Average number of rental units | 24,844 | 25,356 | (512) | (2.0 | )% |
(1) | The average utilization of rental fleet is a measure of efficiency used by management; it represents the percentage of time a unit of equipment is on-rent during a given period. It is not a U.S. GAAP financial measure. |
(2) | The average daily rental rate is used by management to gauge the daily rate of rental equipment that we specifically track during a given period. It is not a U.S. GAAP financial measure. |
(3) | Total operating expenses by reporting segment excludes inter-segment allocations from North America to Europe of $0.9 million for each of the three months ended October 31, 2017 and 2016, respectively. |
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Revenue
North America
Our North American segment, saw overall growth in revenues in several of its key industries. Our largest industry growth was seen within our maintenance end market of $2.2 million, or 7.2%. This was driven by an increase in plant maintenance activities with new and existing customers. Upstream oil and gas revenue also increased for the first time in 10 consecutive quarters, when comparing to the same quarter of the prior year, by $1.2 million, or 24.5%. We started to see slight growth in oil and upstream gas revenue beginning in the second quarter of fiscal 2018, which continued into the current quarter with increased customer commitments. Additional increases of $0.5 million, or 15.9% were spread across our diversified customer base, specifically in the food market, as we continue to diversify into other industries, as well as our environmental industry, which increased $0.4 million, or 6.0%. These increases were offset by a slight decrease in the construction industry of $0.8 million, or 5.7%. Our average utilization rate increased 780 bps. Our average daily rental rate declined due to continued competitive pricing pressures in the marketplace. The rental revenue increase in these industries also positively impacted our sales and service revenue.
Europe
Our European segment revenue increased primarily due to an increase in revenues within our refinery customers of $0.9 million, or 109.5%, our chemical customers of $0.9 million, or 50.5% and our manufacturing customers of $0.4 million, or 95.3%. These increases were partially offset by a decrease in revenue within our environmental customers of $0.6 million, or 28.5%. The increases are primarily due to the introduction of our pumps and filtration line of business partially offset by a large environmental project in the prior year that did not recur in the current year. Average utilization decreased 180 bps primarily due to the 27.0% growth in the number of rental units as our expansion into the pump and filtration business continues to grow. The slight decrease in our average daily rental rate is due to pricing pressures from new competition entering the market.
Operating Expenses
North America
The increase in total operating expenses of $2.7 million was due to the following:
• | $2.5 million increase in professional fees incurred in connection with a detailed review of strategic options, and various corporate finance considerations, consisting of potential refinancing options. |
• | $0.8 million increase in employee related expenses due to an increase in headcount, adding 32 employees since October 31, 2016. |
• | $0.7 million increase in rental expenses is primarily due to rebill and rerent expenses as a result of higher rental revenue. |
• | $0.9 million increase in other operating expenses is due to higher personnel recruiting, employee training and travel expenses. |
• | $0.6 million increase in facility expense primarily due to the termination of a rental location in Canada of $0.3 million. |
• | $0.6 million increase in repair and maintenance expense as part of our initiative to get the majority of our network Rental Ready Optimization Concept (“RROC”) certified. The RROC program has many features, in particular maintaining certain levels of rent readiness throughout the network in anticipation of demand. |
The above increases were partially offset by the following decreases:
• | $3.1 million decrease in long-lived asset impairment from $3.9 million during the three months ended October 31, 2016 to $0.8 million during the three months ended October 31, 2017. |
• | $0.3 million decrease in depreciation and amortization expense due to more assets becoming fully depreciated before the start of fiscal year 2018 than the depreciation on newly acquired assets as well as the impairment of certain identified assets during the year ended January 31, 2017. |
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Europe
The increase in total operating expenses of $1.3 million was due to the following:
• | $0.4 million increase in employee related expenses primarily in wages for operations. Employee related expenses increased primarily due to an increase in headcount of 23 employees, or 18.3%, from 126 employees as of October 31, 2016 to 149 employees as of October 31, 2017, to support the growth in our business. |
• | $0.3 million increase in depreciation and amortization expense as a result of the increase in fixed assets specifically related to the introduction of the pump and filtration business line. |
• | $0.2 million increase in other operating expenses, primarily for employee safety and training. |
• | $0.1 million increase in facility expense due to the increase in rental equipment at our facilities. |
• | $0.3 million increase in repairs and maintenance expense and other expenses due to the increase in our rental fleet. |
Income Tax Benefit
Income tax benefit during the three months ended October 31, 2017 increased by $0.1 million to $2.7 million from $2.6 million during the three months ended October 31, 2016. The tax benefit increase was primarily due to an impairment of non-deductible goodwill during the three months ended October 31, 2016, partially offset by a decrease in book losses.
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Results of Operations
Nine Months Ended October 31, 2017 Compared to October 31, 2016
Nine Months Ended October 31, | ||||||||||||||
(In thousands, except Operating Data) | 2017 | 2016 | $ Change | % Change | ||||||||||
North America | ||||||||||||||
Rental revenue | $ | 137,681 | $ | 133,627 | $ | 4,054 | 3.0 | % | ||||||
Sales revenue | 13,874 | 12,981 | 893 | 6.9 | % | |||||||||
Service revenue | 22,913 | 21,917 | 996 | 4.5 | % | |||||||||
Total North America revenue | 174,468 | 168,525 | 5,943 | 3.5 | % | |||||||||
Total operating expenses(3) | 181,493 | 258,369 | (76,876 | ) | (29.8 | )% | ||||||||
Loss from operations | $ | (7,025 | ) | $ | (89,844 | ) | $ | 82,819 | 92.2 | % | ||||
Europe | ||||||||||||||
Rental revenue | 27,826 | $ | 25,730 | $ | 2,096 | 8.1 | % | |||||||
Sales revenue | 523 | $ | 42 | 481 | 100.0 | % | ||||||||
Service revenue | 2,312 | $ | 2,247 | 65 | 2.9 | % | ||||||||
Total European revenue | 30,661 | 28,019 | 2,642 | 9.4 | % | |||||||||
Total operating expenses(3) | 21,048 | 17,863 | 3,185 | 17.8 | % | |||||||||
Income from operations | $ | 9,613 | $ | 10,156 | $ | (543 | ) | 5.3 | % | |||||
Consolidated | ||||||||||||||
Total revenue | $ | 205,129 | $ | 196,544 | $ | 8,585 | 4.4 | % | ||||||
Total operating expenses | 202,541 | 276,232 | (73,691 | ) | (26.7 | )% | ||||||||
Total income (loss) from operations | $ | 2,588 | $ | (79,688 | ) | $ | 82,276 | 103.2 | % | |||||
Operating Data: | ||||||||||||||
North America | ||||||||||||||
Average utilization (1) | 49.2 | % | 44.3 | % | 490 | bps | ||||||||
Average daily rental rate (2) | $ | 28.88 | $ | 29.97 | $ | (1.09 | ) | (3.6 | )% | |||||
Average number of rental units | 22,679 | 23,419 | (740) | (3.2 | )% | |||||||||
Europe | ||||||||||||||
Average utilization (1) | 40.9 | % | 47.7 | % | (680 | ) bps | ||||||||
Average daily rental rate (2) | $ | 84.50 | $ | 88.25 | $ | (3.75 | ) | (4.2 | )% | |||||
Average number of rental units | 2,077 | 1,583 | 494 | 31.2 | % | |||||||||
Consolidated | ||||||||||||||
Average utilization (1) | 48.5 | % | 44.5 | % | 400 | bps | ||||||||
Average daily rental rate (2) | $ | 32.82 | $ | 33.92 | $ | (1.10 | ) | (3.2 | )% | |||||
Average number of rental units | 24,756 | 25,002 | (246) | (1.0 | )% |
(1) | The average utilization of rental fleet is a measure of efficiency used by management; it represents the percentage of time a unit of equipment is on-rent during a given period. It is not a U.S. GAAP financial measure. |
(2) | The average daily rental rate is used by management to gauge the daily rate of rental equipment that we specifically track during a given period. It is not a U.S. GAAP financial measure. |
(3) | Total operating expenses by reporting segment excludes inter-segment allocations from North America to Europe of $2.7 million and $2.6 million for the nine months ended October 31, 2017 and 2016, respectively. |
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Revenue
North America
Our North American segment revenue increased primarily due to increases in our construction industry of $1.6 million, or 4.4%, as we continue to increase our focus in this growing market, as well as the recognition of one of our fixed installation electrocoagulation jobs. We additionally experienced increases in some of our secondary markets, consisting of food, manufacturing and mining industries totaling $2.1 million, or 23.2%. Our maintenance industry also showed an increase of $0.7 million, or 0.8%. The environmental and oil and gas industries also increased by $0.6 million or 3.2%, and $0.4 million, or 2.7%, respectively. Upstream oil and gas revenue increased for the first time in 10 consecutive quarters, when comparing to the same quarter of the prior year. The results during the three months ended October 31, 2017, were a continuation and acceleration of the growth we experienced during the first two quarters of 2017. Our average utilization rate increased by 490 bps. Our average daily rental rate declined due to competitive pricing pressures in the marketplace. The increase in rental revenue of these industries also drove the increase in our sales and service revenue.
Europe
Our European segment revenue increased primarily due to increases in revenues relating to our refinery customers of $2.8 million, or 80.6%, our chemical customers of $1.0 million, or 16.7% and our manufacturing customers of $0.5 million, or 39.8%. These increases were partially offset by a decrease in revenue relating to our environmental customers of $2.4 million, or 36.6%. The increases are primarily due to the introduction of our pumps and filtration line of business partially offset by a large environmental project in the prior year that did not recur in the current year. Average utilization decreased 680 bps primarily due to the 31.2% growth in the number of rental units as our expansion into the pump and filtration business continues to grow. The decrease in our average daily rental rate is due to pricing pressures from new competition entering the market.
Operating Expenses
North America
The decrease in total operating expenses of $77.0 million was due to the following:
• | $83.0 million decrease in goodwill and other intangible asset impairments due to an $84.0 million goodwill impairment recorded during the first quarter of the fiscal 2016, partially offset by an impairment of our trade name indefinite-lived intangible asset of $1.0 million recorded during the three months ended July 31, 2017. |
• | $3.0 million decrease in long-lived asset impairment from $3.9 million during the three months ended October 31, 2016 to $0.9 million during the three months ended October 31, 2017. |
• | $1.4 million decrease in depreciation and amortization expense due to more assets becoming fully depreciated before the start of fiscal year 2018 than the depreciation on new assets as well as the impairment of certain identified assets during the year ended January 31, 2017. |
The above decreases were partially offset by the following increases:
• | $3.4 million increase in rental expense primarily due to a $1.3 million increase in outside hauling resulting from the repositioning of assets to meet market demands as well as costs to transport our assets to refurbishment centers, and due to increased rebill and rerent expenses as a result of higher rental revenue. |
• | $2.3 million increase in professional fees incurred in connection with a detailed review of strategic options, and various corporate finance considerations, consisting of potential refinancing options. |
• | $1.9 million increase in repair and maintenance primarily due to the $0.6 million reversal of a regulatory liability in the period ended July 31, 2016 and a $1.3 million increase in rental asset repair and maintenance in order to have our equipment rent-ready. |
• | $1.3 million increase in other operating expenses due to higher personnel recruiting and employee training of $0.6 million, travel of $0.2 million and various other operating expenses.totaling $0.3 million. |
• | $0.9 million increase in cost of goods due to the recognition of revenue on one of our fixed installation electrocoagulation jobs. |
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• | $0.5 million increase in employee related expenses due to an increase in headcount, adding 32 employees since October 31, 2016 totaling $0.8 million. Temp labor also increased $0.4 million to support the revenue growth. Share-based compensation expense increased $0.3 million due to the reduction of share-based compensation as a result of the remeasurement of stock option awards accounted for as liability awards during the period ended July 31, 2016. Insurance costs increased $0.2 million due to a higher number of claims in health insurance under our self-insured plan. These increases were offset by a $0.8 million decrease in bonus due to our operating results being lower that plan and a $0.4 million decrease in severance due to a charge during the prior year that did not occur in the current period. |
Europe
The increase in total operating expenses of $3.2 million is due primarily to the following:
• | $0.7 million increase in employee related expenses due to the increase in headcount to support the growth in the European business. Our headcount increased by 23 employees, or 18.3%, from 126 employees as of October 31, 2016 to 149 employees as of October 31, 2017. |
• | $0.7 million increase in depreciation and amortization as a result of a larger rental fleet due to the |
addition of pump and filtration equipment and overall growth of the business.
• | $0.6 million increase in rental expenses related to the reposition of equipment to locations with the highest utilization resulting in an increase in rental revenue. |
• | $0.4 million increase in facility expenses to support our growth of equipment at our branch locations and our increase in revenue. |
• | $0.4 million increase in filtration cost of sales due to increased sales revenue. The increase in sales revenue is a direct result of our European expansion and filtration strategy. |
• | $0.3 million increase in other operating expenses primarily related to staffing and business development |
expenses.
•$0.1 million increase in repairs and maintenance expense to support the expansion of our rental fleet.
Income Tax Benefit
Income tax benefit during the nine months ended October 31, 2017 decreased by $15.4 million to $10.3 million from $25.7 million during the nine months ended October 31, 2016. The tax benefit decrease was primarily due to a decrease in book losses for the nine months ended October 31, 2017, partially offset by an impairment of non-deductible goodwill during the nine months ended October 31, 2016.
Liquidity and Capital Resources
Liquidity Summary
We have a history of generating higher cash flow from operations than net income (loss) recorded during the same period. The cash flow to fund our business has historically been generated from operations. We utilize this cash flow to invest in property and equipment that are core to our business and to reduce debt. We invest in assets that have relatively long useful lives. The Internal Revenue Code allows us to accelerate the depreciation of these assets for tax purposes over a much shorter period allowing us to defer the payment of income taxes.
Cash and cash equivalents by geographic region were the following:
(In thousands) | October 31, 2017 | January 31, 2017 | $ Change | % Change | ||||||||||
United States | $ | 11,333 | $ | 30,608 | $ | (19,275 | ) | (63.0 | )% | |||||
Europe | 16,073 | 13,438 | 2,635 | 19.6 | % | |||||||||
Canada | 1,159 | 517 | 642 | 124.2 | % | |||||||||
Total cash and cash equivalents | $ | 28,565 | $ | 44,563 | $ | (15,998 | ) | (35.9 | )% |
Our cash held outside the United States may be repatriated to the United States but, under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. We do not plan to repatriate cash balances from our foreign subsidiaries to fund our operations within the United States. We have not provided for the United States federal tax liability on these amounts as this cash is considered permanently reinvested outside of the United States. We utilize a variety of
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cash planning strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. Our intent is to meet our domestic liquidity needs through ongoing cash flow, external borrowings, or both.
Our business requires ongoing investment in equipment to maintain the size of our rental fleet. Most of our assets, if properly maintained, may generate a level of revenue similar to new assets of the same type over the assets’ useful lives. There is not a well-defined secondary or resale market for the majority of our assets; therefore, we rent our assets for as long as they may safely be employed to meet our customers’ needs. We invest capital in additional equipment with the expectation of generating revenue on that investment within a relatively short period of time.
We invest in new equipment for several reasons, including:
• | to expand our fleet of current product lines within markets where we already operate; |
• | to enter new geographic regions; |
• | to add additional product offerings in response to customer or market demands; and |
• | to replace equipment that has been retired because it is no longer functional. |
We have not made long-term commitments to purchase equipment. Additionally, the period of time between when we place an order for equipment and when we begin to receive it is typically two to four months. This ordering process enables us to quickly reduce our capital spending during periods of economic slowdown. During periods of expansion, we fund our investments in equipment utilizing our cash flow from operations or borrowings. Management believes our cash flow from operations and available under our credit facility will be sufficient to fund our current operating needs and capital expenditures for at least the next 12 months; however, there can be no assurance that this will be the case.
We may use funds to repurchase our outstanding indebtedness from time to time, including outstanding indebtedness under our credit facility and notes. Repurchases may be made in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms we deem appropriate and subject to our cash requirements for other purposes, compliance with the covenants under our debt agreements, and other factors management deems relevant. In addition to repurchasing our indebtedness we regularly review our capital structure and market conditions with respect to refinancing our existing indebtedness and incurring new indebtedness.
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Debt
On June 1, 2011, we (i) entered into a $435.0 million senior secured credit facility (the “Credit Facility”), consisting of a $390.0 million term loan facility (the “Senior Term Loan”) and a $45.0 million revolving credit facility (the “Revolving Credit Facility”) and (ii) issued $240.0 million in aggregate principal amount of fixed rate 8.25% senior unsecured notes due June 1, 2019 (the “Notes”).
Credit Facility
On February 7, 2013, we entered into a first amendment to our Credit Facility (the “First Amendment”) to refinance our Credit Facility. Pursuant to the First Amendment, we borrowed $384.2 million of term loans (the “Amended Senior Term Loan”) to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Notes are not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to the Company’s ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to the Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term Loan”), which may be used for general corporate purposes, including to finance permitted acquisitions. The terms applicable to the Incremental Term Loan are the same as those applicable to the term loans under the Credit Facility.
On November 3, 2016, we entered into a third amendment to our Credit Facility (the “Third Amendment”) to amend the Revolving Credit Facility. The amendment (i) extends the Revolving Credit Facility maturity date from February 7, 2018 to November 7, 2019 (provided that such maturity date will be accelerated to January 30, 2019 unless the Notes are repaid in full or extended or refinanced on or prior to January 30, 2019) and (ii) reduces the revolver commitment from $45.0 million to $40.0 million in addition to certain other amendments to the original terms.
Under the Credit Facility, we may be required to satisfy and maintain a total leverage ratio not in excess of the leverage ratio 6.00:1.00 if there is an outstanding balance on the Revolving Credit Facility of 25% or more of the committed amount on any quarter end. The total leverage ratio is calculated as our net debt (total debt less cash and cash equivalents) divided by our trailing twelve months’ Adjusted EBITDA.
On October 31, 2017, we did not have an outstanding balance on the Revolving Credit Facility, as a result, we were not subject to a leverage test. Additionally, we were in compliance with all of our requirements and covenant tests under the Credit Facility.
The Credit Facility, as amended, during February 2013, November 2013 and November 2016, contains certain restrictive covenants (in each case, subject to exclusions) that limit, among other things, our ability and the ability of our restricted subsidiaries to: (1) create, incur, assume, or permit to exist, any liens; (2) create, incur, assume, or permit to exist, directly or indirectly, any additional indebtedness; (3) consolidate, merge, amalgamate, liquidate, wind up, or dissolve themselves; (4) convey, sell, lease, license, assign, transfer, or otherwise dispose of assets; (5) make certain restricted payments; (6) make certain investments; (7) make any optional prepayment, repayment, or redemption with respect to, or amend or otherwise alter the terms of documents related to, certain subordinated indebtedness; (8) enter into sale leaseback transactions; (9) enter into transactions with affiliates; (10) change our fiscal year end date or the method of determining fiscal quarters; (11) enter into contracts that limit our ability to incur any lien to secure our obligations under the Credit Facility; (12) create any encumbrance or restriction on the ability of any restricted subsidiary to make certain distributions; and (13) engage in certain lines of business. The Credit Facility also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds.
The Third Amendment is accounted for as debt modification. Costs incurred in connection with the Third Amendment were deferred and amortized over the term of the amended Revolving Credit Facility. In addition, any unamortized deferred costs related to the old arrangement were written off in proportion to the decrease in borrowing capacity.
Costs related to debt financing are deferred and amortized to interest expense over the term of the underlying debt instruments utilizing the straight-line method for our revolving credit facility and the effective interest method for our senior term and revolving loan facilities. We amortized $0.8 million of deferred financing costs during each of the three months ended
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October 31, 2017 and 2016, respectively. We amortized $2.3 million and $2.2 million of deferred financing costs during the nine months ended October 31, 2017 and 2016, respectively.
Senior Unsecured Notes due 2019
On June 1, 2011, we issued the Notes. We may redeem all or any portion of the Notes at the redemption prices set forth in the indenture, plus accrued and unpaid interest. Upon a change of control, we are required to make an offer to redeem all of the Notes from the holders at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of the repurchase. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our direct and indirect existing and future wholly-owned domestic restricted subsidiaries.
Interest and Fees
Interest and fees related to our Credit Facility and the Notes were as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Credit Facility interest and fees | $ | 4,821 | $ | 4,859 | $ | 14,457 | $ | 14,496 | ||||||||
Notes interest and fees (1) | 5,312 | 5,281 | 15,912 | 15,822 | ||||||||||||
Total interest and fees | $ | 10,133 | $ | 10,140 | $ | 30,369 | $ | 30,318 | ||||||||
Credit Facility interest rate | 4.31 | % | 4.25 | % | 4.25 | % | 4.25 | % |
(1) | Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%. |
Principal Payments on Debt
As of October 31, 2017, the schedule of minimum required principal payments on our debt for each of the fiscal years ending January 31 are due according to the table below:
(In thousands) | |||
Remainder of the fiscal year ending January 31, 2018 | $ | 1,041 | |
2019 | 4,163 | ||
2020 | 634,414 | ||
Total | $ | 639,618 |
Sources and Uses of Cash
The cash flow to fund our business has historically been generated from operations. Our principal needs for liquidity historically have been for the purchase of rental equipment for our fleet, other capital expenditures, including delivery vehicles and debt service. These will be our principal liquidity needs going forward.
Our largest use of liquidity has been and will continue to be for the acquisition of equipment for our rental fleet. Our large rental fleet requires a substantial ongoing commitment of capital. While we can manage the size and aging of our fleet generally over time, eventually we retire older equipment and either allow our fleet to shrink or replace the older equipment in our fleet with newer models. For the nine months ended October 31, 2017 and 2016, our net rental fleet capital expenditures totaled $20.9 million and $24.2 million, respectively. We have historically financed these new additions to our rental fleet using cash flows from operations. We are also using our liquidity to finance other non-rental equipment capital expenditures, typically consisting of delivery vehicles, through our cash flows from operations or capital leasing.
Cash Provided by Operating Activities
Cash provided by operating activities was $6.3 million as compared to $25.4 million for the nine months ended October 31, 2016. Net loss of $17.6 million was adjusted by the following non-cash items, such as depreciation of $44.5 million,
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deferred income taxes $12.0 million, gain on sale of equipment of $2.7 million, amortization of deferred financing costs $2.3 million, impairment of long-lived assets of $1.2 million and impairment of goodwill and other intangible assets of $1.0 million. Additionally, our cash flows from operations include a $16.8 million use of cash related to an increase in accounts receivable as a result of higher revenues. Accounts payable and other liabilities was a source of cash of $4.7 million due to the timing of purchases and payments to our suppliers. Prepaid expenses and other assets was a source of cash of $1.1 million primarily relating to the timing of the amortization of various prepaid expenses.
Cash Used In Investing Activities
Cash used in investing activities was $20.3 million for the nine months ended October 31, 2017, as compared to $27.1 million for the nine months ended October 31, 2016. Cash used for the purchase of rental equipment was $20.9 million for the nine months ended October 31, 2017, compared to $24.2 million for the nine months ended October 31, 2016. We received $3.9 million in cash proceeds from the sale of equipment for the nine months ended October 31, 2017, compared to $3.8 million for the nine months ended October 31, 2016.
Cash Used In Financing Activities
Cash used in financing activities was $3.1 million for each of the nine months ended October 31, 2017 and 2016 and represents principal payments on our debt.
Effect of Exchange Rate Changes on Cash
The effect of foreign currency translation on cash resulted in an increase of $1.1 million and $0.6 million to cash and cash equivalents during the nine months ended October 31, 2017 and 2016, respectively.
Hedging Activities
From time to time, we may use interest rate swap agreements to effectively convert a portion of our debt with variable interest rates into a fixed interest rate obligation. Under our interest rate swap agreements, we typically agree to pay the counterparty a fixed interest rate in exchange for receiving interest payments based on an interest rate that will vary similarly to the rate on the debt that we are attempting to hedge. We have historically conducted our swaps with large well-capitalized counterparties whom we determined to be creditworthy.
Our interest rate swaps expired as of July 31, 2016 and we are not a party to any new interest rate swaps since their expiration. We are always evaluating the interest rate risk exposure and could enter into agreements to manage our risk.
Contractual Obligations
There has been no material change to our contractual obligations as disclosed in our 2017 Annual Report.
Off-Balance Sheet Arrangements
As of October 31, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a material current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
From time to time, we may use interest rate swaps, collars or options to manage our exposure to fluctuations in interest rates. As of October 31, 2017, our total indebtedness was $639.6 million (including $240.0 million aggregate principal amount of Notes and $399.6 million aggregate principal amount outstanding of LIBOR term loans (subject to a 1.25% floor) under our term loan facility). A 100 basis point increase or decrease in the assumed interest rates on the credit facilities would result in a $1.5 million increase or decrease in reported net loss for the nine months ended October 31, 2017.
Impact of Foreign Currency Rate Changes
We currently have branch operations outside the United States, and our foreign subsidiaries conduct their business in local currency. Our operations in Canada are denominated in the Canadian dollar, operations in the Netherlands, Germany and
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France are denominated in the Euro, and operations in the United Kingdom are denominated in the British Pound Sterling. Likewise, we pay our expenses in the local currencies, described above, in the areas in which we operate. We are exposed to foreign exchange rate fluctuations as the financial results of our non-United States operations are translated into U.S. dollars. Based upon the financial results of our international operations during the period relative to the Company as a whole, a 10% change in the exchange rates would not have a material impact on our after-tax earnings.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (its principal executive officer) and the Chief Financial Officer (its principal financial officer), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of October 31, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended October 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth above under Note 13, “Commitments and Contingencies – Litigation,” contained in the notes to the condensed consolidated financial statements is incorporated herein by reference.
Item 1A. Risk Factors
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Form 10-K for the year ended January 31, 2017, which risk factors are incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BAKERCORP INTERNATIONAL, INC. | |||
Date: | December 13, 2017 | By: | /s/ Robert Craycraft |
Robert Craycraft | |||
President and Chief Executive Officer | |||
By: | /s/ Michael J. Henricks | ||
Michael J. Henricks | |||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
32 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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