BakerCorp International, Inc. - FORM 10-Q

BakerCorp International, Inc. - FORM 10-Q - September 12, 2014

Attached files

Attached files

BakerCorp International, Inc. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - BakerCorp International, Inc.	Financial_Report.xls
EX-31.1 - EX-31.1 - BakerCorp International, Inc.	bakercorpexhibit311-731201.htm
EX-31.2 - EX-31.2 - BakerCorp International, Inc.	bakercorpexhibit312-731201.htm
EX-32 - EX-32 - BakerCorp International, Inc.	bakercorpexhibit32-7312014.htm

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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 July 31, 2014



¨	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.)

3020 Old Ranch Parkway, Suite 220, Seal Beach, California		90740
(Address of principal executive offices)		(Zip Code)

(562) 430-6262

(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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 September 5, 2014.

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TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Consolidated Condensed Balance Sheets on July 31, 2014 (unaudited) and January 31, 2014 (audited)	1
Consolidated Condensed Statements of Operations for the Three and Six months ended July 31, 2014 and 2013 (unaudited)	2
Consolidated Condensed Statements of Comprehensive Loss for the Three and Six months ended July 31, 2014 and 2013 (unaudited)	3
Consolidated Condensed Statements of Cash Flows for the Six months ended July 31, 2014 and 2013 (unaudited)	4
Notes to Consolidated Condensed Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3. Quantitative and Qualitative Disclosures about Market Risk	56
Item 4. Controls and Procedures	56
PART II. OTHER INFORMATION	56
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3. Defaults upon Senior Securities	57
Item 4. Mine Safety Disclosures	57
Item 5. Other Information	57
Item 6. Exhibits	57

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BakerCorp International, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)



	July 31, 2014			January 31, 2014

Assets
Current assets:
Cash and cash equivalents	$	13,307		$	25,536
Accounts receivable, less allowance for doubtful accounts of $2,414 and $2,610 on July 31, 2014 and January 31, 2014, respectively	69,856			65,142
Inventories, net	7,554			5,748
Prepaid expenses and other current assets	6,034			5,395
Deferred tax assets	8,502			6,633
Total current assets	105,253			108,454
Property and equipment, net	386,790			393,142
Goodwill	319,526			320,069
Other intangible assets, net	442,935			451,402
Deferred financing costs, net	742			846
Other long-term assets	591			593
Total assets	$	1,255,837		$	1,274,506
Liabilities and shareholder’s equity
Current liabilities:
Accounts payable	$	19,445		$	27,808
Accrued expenses	23,148			24,366
Current portion of long-term debt (net of deferred financing costs of $2,474 and $2,406 on July 31, 2014 and January 31, 2014, respectively)	1,689			1,757
Total current liabilities	44,282			53,931
Long-term debt, net of current portion (net of deferred financing costs of $10,295 and $11,543 on July 31, 2014 and January 31, 2014, respectively)	638,689			639,522
Deferred tax liabilities	195,190			196,828
Fair value of interest rate swap liabilities	3,229			4,008
Share-based compensation liability	2,479			2,974
Other long-term liabilities	2,090			3,487
Total liabilities	885,959			900,750
Commitments and contingencies
Shareholder’s equity:
Common stock, $0.01 par value; 100,000 shares authorized; 100 shares issued and outstanding on July 31, 2014 and January 31, 2014	—			—
Additional paid-in capital	390,720			390,628
Accumulated other comprehensive loss	(11,503		)	(10,708		)
Accumulated retained deficit	(9,339		)	(6,164		)
Total shareholder’s equity	369,878			373,756
Total liabilities and shareholder’s equity	$	1,255,837		$	1,274,506

The accompanying notes are an integral part of these consolidated condensed financial statements.

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BakerCorp International, Inc. and Subsidiaries

Consolidated Condensed Statements of Operations (unaudited)

(In thousands)



	Three Months Ended						Six Months Ended
	July 31, 2014			July 31, 2013			July 31, 2014			July 31, 2013
Revenue:
Rental revenue	$	66,143		$	61,820		$	129,145		$	120,104
Sales revenue	5,653			5,986			11,813			10,959
Service revenue	11,150			11,394			21,357			21,916
Total revenue	82,946			79,200			162,315			152,979
Operating expenses:
Employee related expenses	27,993			29,016			54,663			51,981
Rental expenses	9,673			9,523			20,907			18,311
Repair and maintenance	3,645			3,874			7,295			7,651
Cost of goods sold	3,905			3,311			7,508			6,258
Facility expenses	6,894			5,818			13,494			11,817
Professional fees	1,005			2,597			2,608			5,570
Management fees	154			153			303			306
Other operating expenses	4,845			4,083			9,167			7,683
Depreciation and amortization	15,910			15,289			33,109			30,536
Gain on sale of equipment	(686		)	(619		)	(1,085		)	(1,022		)
Impairment of long-lived assets	—			—			1,273			—
Total operating expenses	73,338			73,045			149,242			139,091
Income from operations	9,608			6,155			13,073			13,888
Other expenses:
Interest expense, net	10,686			10,201			21,210			20,349
Loss on extinguishment and modification of debt	—			—			—			2,999
Foreign currency exchange (gain) loss, net	(247		)	469			(488		)	338
Other expense, net	91			—			91			—
Total other expenses, net	10,530			10,670			20,813			23,686
Loss before income tax benefit	(922		)	(4,515		)	(7,740		)	(9,798		)
Income tax benefit	(2,106		)	(174		)	(4,565		)	(2,287		)
Net income (loss)	$	1,184		$	(4,341	)	$	(3,175	)	$	(7,511	)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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BakerCorp International, Inc. and Subsidiaries

Consolidated Condensed Statements of Comprehensive Loss (unaudited)

(In thousands)



	Three Months Ended						Six Months Ended
	July 31, 2014			July 31, 2013			July 31, 2014			July 31, 2013
Net income (loss)	$	1,184		$	(4,341	)	$	(3,175	)	$	(7,511	)
Other comprehensive (loss) income, net of tax
Unrealized gain on interest rate swap agreements, net of tax expense of $135, $366, $289, and $386, respectively	217			590			490			623
Change in foreign currency translation adjustments	(4,594		)	1,980			(1,285		)	(3,130		)
Other comprehensive (loss) income	(4,377		)	2,570			(795		)	(2,507		)
Total comprehensive loss	$	(3,193	)	$	(1,771	)	$	(3,970	)	$	(10,018	)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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BakerCorp International, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows (unaudited)

(In thousands)



	Six Months Ended
	July 31, 2014			July 31, 2013
Operating activities
Net loss	$	(3,175	)	$	(7,511	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for (recovery of) doubtful accounts, net	93			(71		)
Share-based compensation expense	638			1,378
Loss on sale of subsidiary	99			—
Gain on sale of equipment	(1,085		)	(1,022		)
Depreciation and amortization	33,109			30,536
Amortization of deferred financing costs	1,281			1,149
Deferred income taxes	(3,722		)	(763		)
Amortization of above-market lease	(346		)	(340		)
Loss on extinguishment and modification of debt	—			2,999
Impairment of long-lived assets	1,273			—
Changes in assets and liabilities:
Accounts receivable	(4,969		)	(3,803		)
Inventories, net	(1,806		)	322
Prepaid expenses and other assets	(672		)	(2,042		)
Accounts payable and other liabilities	(10,615		)	(3,211		)
Net cash provided by operating activities	10,103			17,621
Investing activities
Purchases of property and equipment	(20,285		)	(27,930		)
Proceeds from sale of equipment	1,531			2,279
Proceeds from sale of subsidiary	100			—
Net cash used in investing activities	(18,654		)	(25,651		)
Financing activities
Repayment of long-term debt	(2,081		)	(1,921		)
(Return of capital to) contributions from BakerCorp International Holdings, Inc.	(1,039		)	65
Payment of deferred financing costs	—			(531		)
Net cash used in financing activities	(3,120		)	(2,387		)
Effect of foreign currency translation on cash	(558		)	48
Net decrease in cash and cash equivalents	(12,229		)	(10,369		)
Cash and cash equivalents, beginning of period	25,536			28,069
Cash and cash equivalents, end of period	$	13,307		$	17,700

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	19,943		$	19,214
Income taxes	$	638		$	1,450
Non-cash operating and financing 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.	$	—		$	(4,036	)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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BakerCorp International, Inc. and Subsidiaries

Notes to Consolidated Condensed 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 a comprehensive suite of 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 have branches within 26 states in the United States as well as branches in the Netherlands, Germany, France, Canada, the United Kingdom and Poland. For reporting purposes, a branch is defined as a location with at least one employee. 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 consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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, 2014, included in our 2014 Annual Report on Form 10-K filed with the SEC on April 16, 2014, referred to as our 2014 Annual Report.

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 to present fairly our results of operations and financial position for the interim periods. The results of operations for the three and six months ended July 31, 2014, are not necessarily indicative of the results to be expected for future quarters or the full year.

Principles of Consolidation

The consolidated condensed 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 a number of 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, warranties, inventory valuation, customer rebates, sales allowance, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, income taxes, share-based compensation expense, 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 may differ from our expectations. Based on our evaluation, our estimates, judgments, and assumptions may be adjusted as more information becomes available. Any adjustment may be material.

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Note 2. Accounting Pronouncements

Recently Adopted Accounting Pronouncements

During April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)-Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 improves the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Under current U.S. GAAP, many disposals, some of which may be routine in nature and not a change in an entity’s strategy, are reported in discontinued operations. The amendments in this Update require expanded disclosures for discontinued operations that should provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. The updated disclosure should provide users with information about the financial effects of significant disposals that do not qualify for discontinued operations reporting. The amendments in this Update also require an entity to disclose the pretax profit or loss (or change in net assets for a not-for-profit entity) of an individually significant component of an entity that does not qualify for discontinued operations reporting. The amendments in this update are effective on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for

sale) that have not been reported in financial statements previously issued or available for issuance. During the three months ended July 31, 2014, we elected to early adopt this update to account for the sale of our wholly owned Mexican subsidiary and recorded a $0.1 million loss on the sale of a subsidiary for our North American segment within the other expenses caption in our consolidated condensed statement of operations (See Note 16, "Loss on the Sale of a Subsidiary").

During July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction, does not require the entity to use, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is intended to improve the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is also permitted. The adoption of this update did not have a significant impact on our consolidated financial statements.

During March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” (“ASU 2013-05”). The objective of ASU 2013-05 is to resolve the diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. The amendments in this ASU are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The adoption of this update did not have a significant impact on our consolidated financial statements.

During February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” ASU No. 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: (i) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (ii) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this update did not have a significant impact on our consolidated financial statements.

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Recently Issued Accounting Pronouncements

During June 2014, the FASB issued ASU No. 2014-12, "Compensation-Stock Compensation (Topic 718)". ASU No. 2014-12 will require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The update is effective for all entities for annual periods beginning after December 15, 2015 and interim periods within those annual periods. The update should be applied on a prospective basis to awards that are granted or modified on or after the effective date. Entities also have the option to apply the amendments on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adoption date. We do not believe the adoption of this update will have a significant impact to our consolidated financial statements.

During May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". 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. This update 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. The update 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 is effective for public entities for annual and interim periods beginning after December 15, 2016. This means that calendar year-end public entities will apply the new standard in the quarter ended March 31, 2017. Early adoption is not permitted under U.S. GAAP, but nonpublic companies may adopt the new standard as of the public entity effective date. We are currently assessing the impact the adoption of this update will have on our consolidated financial statements.

Note 3. Changes in Accumulated Other Comprehensive Loss

The following table includes the components of accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2014:



(In thousands)	Unrealized Loss on Interest Rate Swap Agreements (1)			Change in Foreign Currency Translation Adjustments			Total
Beginning balance on April 30, 2014	$	(2,188	)	$	(4,938	)	$	(7,126	)
Other comprehensive income (loss) before reclassifications	217			(4,594		)	(4,377		)
Net other comprehensive income (loss)	217			(4,594		)	(4,377		)
Balance on July 31, 2014	$	(1,971	)	$	(9,532	)	$	(11,503	)


(1)	Unrealized loss on interest rate swap agreements is net of tax expense of $0.1 million for the three months ended July 31, 2014.

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The following table includes the components of accumulated other comprehensive loss, net of tax, for the three months ended July 31, 2013:



(In thousands)	Unrealized Loss on Interest Rate Swap Agreements (1)			Change in Foreign Currency Translation Adjustments			Total
Beginning balance on April 30, 2013	$	(3,232	)	$	(12,225	)	$	(15,457	)
Other comprehensive income before reclassifications	590			1,980			2,570
Net other comprehensive income	590			1,980			2,570
Balance on July 31, 2013	$	(2,642	)	$	(10,245	)	$	(12,887	)


(1)	Unrealized loss on interest rate swap agreements is net of tax expense of $0.4 million for the three months ended July 31, 2013.

The following table includes the components of accumulated other comprehensive loss, net of tax, for the six months ended July 31, 2014:



(In thousands)	Unrealized loss on interest rate swap agreements (1)			Change in foreign currency translation adjustments			Total
Beginning balance on January 31, 2014	$	(2,461	)	$	(8,247	)	$	(10,708	)
Other comprehensive income (loss)before reclassifications	490			(1,285		)	(795		)
Net other comprehensive income (loss)	490			(1,285		)	(795		)
Balance on July 31, 2014	$	(1,971	)	$	(9,532	)	$	(11,503	)


(1)	Unrealized loss on interest rate swap agreements is net of tax expense of $0.3 million thousand for the six months ended July 31, 2014.

The following table includes the components of accumulated other comprehensive loss, net of tax, for the six months ended July 31, 2013:



(In thousands)	Unrealized loss on interest rate swap agreements (1)			Change in foreign currency translation adjustments			Total
Beginning balance on January 31, 2013	$	(3,265	)	$	(7,115	)	$	(10,380	)
Other comprehensive income (loss) before reclassifications	623			(3,130		)	(2,507		)
Net other comprehensive income (loss)	623			(3,130		)	(2,507		)
Balance on July 31, 2013	$	(2,642	)	$	(10,245	)	$	(12,887	)


(1)	Unrealized loss on interest rate swap agreements is net of tax expense of $0.4 million for the six months ended July 31, 2013.

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Note 4. Inventories, Net

Our inventories are composed of finished goods that we purchase and hold for resale, work-in-process comprised of partially assembled pumps and filtration equipment, and components utilized in the assembly process. Inventories are valued at the lower of cost or market value. The cost is determined using the average cost method for purchased finished goods held for resale and first-in first-out for assembled pump and components. We write down our inventories for the estimated difference between cost and market value based upon our best estimates of market conditions. We carry inventories in amounts necessary to satisfy our customers’ inventory requirements on a timely basis. We continually monitor our inventory status to control inventory levels and write down any excess or obsolete inventories on hand.

Inventories, net consisted of the following on July 31, 2014, and January 31, 2014:



(In thousands)	July 31, 2014			January 31, 2014
Finished goods	$	2,886		$	3,020
Work-in-process	1,931			994
Components	3,287			2,265
Less: inventory reserve	(550		)	(531		)
Inventories, net	$	7,554		$	5,748

Note 5. Property and Equipment, Net

Property and equipment, net consisted of the following on July 31, 2014:



(In thousands)	Book Value		Accumulated Depreciation			Net Carrying Value
Assets held for rent:
Secondary containment	$	4,251	$	(2,883	)	$	1,368
Boxes	25,552		(9,278		)	16,274
Filtration	9,191		(3,636		)	5,555
Generators and light towers	256		(203		)	53
Pipes, hoses and fittings	18,678		(14,298		)	4,380
Non-steel containment	5,129		(1,463		)	3,666
Pumps	50,542		(21,824		)	28,718
Shoring	3,711		(2,258		)	1,453
Steel containment	338,638		(51,532		)	287,106
Tank trailers	1,881		(1,166		)	715
Construction in progress	9,375		—			9,375
Total assets held for rent	$	467,204	$	(108,541	)	$	358,663
Assets held for use:
Leasehold improvements	2,969		(1,534		)	1,435
Machinery and equipment	34,928		(18,681		)	16,247
Office furniture and equipment	5,054		(3,204		)	1,850
Software	6,649		(2,392		)	4,257
Construction in progress	4,338		—			4,338
Total assets held for use	53,938		(25,811		)	28,127
Total	$	521,142	$	(134,352	)	$	386,790

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Property and equipment, net consisted of the following on January 31, 2014:



(In thousands)	Book Value		Accumulated Depreciation			Net Carrying Value
Assets held for rent:
Secondary containment	$	3,924	$	(2,437	)	$	1,487
Boxes	24,603		(8,282		)	16,321
Filtration	8,678		(2,971		)	5,707
Generators and light towers	254		(174		)	80
Pipes, hoses and fittings	17,269		(12,733		)	4,536
Non-steel containment	4,786		(1,231		)	3,555
Pumps	48,208		(18,205		)	30,003
Shoring	3,059		(1,491		)	1,568
Steel containment	330,122		(42,888		)	287,234
Tank trailers	1,887		(1,015		)	872
Construction in progress	13,566		—			13,566
Total assets held for rent	$	456,356	$	(91,427	)	$	364,929
Assets held for use:
Leasehold improvements	2,853		(1,194		)	1,659
Machinery and equipment	32,894		(16,370		)	16,524
Office furniture and equipment	5,016		(2,694		)	2,322
Software	6,639		(1,535		)	5,104
Construction in progress	2,604		—			2,604
Total assets held for use	50,006		(21,793		)	28,213
Total	$	506,362	$	(113,220	)	$	393,142

Depreciation expense for the three months ended July 31, 2014 and July 31, 2013 was $11.8 million and $11.2 million, respectively. Depreciation expense for the six months ended July 31, 2014 and July 31, 2013 was $24.9 million and $22.4 million, respectively.

Note 6. Goodwill and Other Intangible Assets, Net

Goodwill

Goodwill by reportable segment and reporting units on July 31, 2014 and January 31, 2014 and the changes in the carrying amount of goodwill during the six months ended July 31, 2014 were the following:



(In thousands)	North America		Europe			Total
Balance on January 31, 2014	$	257,051	$	63,018		$	320,069
Adjustments (1)	—		(543		)	(543		)
Balance on July 31, 2014	$	257,051	$	62,475		$	319,526


(1)	The adjustments to goodwill were the result of fluctuations in foreign currency exchange rates used to translate the balance into U.S. dollars.

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Other Intangible Assets, Net

The components of other intangible assets, net on July 31, 2014 and January 31, 2014 were the following:



	July 31, 2014							January 31, 2014
(In thousands)	Gross (1)		Accumulated Amortization			Net		Gross (1)		Accumulated Amortization			Net
Carrying amount:
Customer relationships (25 years)	$	404,797	$	(51,274	)	$	353,523	$	404,981	$	(43,198	)	$	361,783
Customer backlog (1 year)	200		(64		)	$	136	200		(21		)	$	179
Developed technology (11 years)	1,693		(99		)	$	1,594	1,695		(22		)	$	1,673
Trade name (Indefinite)	87,682		—			$	87,682	87,767		—			87,767
Total carrying amount	$	494,372	$	(51,437	)	$	442,935	$	494,643	$	(43,241	)	$	451,402


(1)	The decrease in the gross intangible assets balance on July 31, 2014 compared to January 31, 2014 was the result of fluctuations in the foreign currency exchange rates used to translate foreign intangible asset balances into U.S. dollars.

Amortization expense for the three months ended July 31, 2014 and July 31, 2013 was $4.1 million and $4.1 million, respectively. Amortization expense for the six months ended July 31, 2014 and July 31, 2013 was $8.2 million and $8.1 million, respectively. Estimated amortization expense for the fiscal periods ending January 31 is the following:



(In thousands)	Estimated Amortization Expense
Remainder of the fiscal year ending January 31, 2015	$	8,320
2016	16,346
2017	16,346
2018	16,346
2019	16,346
Thereafter	281,549
Total	$	355,253

Note 7. Accrued Expenses

Accrued expenses consisted of the following:



(In thousands)	July 31, 2014		January 31, 2014
Accrued compensation	$	12,593	$	13,810
Accrued insurance	904		1,038
Accrued interest	3,300		3,304
Accrued professional fees	1,077		1,145
Accrued taxes	2,913		2,542
Accrued above market lease liability	589		698
Other accrued expenses	1,772		1,829
Total accrued expenses	$	23,148	$	24,366

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Note 8. Fair Value Measurements

Instruments Measured at Fair Value on a Recurring Basis

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels, defined as follows:


•	Level 1-Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.


•	Level 2-Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.


•	Level 3-Inputs include management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation.

Instruments measured at fair value on a recurring basis are summarized below (in thousands):



			July 31, 2014
	Total		Level 1		Level 2		Level 3
Liabilities
Interest rate swap liabilities	$	3,229	$	—	$	3,229	$	—
Share-based compensation liability	2,479		—		—		2,479
Total	$	5,708	$	—	$	3,229	$	2,479



			January 31, 2014
	Total		Level 1		Level 2		Level 3
Liabilities
Interest rate swap liabilities	$	4,008	$	—	$	4,008	$	—
Share-based compensation liability	2,974		—		—		2,974
Total	$	6,982	$	—	$	4,008	$	2,974

As discussed in Note 10, “Derivatives”, we had interest rate swap contracts with a total notional principal of $221.0 million outstanding on July 31, 2014. The fair value of interest rate swap contracts is calculated based on the fixed rate, notional principal, settlement date, present value of the future cash flows, terms of the agreement, and future floating interest rates as determined by a future interest rate yield curve. Our interest rate swap contracts are recorded at fair value utilizing Level 2 inputs such as trade data, broker/dealer quotes, observable market prices for similar securities, and other available data. Although readily observable data is utilized in the valuations, different valuation methodologies could have an effect on the estimated fair value. Accordingly, the inputs utilized to determine the fair value of the interest rate swap contracts are categorized as Level 2.

On July 31, 2014 and January 31, 2014, the weighted average fixed interest rate of our interest rate swap contracts were 1.6% and 1.6%, and the weighted average remaining life was 1.4 years and 1.4 years, respectively. Interest expense related to our interest rate swap contracts during the three months ended July 31, 2014 and July 31, 2013 was $0.3 million and $0.5 million, respectively, and during the six months ended July 31, 2014 and July 31, 2013 was $0.8 million, and $1.0 million, respectively.

During the six months ended July 31, 2014, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.

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Level 3 Valuations

When at least one significant valuation model assumption or input used to measure the fair value of financial assets or liabilities is unobservable in the market, they are deemed to be measured using Level 3 inputs. These Level 3 inputs may include pricing models, discounted cash flow methodologies or similar techniques where at least one significant model assumption or input is unobservable. We use Level 3 inputs to value our share-based compensation liability, which were based upon internal valuations, considering input from third parties, utilizing the following assumptions (See Note 12, "Stockholder's Equity"):

•

Current Common Stock Value- We operate as a privately-owned company, and our stock does not and has not been traded on a market or an exchange. As such, we estimate the value of BCI Holdings on a quarterly basis. If there have been no significant changes such as acquisitions, disposals, or loss of a major customer, etc. between our valuation analysis and the grant date of a stock option, we will continue to use that valuation. We determined the fair value of BCI Holdings common stock based on an analysis of the market approach and the income approach. Under the market approach, we estimated the fair value based on market multiples of EBITDA for comparable public companies.


•	Expected Volatility-Management determined that historical volatility of comparable publicly traded companies is the best indicator of our expected volatility and future stock price trends.


•	Expected Dividends-We historically have not paid cash dividends, and do not currently intend to pay cash dividends, and thus have assumed a 0% dividend rate.


•	Expected Term-For options granted "at-the-money", we used the simplified method to estimate the expected term for the stock options as we do not have enough historical exercise data to provide a reasonable estimate. For stock options granted "out-of-the-money", we used an adjusted simplified method that considers the probability of the stock options becoming “in-the-money”.


•	Risk-Free Rate-The risk-free interest rate was based on the U.S. Treasury yield with a maturity date closest to the expiration date of that stock option grant.

We determined that a +/-10% change in the above assumptions would have a $0.5 million increase or decrease to our reported net loss for the three months ended July 31, 2014.

The following tables provide a reconciliation of the beginning and ending balance of our share-based compensation liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended July 31, 2014:



	Three Months Ended
(In thousands)	Level 3
	Share-Based Compensation Liability
Beginning balance on April 30, 2014	$	2,464
Total loss included in operating expense	15
Ending balance on July 31, 2014	$	2,479



	Six Months Ended
(In thousands)	Level 3
	Share-Based Compensation Liability
Beginning balance on January 31, 2014	$	2,974
Total gain included in operating expense	(495		)
Ending balance on July 31, 2014	$	2,479

Instruments Not Recorded at Fair Value on a Recurring Basis

Some of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include cash and cash equivalents, accounts receivables, inventories, certain other assets, accounts payable, and accrued expenses.

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Our long-term debt is not recorded at fair value on a recurring basis but is measured at fair value for disclosure purposes. The fair value of our long-term debt is estimated based on the latest sales price for similar instruments obtained from a third party (Level 2 inputs). On July 31, 2014 and January 31, 2014, the fair values of our senior notes and senior term loan were $243.6 million and $403.8 million, respectively, and $244.2 million and $414.2 million, respectively.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

We reduce the carrying amounts of our goodwill, intangible assets, and long-lived assets to fair value when held for sale or determined to be impaired. The categorization of the fair value of the assets is considered Level 3 due to the subjective nature of the unobservable inputs utilized. During the six months ended July 31, 2014, there were no adjustments to the fair value of goodwill and intangible assets.

During the three months ended April 30, 2014, we reassessed our plans for our wholly owned subsidiary in Mexico. As a result, we performed a long-lived asset impairment analysis. On April 30, 2014, we determined that the $1.4 million net book value of assets related to our Mexican operations exceeded the assets estimated fair value of $0.1 million. The fair value was estimated using data obtained during our investigation of possible disposition options, which was consistent with the market approach. The estimated fair value of the assets utilized significant unobservable inputs (Level 3). Consequently, during the three months ended April 30, 2014, we recorded an impairment charge of $1.3 million in our North American segment, which represents the excess of the net book value of the assets and the assets estimated fair value.

Note 9. 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 ($45.0 million available on July 31, 2014) and (ii) issued $240.0 million in aggregate principal amount of senior unsecured notes due 2019 (the “Notes”). On February 7, 2013, we entered into the First Amendment to our Credit Facility, to refinance our Credit Facility (as discussed below). On November 13, 2013, we entered into the Second Amendment to the Credit Facility. Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term Loans”), 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 Senior Term Loans under the First Amendment to our Credit Agreement.

Long-term debt consisted of the following:



(In thousands)	July 31, 2014			January 31, 2014
Senior term loan (LIBOR margin of 3.0%, and interest rate of 4.25%)	$	413,147		$	415,228
Revolving loan	—			—
Senior unsecured notes	240,000			240,000
Total debt	653,147			655,228
Less deferred financing costs	(12,769		)	(13,949		)
Total debt less deferred financing costs	640,378			641,279
Less current portion (net of current portion of deferred financing costs of $2,474 and $2,406, respectively)	(1,689		)	(1,757		)
Long-term debt, net of current portion (net of long-term portion of deferred financing costs of $10,295 and $11,543, respectively)	$	638,689		$	639,522

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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 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 term loan facility maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Amended Senior Term Loan is not repaid or refinanced on or prior to March 2, 2019, (ii) the revolving 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 fiscal year excess cash flow prepayment requirement is in effect beginning in fiscal year 2015 until the maturity date.

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 $0.7 million and $0.6 million of deferred financing costs during three months ended July 31, 2014 and July 31, 2013, respectively, and $1.3 million and $1.1 million during the six months ended July 31, 2014 and July 31, 2013, respectively.

The Credit Facility issued in June 2011 and amended in February 2013 and November 2013 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, under the Credit Facility agreement, we may be required to satisfy and maintain a total leverage ratio if there is an outstanding balance on the revolving loan of 25% or more of the committed amount on any quarter end.

On July 31, 2014, we did not have an outstanding balance on the revolving loan; therefore, on July 31, 2014, we were not subject to a leverage test. Additionally, on July 31, 2014, we were in compliance with all of our requirements and covenant tests under the Credit Facility.

Senior Unsecured Notes Due 2019

On June 1, 2011, we issued $240.0 million of fixed rate 8.25% Notes due June 1, 2019. 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.

Interest and Fees

Interest and fees related to our Credit Facility and the Notes were as follows:



	Three Months Ended				Six Months Ended
(in thousands)	July 31, 2014		July 31, 2013		July 31, 2014		July 31, 2013
Credit Facility interest and fees (weighted average interest rate of 4.25% and 4.25%, respectively, and 4.25% and 4.28%, respectively) (1)	$	3,421	$	4,532	$	8,203	$	9,025
Notes interest and fees (2)	6,737		5,198		11,952		10,391
Total interest and fees	$	10,158	$	9,730	$	20,155	$	19,416


(1)	Interest on the Amended Senior Term Loan is payable quarterly based upon an interest rate of 4.25%.


(2)	Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.

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Principal Payments on Debt

On July 31, 2014, the schedule of minimum required principal payments relating to the Amended Senior Term Loan and the Notes for each of the twelve months ending January 31 are due according to the table below:



(In thousands)	Principal Payments on Debt
Remainder of the fiscal year ending January 31, 2015	$	2,081
2016	4,163
2017	4,163
2018	4,163
2019	4,163
Thereafter	634,414
Total	$	653,147

Note 10. Derivatives

Cash Flow Hedges

We utilize interest rate derivative contracts to hedge cash flows related to the variable interest rate exposure on our debt. Our use of interest rate derivative contracts is not intended or designed to be used for trading or speculative purposes. For these interest rate swap contracts, we have agreed to pay fixed interest rates while receiving a floating LIBOR. The purpose of holding these interest rate swap contracts is to hedge against the upward movement of LIBOR and the associated interest we pay on our external variable rate credit facilities.

The fair value of the potential termination obligations related to our interest rate swaps, which were recorded within the “Fair value of interest rate swap liabilities” caption of our consolidated condensed balance sheets, were as follows:



(in thousands)	Notional Amount		Interest Rate	July 31, 2014		January 31, 2014
Interest rate swaps effective July 2011, expires July 2014 (1)	$	60,000	1.681%	$	—	$	130
Interest rate swaps effective July 2011, expires July 2016 (1)	150,000		2.346%	2,882		3,585
Interest rate swaps, effective July 2014, expires July 2016 (1)(2)	71,000		1.639%	347		293
				$	3,229	$	4,008


(1)	These interest rate swaps require a fixed rate of interest in exchange for a variable interest rate based on a three-month LIBOR, subject to a 1.25% floor.


(2)	The $71 million notional amount will be reduced to $64.0 million on July 31, 2015, before it terminates on July 29, 2016.

The interest rate swap agreements have been designated as cash flow hedges of our interest rate risk and recorded at estimated fair values on July 31, 2014. The fair value of the interest rate hedges reflect the estimated amount that we would receive or pay to terminate the contracts at each reporting date (See Note 8, “Fair Value Measurements”).

Changes in the fair value of our swaps, to the extent effective, are reported as a component of other comprehensive (loss) income, net (“OCI”) and is subsequently reclassified into interest expense during the same period interest cash flows for our floating-rate debt (hedged item) occur. Changes in the fair value of any portion of a cash flow hedge deemed ineffective are recognized into current period earnings. We determined that the interest rate swap agreements are highly effective in offsetting future variable interest payments associated with the hedged portion of our term loans. During the six months ended July 31, 2014, no ineffectiveness was recorded into current period earnings. We do not expect to reclassify any material amount from OCI into earnings within the next 12 months.

The effective portion of the unrealized gain recognized in OCI for our derivative instruments designated as cash flow hedges was as follows:

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	Three Months Ended				Six Months Ended
(in thousands)	July 31, 2014		July 31, 2013		July 31, 2014		July 31, 2013
Unrealized gain, before income tax expense	$	352	$	956	$	779	$	1,009
Income tax expense	135		366		289		386
Total	$	217	$	590	$	490	$	623

Note 11. Income Taxes

The income tax benefit for the three and six months ended July 31, 2014, and July 31, 2013 are 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 six months ended July 31, 2014 were a benefit of 228.4% and 59.0%, respectively, compared to a benefit for the three and six months ended July 31, 2013 of 3.9% and 23.3%, respectively. The effective tax rates differ from the U.S. federal statutory rate primarily due to income taxed in foreign jurisdictions, state taxes, non-deductible meals and entertainment expenses, and discrete items. The difference in effective income tax rates for the three and six months ended July 31, 2014 and July 31, 2013 primarily relate to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction and discrete items primarily related to the future benefit of bad debt impairment recorded during the three months ended July 31, 2014.

Deferred income taxes are provided for the temporary differences between the financial reporting 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. The majority of our deferred tax assets 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. 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 on July 31, 2014.

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. We do not believe there will be any material unrecognized tax positions over the next 12 months.

We believe appropriate provisions for all outstanding issues have been made for 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. As of the date of this report, we do not anticipate that there will be any material change in the unrecognized tax benefits associated with these audits within the next twelve months.

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Note 12. Stockholder’s Equity

Share-based Compensation

Prior to the June 1, 2011, the Company had share-based incentive plans, whereby restricted shares and options to purchase shares of common stock were granted to key employees and outside directors. The vesting of all outstanding stock options and restricted shares under those plans was accelerated at the consummation of the June 2011 Transaction. Additionally, as part of the change in ownership of the Company, certain members of the management team elected to exchange existing stock options to purchase shares in the Predecessor Company for stock options to purchase shares of BakerCorp International Holdings (“BCI Holdings”). These stock options were fully vested as of the change in ownership.

During June 2011, BCI Holdings adopted a share-based compensation plan, the BakerCorp International Holdings, Inc. 2011 Equity Incentive Plan (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. On July 31, 2014, there were 138,750 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.

Under the amended 2011 Plan, stock option awards are generally granted with an exercise price equal to or greater than the market price of BCI Holdings common stock on the date of grant. All stock options granted to eligible participants, except for the Chief Executive Officer (the “CEO”), are subject to the following:


•	The stock options expire in ten years or less from their grant date, and vest over a five-year period, with 5% vesting per quarter.


•	The fair value of stock option awards is expensed over the related employee’s service period on a straight-line basis for stock options granted with an exercise price approximating the fair value of BCI Holdings common stock on the grant date.

•

Stock options granted with exercise prices substantially higher than the fair value of BCI Holdings common stock on the grant date are deemed to be “deep-out-of-the-money”. The grant date fair value of deep-out-of-the-money options must be recognized in the statement of operations on a tranche by tranche basis (often referred to as the “accelerated attribution method”) rather than on a straight-line basis.

•

Stock options where cash settlement becomes probable are converted to liability awards. Vested liability awards are revalued and reclassified from equity to a liability upon conversion. Any excess of the fair value over the historical compensation expense recognized is recorded to compensation expense. Vested liability awards are revalued each reporting date. Changes in the fair value of liability awards is recognized within share-based compensation expense.

The following table summarizes stock option activity during the six months ended July 31, 2014:



	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)(2)		Weighted Average Term Remaining (in years)	Weighted Average Grant Date Fair Value
Outstanding, January 31, 2014 (1)	897,714		$	202.44	$	8,113	8.1
Granted	54,500		173.23					$	38.61
Exercised	(10,608	)	50.05		636
Forfeited/cancelled/expired	(55,397	)	219.25
Outstanding, July 31, 2014 (1)	886,209		$	201.42	$	5,225	8.1
Vested and expected to vest, July 31, 2014	433,076		$	149.14	$	5,225	7.0
Exercisable, July 31, 2014	229,440		$	123.61	$	5,225	5.8


(1)	The number of options outstanding on July 31, 2014, and January 31, 2014 include 87,270 and 95,428, respectively, of BCI Holdings options that were exchanged for Predecessor Company options as a result of the Transaction. These options on July 31, 2014 and January 31, 2014 had a weighted average exercise price of $36.13 and $36.04, respectively.

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(2)

Aggregate intrinsic value in the table above represents the total pre-tax value that option holders would have received had all option holders exercised their options on July 31, 2014. 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 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 July 31, 2014, there was $6.4 million of unrecognized pre-tax share-based compensation expense related to non-vested stock options, which we expect to recognize over a weighted average period of 3.7 years. Non-cash share-based compensation expense included in employee related expenses in our consolidated statement of operations and the estimated fair value of options vested was the following:



	Three Months Ended				Six Months Ended
(In thousands)	July 31, 2014		July 31, 2013		July 31, 2014		July 31, 2013
Non-cash share-based compensation expense (1)	$	565	$	883	$	638	$	1,378
Estimated fair value of options vested	$	533	$	1,137	$	1,178	$	1,765

(1)

During the six months ended July 31, 2014, we remeasured certain options classified as liability awards, and recorded a credit to our non-cash share-based compensation expense of $0.5 million. During the three months ended July 31, 2014, we recorded a de minimis charge to non-cash share-based compensation expense as a result of our quarterly remeasurement of certain options classified as liability awards.

The fair value of BCI Holdings stock options issued was determined using the Black-Scholes options pricing model utilizing the following assumption for each respective period:



	Six Months Ended
	July 31, 2014		July 31, 2013
Expected volatility	50	%	40	%
Expected dividends	—	%	—	%
Expected term	6.6 years		6.5 years
Risk-free interest rate	2.1	%	1.2	%

CEO Options

During the third quarter of fiscal year 2014, we appointed a new CEO who began employment on September 9, 2013. In connection with his hire, the CEO was granted 450,000 options (which are included in the options disclosed above) to purchase shares of BCI Holdings pursuant to the 2011 Plan as follows: (i) 25,000 options with an exercise price of $125; (ii) 25,000 options with an exercise price of $150; (iii) 50,000 options with an exercise price of $175; (iv) 75,000 options with an exercise price of $225; (v) 75,000 options with an exercise price of $275; and (vi) 200,000 options with an exercise price of $300. The options with exercise prices above $125 are deeply out-of-the-money, which serves as additional incentives for our CEO to maximize the value of BCI Holdings’ common stock. The options become fully vested and exercisable only upon the consummation of a Change in Control (as defined in the 2011 Plan) and only if the CEO remains employed at that time. The options expire ten years from the date of grant and will cease to be exercisable on the 90th day after the date of a Change in Control. Upon any termination of employment, any unvested options terminate immediately.

We determined all tranches of our CEO options contain a service (i.e., CEO remains employed) and performance (i.e., Change in Control) condition. In addition, we analyzed all the options that were granted at a strike price greater than the fair value at the time of grant and determined that these options had characteristics of “deep-out-of-the-money” options. Based on this analysis, we concluded these tranches were granted “deep-out-of-the-money” as the exercise prices were significantly greater than the grant date price of $125. Options granted deep-out-of-the-money are deemed to contain a market condition.

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During the third quarter of fiscal year 2014, the weighted average grant date fair value was $23.54 for the CEO’s options and was estimated using the Black-Scholes option pricing model which required us to make highly subjective assumptions including the following:



	Three Months Ended
	October 31, 2013
Expected volatility (1)	45	%
Expected dividends (2)	—	%
Expected term (3)	4.2 years
Risk-free interest rate (4)	1.4	%


(1)	Expected Volatility-Management determined that historical volatility of comparable publicly traded companies is the best indicator of our expected volatility and future stock price trends.


(2)	Expected Dividends-We historically have not paid cash dividends, and do not currently intend to pay cash dividends, and thus have assumed a 0% dividend rate.


(3)	Expected Term-For tranche one, we used the simplified method to estimate the expected term for the options as we do not have enough historical exercise data to provide a reasonable estimate. For tranches two through six, we used an adjusted simplified method that considers the probability of the options becoming “in the money”.


(4)	Risk-Free Rate-The risk-free interest rate is based on the U.S. Treasury yield with a maturity date closest to the expiration of that grant.

Additionally, we incorporated a common stock value of $125 per share as the “grant date price” for the Black-Scholes option pricing model. Since BCI Holdings operates as a privately-owned company, its stock does not and has not been traded on a market or an exchange. As such, we estimate the value of BCI Holdings on a quarterly basis. If there have been no significant changes such as acquisitions, disposals, or the loss of a major customer, etc. between our valuation analysis and the grant date of a stock option, we will continue to use that valuation. We determined the fair value of BCI Holdings common stock based on an analysis of the market approach and the income approach. Under the market approach, we estimated the fair value based on market multiples of EBITDA for comparable public companies. Under the income approach, we calculate the fair value based on the present value of estimated future cash flows.

Given the CEO’s options contain a liquidity event based performance condition (i.e., Change in Control), we determined recognition of compensation cost should be deferred until the occurrence of a Change in Control. On July 31, 2014, the total unrecognized stock-based compensation expense for the CEO’s options was $10.6 million. During the six months ended July 31, 2014, we did not recognize any stock based compensation expense related to the CEO’s options.

Liability Awards

During the fourth quarter of fiscal year 2014, we began accounting for certain option awards as liability awards, as we determined cash settlement upon exercise was probable. We remeasured the fair value of these options on July 31, 2014, and increased our liability by a de minimis amount during the three months ended July 31, 2014 to $2.5 million from the $3.0 million recognized on January 31, 2014. The quarterly re-measurement resulted in a credit to our non-cash share-based compensation expense of $0.5 million during the six months ended July 31, 2014.

The fair value of BCI Holdings stock options accounted for as liability awards were determined using the Black-Scholes option pricing model utilizing the following assumption for each respective period:



	Six Months Ended
	July 31, 2014		July 31, 2013
Expected volatility	50	%	N/A
Expected dividends	—		N/A
Expected term	3.4		N/A
Risk-free interest rate	1.1	%	N/A

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Note 13. Segment Reporting

We conduct our operations through entities located in the United States, Germany, France, Canada, the Netherlands, the United Kingdom and Poland. 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 consists of branches located in the United States and Canada that provide equipment and services suitable across both of these North American countries.


•	the European segment consists of branches located in France, Germany, the Netherlands, the United Kingdom and Poland that provide equipment and services to customers in a number of European countries.

Selected statement of operations information for our reportable segments is the following:



	Three Months Ended						Six Months Ended
(In thousands)	July 31, 2014			July 31, 2013			July 31, 2014			July 31, 2013
Revenue
United States	$	71,528		$	69,610		$	141,862		$	135,741
Other North America	2,165			1,923			3,807			3,384
North America	73,693			71,533			145,669			139,125
Europe	9,253			7,667			16,646			13,854
Total revenue	$	82,946		$	79,200		$	162,315		$	152,979
Depreciation and amortization
North America	$	14,609		$	14,271		$	30,560		$	28,564
Europe	1,301			1,018			2,549			1,972
Total depreciation and amortization	$	15,910		$	15,289		$	33,109		$	30,536
Interest expense, net
North America	$	10,686		$	10,201		$	21,210		$	20,349
Europe	—			—			—			—
Total interest expense, net	$	10,686		$	10,201		$	21,210		$	20,349
Income tax benefit
North America	$	(2,498	)	$	(311	)	$	(4,892	)	$	(2,716	)
Europe	392			137			327			429
Total income tax benefit	$	(2,106	)	$	(174	)	$	(4,565	)	$	(2,287	)
Net (loss) income
North America (1)	$	(213	)	$	(4,523	)	$	(5,292	)	$	(8,237	)
Europe (1)	1,397			182			2,117			726
Total net loss	$	1,184		$	(4,341	)	$	(3,175	)	$	(7,511	)


(1)	During the three and six months ended July 31, 2014 and July 31, 2013, we included $1.9 million and $2.0 million, respectively, and $2.9 million and $2.8 million, respectively, of intersegment expense allocations from North America to Europe.

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Total asset and long-lived asset information is the following:



(In thousands)	July 31, 2014		January 31, 2014
Total assets
United States	$	1,115,127	$	1,128,323
Other North America	8,428		9,564
North America	1,123,555		1,137,887
Europe	132,282		136,619
Total assets	$	1,255,837	$	1,274,506
Long-lived assets
United States	$	317,301	$	324,008
Other North America	13,055		11,041
North America	330,356		335,049
Europe	56,434		58,093
Total long-lived assets	$	386,790	$	393,142

Note 14. Related Party Transactions

From time to time, we may enter into transactions related parties. We believe that such transactions have terms consistent with terms offered in the ordinary course of business. The accounting policies that we apply to our transactions with related parties are consistent with those applied in transactions with independent third parties.

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 aggregate management fees and expenses to the Sponsor of $0.2 million and $0.2 million during the three months ended July 31, 2014 and July 31, 2013, respectively, and $0.3 million and $0.3 million during six months ended July 31, 2014 and July 31, 2013, respectively.

Note 15. 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 consolidated financial position, results of operations, or cash flow. We expense legal fees in the period in which they are incurred.

Note 16. Loss on the Sale of a Subsidiary

On July 1, 2014, we sold our equity interest in our wholly owned Mexican subsidiary for cash consideration of $0.1 million. This sale allows us to increase our focus on growing our business within United States, Canada and Europe. During the five months and one day ended July 1, 2014, our Mexican subsidiary reported a pretax loss of $0.6 million. On July 1, 2014, the carrying value of our Mexican subsidiary’s net assets was $0.2 million. As a result, during the three months ended July 31, 2014, we recorded a $0.1 million loss on the sale of a subsidiary within the other expense caption of our North American segment and consolidated condensed statements of operations.

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Note 17. 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 may 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 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 our 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 the payment 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

July 31, 2014 (unaudited)

(In thousands)



	Parent			Guarantors		Non- Guarantor Subsidiaries		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	9,029	$	4,278	$	—		$	13,307
Accounts receivable, net	—			57,764		12,092		—			69,856
Inventories, net	—			7,541		13		—			7,554
Prepaid expenses and other current assets	267			4,353		1,414		—			6,034
Deferred tax assets	—			8,502		—		—			8,502
Total current assets	267			87,189		17,797		—			105,253
Property and equipment, net	—			316,966		69,824		—			386,790
Goodwill	—			257,052		62,474		—			319,526
Other intangible assets, net	—			413,944		28,991		—			442,935
Deferred tax assets	28,229			57,202		177		(85,608		)	—
Deferred financing costs, net	742			—		—		—			742
Other long-term assets	—			446		145		—			591
Investment in subsidiaries	600,896			125,804		—		(726,700		)	—
Total assets	$	630,134		$	1,258,603	$	179,408	$	(812,308	)	$	1,255,837
Liabilities and shareholder’s equity
Current liabilities:
Accounts payable	$	19		$	17,828	$	1,598	$	—		$	19,445
Accrued expenses	3,306			18,347		1,495		—			23,148
Current portion of long-term debt, net	1,689			—		—		—			1,689
Intercompany balances	(388,091		)	347,977		40,114		—			—
Total current liabilities	(383,077		)	384,152		43,207		—			44,282
Long-term debt, net of current portion	638,689			—		—		—			638,689
Deferred tax liabilities	1,415			269,028		10,355		(85,608		)	195,190
Fair value of interest rate swap liabilities	3,229			—		—		—			3,229
Share-based compensation liability	—			2,479		—		—			2,479
Other long-term liabilities	—			2,048		42		—			2,090
Total liabilities	260,256			657,707		53,604		(85,608		)	885,959
Total shareholder’s equity	369,878			600,896		125,804		(726,700		)	369,878
Total liabilities and shareholder’s equity	$	630,134		$	1,258,603	$	179,408	$	(812,308	)	$	1,255,837

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Condensed Consolidating Balance Sheet

January 31, 2014

(In thousands)



	Parent			Guarantors		Non- Guarantor Subsidiaries		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	20,930	$	4,606	$	—		$	25,536
Accounts receivable, net	—			54,387		10,755		—			65,142
Inventories, net	—			5,746		2		—			5,748
Prepaid expenses and other current assets	230			3,752		1,413		—			5,395
Deferred tax assets	—			6,633		—		—			6,633
Total current assets	230			91,448		16,776		—			108,454
Property and equipment, net	—			324,453		68,689		—			393,142
Goodwill	—			257,052		63,017		—			320,069
Other intangible assets, net	—			421,714		29,688		—			451,402
Deferred tax assets	26,562			57,299		172		(84,033		)	—
Deferred financing costs, net	846			—		—		—			846
Other long-term assets	—			419		174		—			593
Investment in subsidiaries	598,874			120,568		—		(719,442		)	—
Total assets	$	626,512		$	1,272,953	$	178,516	$	(803,475	)	$	1,274,506
Liabilities and shareholder’s equity
Current liabilities:
Accounts payable	$	38		$	21,632	$	6,138	$	—		$	27,808
Accrued expenses	3,307			19,955		1,104		—			24,366
Current portion of long-term debt, net	1,757			—		—		—			1,757
Intercompany balances	(397,291		)	357,032		40,259		—			—
Total current liabilities	(392,189		)	398,619		47,501		—			53,931
Long-term debt, net of current portion	639,522			—		—		—			639,522
Deferred tax liabilities	1,415			269,028		10,418		(84,033		)	196,828
Fair value of interest rate swap liabilities	4,008			—		—		—			4,008
Share-based compensation liability	—			2,974		—		—			2,974
Other long-term liabilities	—			3,458		29		—			3,487
Total liabilities	252,756			674,079		57,948		(84,033		)	900,750
Total shareholder’s equity	373,756			598,874		120,568		(719,442		)	373,756
Total liabilities and shareholder’s equity	$	626,512		$	1,272,953	$	178,516	$	(803,475	)	$	1,274,506

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Condensed Consolidating Statement of Operations

For the Three Months Ended July 31, 2014 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Revenue	$	—		$	71,466		$	11,480		$	—		$	82,946
Operating expenses:
Employee related expenses	41			24,954			2,998			—			27,993
Rental expense	—			8,587			1,086			—			9,673
Repair and maintenance	—			3,385			260			—			3,645
Cost of goods sold	—			3,865			40			—			3,905
Facility expense	6			6,042			846			—			6,894
Professional fees	16			961			28			—			1,005
Management fees	—			154			—			—			154
Other operating expenses	145			2,197			2,503			—			4,845
Depreciation and amortization	—			14,301			1,609			—			15,910
Gain on sale of equipment	—			(639		)	(47		)	—			(686		)
Impairment of long-lived assets	—			—			—			—			—
Total operating expenses	208			63,807			9,323			—			73,338
(Loss) income from operations	(208		)	7,659			2,157			—			9,608
Other expenses:	—			—			—			—			—
Interest expense (income), net	10,644			45			(3		)	—			10,686
Foreign currency exchange gain, net	—			(50		)	(197		)	—			(247		)
Other expense, net	—			91			—			—			91
Total other expense, net	10,644			86			(200		)	—			10,530
(Loss) income before income tax (benefit) expense	(10,852		)	7,573			2,357			—			(922		)
Income tax benefit	(990		)	(1,548		)	432			—			(2,106		)
(Loss) income before equity in net earnings of subsidiaries	(9,862		)	9,121			1,925			—			1,184
Equity in net earnings of subsidiaries	11,046			1,925			—			(12,971		)	—
Net (loss) income	$	1,184		$	11,046		$	1,925		$	(12,971	)	$	1,184

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Condensed Consolidating Statement of Operations

For the Three Months Ended July 31, 2013 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Revenue	$	—		$	70,009		$	9,191		$	—		$	79,200
Operating expenses:
Employee related expenses	41			26,282			2,693			—			29,016
Rental expense	—			8,572			951			—			9,523
Repair and maintenance	—			3,662			212			—			3,874
Cost of goods sold	—			3,302			9			—			3,311
Facility expense	10			5,135			673			—			5,818
Professional fees	71			2,392			134			—			2,597
Management fees	—			153			—			—			153
Other operating expenses (income)	152			1,122			2,809			—			4,083
Depreciation and amortization	—			14,083			1,206			—			15,289
Gain on sale of equipment	—			(615		)	(4		)	—			(619		)
Total operating expenses	274			64,088			8,683			—			73,045
(Loss) income from operations	(274		)	5,921			508			—			6,155
Other expense:
Interest expense (income), net	10,216			(13		)	(2		)	—			10,201
Foreign currency exchange loss, net	—			366			103			—			469
Total other expense, net	10,216			353			101			—			10,670
(Loss) income before income taxes	(10,490		)	5,568			407			—			(4,515		)
Income tax (benefit) expense	(932		)	652			106			—			(174		)
(Loss) income before equity in net earnings of subsidiaries	(9,558		)	4,916			301			—			(4,341		)
Equity in net earnings of subsidiaries	5,217			301			—			(5,518		)	—
Net (loss) income	$	(4,341	)	$	5,217		$	301		$	(5,518	)	$	(4,341	)

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Condensed Consolidating Statement of Operations

For the Six Months Ended July 31, 2014 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Revenue	$	—		$	141,862		$	20,453		$	—		$	162,315
Operating expenses:
Employee related expenses	84			48,587			5,992			—			54,663
Rental expense	—			19,010			1,897			—			20,907
Repair and maintenance	—			6,770			525			—			7,295
Cost of goods sold	—			7,461			47			—			7,508
Facility expense	11			11,788			1,695			—			13,494
Professional fees	60			2,451			97			—			2,608
Management fees	—			303			—			—			303
Other operating expenses	323			4,872			3,972			—			9,167
Depreciation and amortization	—			29,984			3,125			—			33,109
(Gain) loss on sale of equipment	—			(1,297		)	212			—			(1,085		)
Impairment of long-lived assets	—			789			484			—			1,273
Total operating expenses	478			130,718			18,046			—			149,242
(Loss) income from operations	(478		)	11,144			2,407			—			13,073
Other expenses:
Interest expense (income), net	21,112			103			(5		)	—			21,210
Foreign currency exchange (gain), net	—			(238		)	(250		)	—			(488		)
Other expense, net	—			91			—			—			91
Total other expense (income), net	21,112			(44		)	(255		)	—			20,813
(Loss) income before income tax (benefit) expense	(21,590		)	11,188			2,662			—			(7,740		)
Income tax (benefit) expense	(1,957		)	(2,960		)	352			—			(4,565		)
(Loss) income before equity in net earnings of subsidiaries	(19,633		)	14,148			2,310			—			(3,175		)
Equity in net earnings of subsidiaries	16,458			2,310			—			(18,768		)	—
Net (loss) income	$	(3,175	)	$	16,458		$	2,310		$	(18,768	)	$	(3,175	)

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Condensed Consolidating Statement of Operations

For the Six Months Ended July 31, 2013 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Revenue	$	—		$	136,528		$	16,451		$	—		$	152,979
Operating expenses:
Employee related expenses	88			46,896			4,997			—			51,981
Rental expense	—			16,679			1,632			—			18,311
Repair and maintenance	—			7,121			530			—			7,651
Cost of goods sold	—			6,240			18			—			6,258
Facility expense	29			10,527			1,261			—			11,817
Professional fees	972			4,395			203			—			5,570
Management fees	—			306			—			—			306
Other operating expenses (income)	454			3,080			4,149			—			7,683
Depreciation and amortization	—			28,210			2,326			—			30,536
Gain on sale of equipment	—			(1,006		)	(16		)	—			(1,022		)
Total operating expenses	1,543			122,448			15,100			—			139,091
(Loss) income from operations	(1,543		)	14,080			1,351			—			13,888
Other expense:
Interest expense (income), net	20,373			(20		)	(4		)	—			20,349
Loss on extinguishment and modification of debt	2,999			—			—			—			2,999
Foreign currency exchange loss, net	—			227			111			—			338
Total other expense, net	23,372			207			107			—			23,686
(Loss) income before income taxes	(24,915		)	13,873			1,244			—			(9,798		)
Income tax (benefit) expense	(2,459		)	(227		)	399			—			(2,287		)
(Loss) income before equity in net earnings of subsidiaries	(22,456		)	14,100			845			—			(7,511		)
Equity in net earnings of subsidiaries	14,945			845			—			(15,790		)	—
Net income (loss)	$	(7,511	)	$	14,945		$	845		$	(15,790	)	$	(7,511	)

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Condensed Consolidating Statement of Comprehensive (Loss) Income

For the Three Months Ended July 31, 2014 (unaudited)

(In thousands)



	Parent		Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total
Net (loss) income	$	1,184	$	11,046	$	1,925		$	(12,971	)	$	1,184
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swap agreements, net of tax expense of $135	217		—		—			—			217
Change in foreign currency translation adjustments	—		—		(4,594		)	—			(4,594		)
Other comprehensive income (loss)	217		—		(4,594		)	—			(4,377		)
Total comprehensive (loss) income	$	1,401	$	11,046	$	(2,669	)	$	(12,971	)	$	(3,193	)

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Condensed Consolidating Statement of Comprehensive (Loss) Income

For the Three Months Ended July 31, 2013 (unaudited)

(In thousands)



	Parent			Guarantors		Non- Guarantor Subsidiaries		Eliminations			Total
Net (loss) income	$	(4,341	)	$	5,217	$	301	$	(5,518	)	$	(4,341	)
Other comprehensive income, net of tax:
Unrealized gain on interest rate swap agreements, net of tax expense of $366	590			—		—		—			590
Change in foreign currency translation adjustments	—			—		1,980		—			1,980
Other comprehensive income	590			—		1,980		—			2,570
Total comprehensive (loss) income	$	(3,751	)	$	5,217	$	2,281	$	(5,518	)	$	(1,771	)

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Condensed Consolidating Statement of Comprehensive (Loss) Income

For the Six Months Ended July 31, 2014 (unaudited)

(In thousands)



	Parent			Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total
Net (loss) income	$	(3,175	)	$	16,458	$	2,310		$	(18,768	)	$	(3,175	)
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swap agreements, net of tax expense of $289	490			—		—			—			490
Change in foreign currency translation adjustments	—			—		(1,285		)	—			(1,285		)
Other comprehensive income (loss)	490			—		(1,285		)	—			(795		)
Total comprehensive (loss) income	$	(2,685	)	$	16,458	$	1,025		$	(18,768	)	$	(3,970	)

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Condensed Consolidating Statement of Comprehensive (Loss) Income

For the Six Months Ended July 31, 2013 (unaudited)

(In thousands)



	Parent			Guarantors		Non- Guarantor Subsidiaries			Eliminations			Total
Net (loss) income	$	(7,511	)	$	14,945	$	845		$	(15,790	)	$	(7,511	)
Other comprehensive income (loss), net of tax:
Unrealized gain on interest rate swap agreements, net of tax expense of $386	623			—		—			—			623
Change in foreign currency translation adjustments	—			—		(3,130		)	—			(3,130		)
Other comprehensive income (loss)	623			—		(3,130		)	—			(2,507		)
Total comprehensive (loss) income	$	(6,888	)	$	14,945	$	(2,285	)	$	(15,790	)	$	(10,018	)

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Condensed Consolidating Statement of Cash Flows

For the Six Months Ended July 31, 2014 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Operating activities
Net (loss) income	$	(3,175	)	$	16,458		$	2,310		$	(18,768	)	$	(3,175	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Provision for (recovery of) doubtful accounts, net	—			264			(171		)	—			93
Share-based compensation expense	84			554			—			—			638
Loss on sale of subsidiary				99			—						99
(Gain) loss on sale of equipment	—			(1,297		)	212			—			(1,085		)
Depreciation and amortization	—			29,984			3,125			—			33,109
Amortization of deferred financing costs	1,281			—			—			—			1,281
Impairment of long-lived assets	—			789			484			—			1,273
Deferred income taxes	(1,958		)	(1,603		)	(161		)	—			(3,722		)
Amortization of above market lease	—			(346		)	—			—			(346		)
Equity in net earnings of subsidiaries, net of taxes	16,458			2,310			—			(18,768		)	—
Changes in assets and liabilities:
Accounts receivable	—			(3,641		)	(1,328		)	—			(4,969		)
Inventories, net	—			(1,795		)	(11		)	—			(1,806		)
Prepaid expenses and other assets	(34		)	(628		)	(10		)	—			(672		)
Accounts payable and other liabilities	476			(6,971		)	(4,120		)	—			(10,615		)
Net cash provided by (used in) operating activities	13,132			34,177			330			(37,536		)	10,103
Investing activities
Purchases of property and equipment	—			(15,639		)	(4,646		)	—			(20,285		)
Proceeds from sale of equipment	—			1,420			111			—			1,531
Proceeds from sale of subsidiary	—			100			—			—			100
Net cash used in investing activities	—			(14,119		)	(4,535		)	—			(18,654		)
Financing activities
Intercompany investments and loans	(10,012		)	(31,959		)	4,122			37,849			—
Repayments of long-term debt	(2,081		)	—			—			—			(2,081		)
Return of capital to BakerCorp International Holdings, Inc.	(1,039		)	—			—			—			(1,039		)
Net cash (used in) provided by financing activities	(13,132		)	(31,959		)	4,122			37,849			(3,120		)
Effect of foreign currency translation on cash	—			—			(245		)	(313		)	(558		)
Net (decrease) increase in cash and cash equivalents	—			(11,901		)	(328		)	—			(12,229		)
Cash and cash equivalents, beginning of period	—			20,930			4,606			—			25,536
Cash and cash equivalents, end of period	—			9,029			4,278			—			13,307

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Condensed Consolidating Statement of Cash Flows

For the Six Months Ended July 31, 2013 (unaudited)

(In thousands)



	Parent			Guarantors			Non- Guarantor Subsidiaries			Eliminations			Total
Operating activities
Net (loss) income	$	(7,511	)	$	14,945		$	845		$	(15,790	)	$	(7,511	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
(Recovery of) provision for doubtful accounts, net	—			(259		)	188			—			(71		)
Share-based compensation expense	88			1,290			—			—			1,378
Gain on sale of equipment	—			(1,006		)	(16		)	—			(1,022		)
Depreciation and amortization	—			28,226			2,327			(17		)	30,536
Amortization of deferred financing costs	1,149			—			—			—			1,149
Deferred income taxes	(2,459		)	1,861			(165		)	—			(763		)
Amortization of above market lease	—			(340		)	—			—			(340		)
Loss on extinguishment and modification of debt	2,999			—									2,999
Equity in net earnings of subsidiaries, net of taxes	14,945			845			—			(15,790		)	—
Changes in assets and liabilities:
Accounts receivable	—			(622		)	(3,181		)	—			(3,803		)
Inventories, net	—			352			(30		)				322
Prepaid expenses and other current assets	(33		)	(713		)	(1,296		)	—			(2,042		)
Accounts payable and other liabilities	(4,172		)	672			289			—			(3,211		)
Net cash provided by (used in) operating activities	5,006			45,251			(1,039		)	(31,597		)	17,621
Investing activities
Purchases of property and equipment	—			(18,160		)	(9,682		)	(88		)	(27,930		)
Proceeds from sale of equipment	—			2,264			15			—			2,279
Net cash used in investing activities	—			(15,896		)	(9,667		)	(88		)	(25,651		)
Financing activities
Intercompany investments and loans	(2,619		)	(40,706		)	11,320			32,005			—
Repayment of long-term debt	(1,921		)	—			—			—			(1,921		)
Return of capital to BakerCorp International Holdings, Inc.	65			—			—			—			65
Payment of deferred financing costs	(531		)	—			—			—			(531		)
Net cash (used in) provided by financing activities	(5,006		)	(40,706		)	11,320			32,005			(2,387		)
Effect of foreign currency translation on cash	—			(82		)	450			(320		)	48
Net (decrease) increase in cash and cash equivalents	—			(11,433		)	1,064			—			(10,369		)
Cash and cash equivalents, beginning of period	—			22,978			5,091			—			28,069
Cash and cash equivalents, end of period	$	—		$	11,545		$	6,155		$	—		$	17,700

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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 consolidated condensed 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, 2014. The following tables show our selected 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 consolidated results of operations and financial condition. The discussion includes the following:


•	Overview;


•	Results of Operations;


•	Liquidity and Capital Resources; and


•	Critical Accounting Policies, Estimates, and Judgments.

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, service 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 25,000 units, including steel tanks, polyethylene tanks and berms, roll-off boxes, pumps, pipes, hoses and fittings, filtration units, and tank trailers.

We serve customers in over 15 industries, including oil and gas, industrial and environmental services, refining, environmental remediation, construction, chemicals, transportation, power, and municipal works. During the six months ended July 31, 2014, no single customer accounted for more than 10% of our total revenue.

Our revenue growth is generated primarily by increasing the efficiency, scope and scale of our rental fleet and related services. Our key business objectives are the following:


•	Increase the utilization of our equipment, which we measure using the ratio of the number of days that our rental fleet is on rent to the total number of days in the period. Utilization reflects the demand for our products in relation to the level of equipment available to service our customers’ needs.


•	Increase the size and scope of our rental fleet. Although our equipment has relatively long useful lives, we need to invest in equipment to replace units that have been retired and purchase additional equipment to support any growth in our revenues.


•	Improve the average daily rental rate that we earn from our products and services by obtaining deeper service and maintenance relationships with customers.


•	Provide additional ancillary services related to our rental activity to differentiate our offerings.


•	Increase our market share in the markets we currently serve by expanding our customer base, improving our share with current customers, and expanding our existing product lines across our branch network.


•	Evaluate additional product lines and service offerings that complement and enhance our current capabilities.


•	Expand our market presence domestically and into new markets internationally. We will seek to expand our market presence which may require an upfront investment in equipment, facilities, and new staff. These investments may initially impact our near-term profitability, utilization, and other financial metrics.


•	Acquire organizations that possess products and services that will complement those of our Company and accelerate our entry into new markets, reach new customers, and enhance our product and service capabilities.

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Geographic Operating Performance

Our branches and employees by reportable segment on July 31, 2014 and July 31, 2013 were the following:



	July 31, 2014	July 31, 2013	Change
Branches:
Number of branches-North American Segment	67	67	—
Number of branches-European Segment	11	9	2
Total branches	78	76	2
Employees:
Number of employees-North American Segment	908	874	34
Number of employees-European Segment	92	74	18
Total employees	1,000	948	52

Our operations are managed from our corporate headquarters, which is located in Seal Beach, California. 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. We had four branches in Canada on July 31, 2014. Our equipment has the capability to be utilized for multiple applications within North America. Within the U.S. and Canada we incentivize our local managers to maximize return on assets under their control and have provided systems to enable equipment and resource sharing. As a result, equipment in the U.S. and Canada is readily moved 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. On July 31, 2014, we had $330.4 million of net property and equipment located in North America.

We serve customers from our European segment from branches located in the Netherlands, Germany, France, the United Kingdom and Poland. Our European operations are headquartered in the Netherlands. Our equipment is transferred between European countries to serve customers as demand dictates. On July 31, 2014, we had $56.4 million of net property and equipment located in Europe.

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, volume of rental revenue on bulk items not individually tracked (which includes primarily 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 rental rates on rental equipment that we specifically track during the period.


•	Available Rental Fleet – The available rental fleet, as we define it, is the average number of 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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Consolidated Condensed Statements of Operations (unaudited)

The following table presents our results for the three and six months ended July 31, 2014 and July 31, 2013:



(In thousands, except percentages)	Three Months Ended										Six Months Ended
	July 31, 2014					July 31, 2013					July 31, 2014					July 31, 2013
	Amount			% of Revenue		Amount			% of Revenue		Amount			% of Revenue		Amount			% of Revenue
Revenue:
Rental revenue	$	66,143		79.8	%	$	61,820		78.1	%	$	129,145		79.6	%	$	120,104		78.5	%
Sales revenue	5,653			6.8	%	5,986			7.6	%	11,813			7.3	%	10,959			7.2	%
Service revenue	11,150			13.4	%	11,394			14.3	%	21,357			13.1	%	21,916			14.3	%
Total revenue	82,946			100.0	%	79,200			100.0	%	162,315			100.0	%	152,979			100.0	%
Operating expenses:
Employee related expenses	27,993			33.7	%	29,016			36.6	%	54,663			33.7	%	51,981			34.0	%
Rental expenses	9,673			11.7	%	9,523			12.0	%	20,907			12.9	%	18,311			12.0	%
Repair and maintenance	3,645			4.4	%	3,874			4.9	%	7,295			4.5	%	7,651			5.0	%
Cost of goods sold	3,905			4.7	%	3,311			4.2	%	7,508			4.6	%	6,258			4.1	%
Facility expenses	6,894			8.3	%	5,818			7.3	%	13,494			8.3	%	11,817			7.7	%
Professional fees	1,005			1.2	%	2,597			3.3	%	2,608			1.6	%	5,570			3.6	%
Management fees	154			0.2	%	153			0.2	%	303			0.2	%	306			0.2	%
Other operating expenses	4,845			5.8	%	4,083			5.2	%	9,167			5.6	%	7,683			5.0	%
Depreciation and amortization	15,910			19.2	%	15,289			19.3	%	33,109			20.4	%	30,536			20.0	%
Gain on sale of equipment	(686		)	(0.8	)%	(619		)	(0.8	)%	(1,085		)	(0.7	)%	(1,022		)	(0.7	)%
Impairment of long-lived assets	—			—	%	—			—	%	1,273			0.8	%	—			—	%
Total operating expenses	73,338			88.4	%	73,045			92.2	%	149,242			91.9	%	139,091			90.9	%
Income from operations	9,608			11.6	%	6,155			7.8	%	13,073			8.1	%	13,888			9.1	%
Other expense:
Interest expense, net	10,686			12.9	%	10,201			12.9	%	21,210			13.1	%	20,349			13.3	%
Loss on extinguishment and modification of debt	—			—	%	—			—	%	—			—	%	2,999			2.0	%
Foreign currency exchange loss, net	(247		)	(0.3	)%	469			0.6	%	(488		)	(0.3	)%	338			0.2	%
Other expense, net	91			0.1	%	—			—	%	91			0.1	%	—			—	%
Total other expenses, net	10,530			12.7	%	10,670			13.5	%	20,813			12.9	%	23,686			15.5	%
Loss before income taxes	(922		)	(1.1	)%	(4,515		)	(5.7	)%	(7,740		)	(4.8	)%	(9,798		)	(6.4	)%
Income tax benefit	(2,106		)	(2.5	)%	(174		)	(0.2	)%	(4,565		)	(2.8	)%	(2,287		)	(1.5	)%
Net income (loss)	$	1,184		1.4	%	$	(4,341	)	(5.5	)%	$	(3,175	)	(1.9	)%	$	(7,511	)	(4.9	)%

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Non-U.S. GAAP Financial Measures

The following is a reconciliation of our net income (loss) to EBITDA and Adjusted EBITDA for the three and six months ended July 31, 2014 and July 31, 2013:



(In thousands)	Three Months Ended						Six Months Ended
	July 31, 2014			July 31, 2013			July 31, 2014			July 31, 2013
Net income (loss)	$	1,184		$	(4,341	)	$	(3,175	)	$	(7,511	)
Interest expense, net	10,686			10,201			21,210			20,349
Income tax benefit	(2,106		)	(174		)	(4,565		)	(2,287		)
Depreciation and amortization	15,910			15,289			33,109			30,536
EBITDA	$	25,674		$	20,975		$	46,579		$	41,087
Foreign currency exchange loss (gain), net	(247		)	469			(488		)	338
Loss on modification of debt	—			—			—			2,999
Acquisition and transaction costs	—			1,567			—			1,741
Financing related costs	33			34			78			1,230
Regulatory and SOX related costs	—			591			—			1,183
Severance related costs	166			2,565			595			2,565
Sponsor management fees	154			153			303			306
Share-based compensation expense	565			883			638			1,378
Impairment of long-lived assets	—			—			1,273			—
Other	384			716			766			922
Adjusted EBITDA (1)(2)(3)	$	26,729		$	27,953		$	49,744		$	53,749
Adjusted EBITDA margin (3)	32.2		%	35.3		%	30.6		%	35.1		%

(1)

We define EBITDA as earnings before deducting interest, income taxes and depreciation and amortization. We define Adjusted EBITDA as 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 an alternative 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.


(2)	Because EBITDA and Adjusted EBITDA are non-U.S. GAAP financial measures, as defined by the SEC, we include reconciliations of EBITDA and Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.


(3)	Beginning in the second quarter of fiscal year 2014, Adjusted EBITDA no longer excludes the impact of gain on sale of equipment. Previously reported Adjusted EBITDA has been restated to conform to the fiscal year 2015 presentation.

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Results of Operations

Three Months Ended-July 31, 2014 compared to July 31, 2013

Revenue



(In thousands, except Operating Data)	Three Months Ended
	July 31, 2014			July 31, 2013			$ Change			% Change
North America
Rental revenue	$	57,633		$	54,841		$	2,792		5.1	%
Sales revenue	5,651			5,980			(329		)	(5.4	)%
Service revenue	10,409			10,712			(303		)	(2.7	)%
Total North America revenue	73,693			71,533			2,160			3.0	%
Europe
Rental revenue	8,510			6,979			1,531			21.9	%
Sales revenue	2			6			(4		)	(66.7	)%
Service revenue	741			682			59			8.7	%
Total European revenue	9,253			7,667			1,586			20.7	%
Total Consolidated Revenue	$	82,946		$	79,200		$	3,746		4.7	%

Operating Data:
North America
Average utilization (1)	55.1		%	54.6		%	50bps
Average daily rental rate (2)	$	33.83		$	33.31		$	0.52		1.6	%
Average number of rental units	24,079			22,650			1,429			6.3	%
Europe
Average utilization (1)	49.6		%	63.4		%	(1,380bps)
Average daily rental rate (2)	$	114.26		$	96.29		$	17.97		18.7	%
Average number of rental units	1,253			992			261			26.3	%
Consolidated
Average utilization (1)	54.8		%	55.0		%	(20bps)
Average daily rental rate (2)	$	37.45		$	36.35		$	1.10		3.0	%
Average number of rental units	25,332			23,642			1,690			7.1	%


(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.

Consolidated Revenue

Total revenue during the three months ended July 31, 2014 increased by $3.7 million, or 4.7%, compared to the three months ended July 31, 2013. Excluding oil and gas customers, consolidated revenue increased by $7.8 million, or 13.1%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The consolidated revenue increase, excluding oil and gas revenue, was due to increases in revenue related to our construction, environmental remediation customers, chemical, power, and terminal/pipeline. During the three months ended July 31, 2014, revenue from oil and gas customers decreased by $4.1 million, or 20.7%, compared to the three months ended July 31, 2013, due to an oversupply of tanks in certain shale regions and lower drilling rig activity.

Revenue by reportable segment for three months ended July 31, 2014 is discussed in detail below.

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North America

Our North American segment revenue increased $2.2 million, or 3.0%, as a result of the increase in rental revenue of $2.8 million. The increase in North American rental revenue was partially offset by decreases in service and sales revenue of $0.3 million and $0.3 million, respectively. The increase in total North America revenue is primarily due to increased revenue from construction, environmental, pipeline, chemical, and power industries by $7.7 million, or 29%. The increase was partially offset by lower revenue from oil and gas and municipal/industrial industries by $4.3 million, or 22.9%, and $1.2 million, or 9.3%, respectively. The decline in oil and gas revenue is due to the factors mentioned in our Consolidated Revenue discussion above.

Rental Revenue

Rental revenue increased by $2.8 million, or 5.1%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The increase in rental revenue was primarily attributed to the 1.6% increase in average daily rental rate, the increase in the average number of rental units by 6.3%, and a 50 basis point increase in average utilization. The increase in the average daily rental rate was positively impacted in part by mix as a higher portion of our rental revenue was driven by rental of equipment with higher rental rates. Our average number of rental units increased 1,429 units, or 6.3%, on July 31, 2014 from 22,650 units on July 31, 2013, as we incurred $12.0 million of capital expenditures in our North American Segment during the three months ended July 31, 2014. In addition to the above, re-rent revenue increased $0.3 million due to a slight increase in third-party rental equipment revenue. Additionally, the rental revenue increase was slightly attributed to average utilization, which increased 50 basis points.

Sales Revenue

Sales revenue decreased by $0.3 million, or 5.4%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013 primarily due to decreased sales of bulk items.

Service Revenue

Service revenue decreased by $0.3 million, or 2.7%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The decrease in service revenue was primarily driven by a decrease in the activity of our rental equipment fleet.

Europe

Total revenue from our European segment increased by $1.6 million, or 20.7%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The increase in European revenue was primarily due to increased revenues from environmental remediation customers and oil and gas customers. The increase in revenue is the result of branch expansion, further market penetration into existing markets, and growth in revenues from existing customers.

Rental Revenue

Rental revenue increased by $1.5 million, or 21.9%, during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The increase in rental revenue was primarily due to a 26.3% increase in the average number of rental units and an 18.7% increase in the average daily rate, partially offset by a decrease in utilization. Utilization decreased as a result of the increase in rental units and the initiation of comparatively less refinery maintenance projects during the quarter ended July 31, 2014. The available rental fleet increased by 261 units, from 992 units during the three months ended July 31, 2013, as we continue to invest capital to improve market penetration and support our branch expansion. Rental revenue from bulk items increased $0.5 million due primarily to higher demand for pipes, hoses, fittings, and other items. The above increase also included a $0.4 million favorable impact on revenue as a result of the Euro strengthening against the dollar.

Sales Revenue

Sales revenue during the three months ended July 31, 2014 decreased slightly compared to the three months ended July 31, 2013. As a result, sales revenue did not contribute significantly to the change in total European revenue.

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Service Revenue

Service revenue for Europe increased slightly during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. As a result, service revenue did not contribute significantly to the change in total European revenue.

Operating Expenses

Consolidated Operating Expenses

Total operating expenses during the three months ended July 31, 2014 increased by $0.3 million, or 0.4%, compared to the three months ended July 31, 2013. The increase was primarily attributable to our European segment, which increased operating expenses by $0.6 million, or 10.7%, compared to the three months ended July 31, 2013. This increase was partially offset by our North American segment which decreased operating expenses by $0.3 million, or 0.4%, which is discussed in detail below. The North American and European segments do not include an allocation of all inter-segment expenses.

North America

Total operating expenses during the three months ended July 31, 2014 were $67.5 million, a decrease of $0.3 million, or 0.4%, compared to the three months ended July 31, 2013. The decrease was primarily attributable to the following:


•	$1.5 million decrease in professional and legal fees as the result of the additional costs to amend the Credit Facility and consulting fees related to system implementation projects incurred during the three months ended July 31, 2013, which did not recur during the three months ended July 31, 2014.

•

$1.2 million decrease in employee related expenses primarily due to a $2.4 million decrease in severance payments, $1.5 decrease in bonus expenses, and $0.3 million decrease in stock based compensation. The decrease in severance expenses was driven by the former members of management that left the Company during the prior fiscal period. The decrease in bonus expense is attributable to our operating results, which were below our plan. The decrease was partially offset by a $1.6 million increase in payroll and payroll-related costs and $1.4 million increase in insurance expenses. The increase in payroll and payroll-related costs were primarily driven by an increase in headcount of 34 additional employees, or 3.9%, from 874 employees on July 31, 2013 to 908 employees on July 31, 2014. The increase in insurance expense was driven by increased premiums related to our new insurance carrier.


•	$0.3 million decrease in repair and maintenance expenses primarily due to the reduction of certain regulatory compliance costs.


•	$0.1 million increase in gains on the sale of equipment.

•

The above decreases were partially offset by a $1.0 million increase in facility expenses due to increased rent of $0.3 million, property tax of $0.2 million, data processing of $0.3 million, and various other expenses of $0.2 million during the three months ended July 31, 2014 compared to the three months ended July 31, 2013. The increase in rent was primarily attributed to increased rental rates for various branches. The increase in property tax expense was primarily due to an additional charge related to our property tax audit. The increase in data processing was primarily due to increased cost related to corporate initiatives to improve certain business processes.

•

$0.7 million increase in other operating expenses primarily due to increases of $0.5 million in advertising and travel expenses, $0.1 million of bad debt expenses, and $0.1 million of various other expenses. The increase in advertising expense was driven by increased costs related to trade shows and promotions. The increase in travel expenses was primarily due to increased travel costs related to the expansion of Canada and corporate initiatives.


•	$0.6 million increase in cost of goods sold primarily due to an increase of filtration equipment sales and fuel costs.


•	$0.4 million increase in depreciation expense as we increased our investment in rental fleet during the prior twelve months.


•	$0.1 million increase within rental expenses driven by the increases in rental revenue.

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Europe

Operating expenses for the European segment during the three months ended July 31, 2014 were $5.9 million, an increase of $0.6 million, or 10.7%, compared to the three months ended July 31, 2013. This increase was primarily due to the following:


•	$0.2 million increase in employee related expenses. The headcount in Europe increased by 18 employees, or 24.3%, on July 31, 2014 to 92 employees from 74 employees on July 31, 2013.


•	Depreciation expense increased $0.3 million, as we increased our investment in rental fleet during the prior twelve months.


•	$0.1 million increase in facility expenses, primarily due to the expansion of our branch network.

Other Expenses, Net

Consolidated

Other expenses, net during the three months ended July 31, 2014 decreased by $0.2 million, or 1.3%, to $10.5 million from $10.7 million during the three months ended July 31, 2013. The above decrease was primarily due to a $0.7 million increase in foreign currency exchange gains primarily driven by favorable changes in the British Pound Sterling and Mexican Peso. The above decrease was partially offset by an increase of $0.5 million in interest expense due to the $35 million incremental term loan as a result of the Second Amendment to the Credit Facility. Refer to Note 9, “Debt” of the notes to the consolidated condensed financial statements for further details. Additionally, we incurred a $0.1 million loss on the sale of our Mexican subsidiary.

Income Tax Benefit

Income tax benefit during the three months ended July 31, 2014 increased by $1.9 million, to a benefit of $2.1 million from a benefit of $0.2 million during the three months ended July 31, 2013. The tax benefit increase is primarily due to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction and a discrete item primarily related to the future benefit of bad debt impairment recorded during the three months ended July 31, 2014.

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Six Months Ended-July 31, 2014 compared to July 31, 2013

Revenue



(In thousands, except Operating Data)	Six Months Ended
	July 31, 2014			July 31, 2013			$ Change			% Change
North America
Rental revenue	$	113,891		$	107,583		$	6,308		5.9	%
Sales revenue	11,811			10,946			865			7.9	%
Service revenue	19,967			20,596			(629		)	(3.1	)%
Total North America revenue	145,669			139,125			6,544			4.7	%
Europe
Rental revenue	15,254			12,521			2,733			21.8	%
Sales revenue	2			13			(11		)	(84.6	)%
Service revenue	1,390			1,320			70			5.3	%
Total European revenue	16,646			13,854			2,792			20.2	%
Total Consolidated Revenue	$	162,315		$	152,979		$	9,336		6.1	%

Operating Data:
North America
Average utilization (1)	54.8		%	55.3		%	(50bps)
Average daily rental rate (2)	$	34.03		$	33.24		$	0.79		2.4	%
Average number of rental units	23,870			22,575			1,295			5.7	%
Europe
Average utilization (1)	44.8		%	57.7		%	(1,290bps)
Average daily rental rate (2)	$	118.43		$	97.99		$	20.44		20.9	%
Average number of rental units	1,242			950			292			30.7	%
Consolidated
Average utilization (1)	54.3		%	55.4		%	(110bps)
Average daily rental rate (2)	$	37.48		$	35.96		$	1.52		4.2	%
Average number of rental units	25,112			23,525			1,587			6.7	%


(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.

Consolidated Revenue

Total revenue during the six months ended July 31, 2014 increased by $9.3 million, or 6.1%, compared to the six months ended July 31, 2013. Excluding oil and gas customers, consolidated revenue increased by $15.6 million, or 13.6%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The consolidated revenue increase, excluding oil and gas revenue, was due to increases in revenue related to our construction, chemical, industrial, terminal/pipeline, power, and environmental remediation customers. During the six months ended July 31, 2014, revenue from oil and gas customers decreased by $6.3 million, or 16.2%, compared to the six months ended July 31, 2013, due to an oversupply of tanks in certain shale regions and lower drilling rig activity.

Revenue by reportable segment for six months ended July 31, 2014 is discussed in detail below.

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North America

Our North American segment revenue increased $6.5 million, or 4.7%, as a result of the increase in rental and sales revenue of $6.3 million and $0.9 million, respectively. The increase in North American rental revenue was partially offset by a decrease in service revenue of $0.6 million. The increase in total North America revenue is primarily due to increased revenue from construction, pipeline, chemical, power, industrial, and environmental remediation customers by $13.7 million, or 19.4%, respectively. The increase was partially offset by lower revenue from oil and gas by $6.9 million, or 18.3%. The decline in oil and gas revenue is due to the factors mentioned in our Consolidated Revenue discussion above.

Rental Revenue

Rental revenue increased by $6.3 million, or 5.9%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The increase in rental revenue was primarily attributed to the 2.4% increase in average daily rental rate and the increase in the average number of rental units by 5.7%. The increase in the average daily rental rate was positively impacted in part by mix as a higher portion of our rental revenue was driven by the rental of equipment with higher rental rates. Our average number of rental units increased 1,295 units, or 5.7%, on July 31, 2014 from 22,575 units on July 31, 2013, as we incurred $19.4 million of capital expenditures in our North American Segment during the six months ended July 31, 2014. In addition to the above, re-rent revenue increased $1.7 million due to a slight increase in third-party rental equipment revenue. The above increases were partially offset by a 50 basis point decrease in average utilization.

Sales Revenue

Sales revenue increased by $0.9 million, or 7.9%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013 primarily due to increased sales of filtration media and pumps primarily during the first quarter. We have increased our inventory of pump parts, shortening the time to fill customer pump orders, resulting in additional pump revenue opportunities.

Service Revenue

Service revenue decreased by $0.6 million, or 3.1%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The decrease in service revenue was primarily driven by a decrease in the activity of our rental equipment fleet.

Europe

Total revenue from our European segment increased by $2.8 million, or 20.2%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The increase in European revenue was primarily due to increased revenues from environmental remediation customers of $1.3 million, or 69.1%, chemical and industrial services of $1.3 million, or 21.9%, and oil and gas customers of $0.6 million, or 66.5%. The increase in revenue is the result of branch expansion, further market penetration into existing markets, and growth in revenues from existing customers.

Rental Revenue

Rental revenue increased by $2.7 million, or 21.8%, during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The increase in rental revenue was primarily due to a 30.7% increase in the average number of rental units and a 20.9% increase in the average daily rate, partially offset by a decrease in utilization. Utilization decreased as a result of the increase in rental units and the initiation of comparatively less refinery maintenance projects during the six months ended July 31, 2014. The available rental fleet increased by 292 units, from 950 units on July 31, 2013, as we continue to invest capital to improve market penetration and support our branch expansion. Rental revenue from bulk items increased $0.9 million due primarily to higher demand for pipes, hoses, fittings, and other items. The above increase also included a $0.7 million favorable impact on revenue as a result of the Euro strengthening against the dollar.

Sales Revenue

Sales revenue during the six months ended July 31, 2014 decreased slightly, compared to the six months ended July 31, 2013. As a result, sales revenue did not contribute significantly to the change in total European revenue.

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Service Revenue

Service revenue for Europe increased slightly during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. As a result, service revenue did not contribute significantly to the change in total European revenue.

Operating Expenses

Consolidated Operating Expenses

Total operating expenses during the six months ended July 31, 2014 increased by $10.1 million, or 7.3%, compared to the six months ended July 31, 2013. The increase was primarily attributable to increased operating expenses of $8.4 million, or 6.5%, in North America, which is discussed in detail below. The increase in North American operating expenses was compounded by our European segment which increased operating expenses by $1.7 million, or 17.6%, compared to the six months ended July 31, 2013. The North American and European segments do not include an allocation of all inter-segment expenses.

North America

Total operating expenses during the six months ended July 31, 2014 were $137.7 million, an increase of $8.4 million, or 6.5%, compared to the six months ended July 31, 2013. The increase was primarily attributable to the following:


•	$2.5 million increase within rental expenses driven by the increases in rental revenue.

•

$2.0 million increase in employee related expenses primarily due to a $3.2 million increase in payroll and payroll-related costs and a $2.3 million increase in insurance expenses. The increase in payroll and payroll-related costs was primarily driven by an increase in headcount of 34 additional employees, or 3.9%, from 874 employees on July 31, 2013 to 908 employees on July 31, 2014. The increase in insurance expense was driven by increased premiums related to our new insurance carrier. The increase was partially offset by $2.0 million decrease in severance expenses, $0.9 million decrease in bonus expenses, and $0.7 million decrease in stock-based compensation expense. The decrease in severance expenses was a result of former members of management that left the Company during the prior fiscal period. The decrease in bonus expense is the result of our operating results, which were below plan. The decrease in stock-based compensation was driven by a $0.5 million credit related to the remeasurement of our stock options accounted for as liability awards.


•	$2.0 million increase in depreciation expense as we increased our investment in rental fleet during the prior twelve months.

•

$1.5 million increase in facility expenses due to increases of $0.6 million in rent expense, $0.6 million of data processing expense, and property tax expense of $0.3 million during the six months ended July 31, 2014 compared to the six months ended July 31, 2013. The increase in rent was primarily attributed to increased rental rates for various branches. The increase in data processing was primarily due to increased cost related to corporate initiatives to improve certain business processes. The increase in property tax expense was primarily due to an additional charge related to our property tax audit.

•

$1.4 million increase in other operating expenses due to increases of $0.4 million in bad debt expense, $0.4 million of insurance and travel expenses, $0.4 of advertising expenses, and $0.2 million of various other expenses. Bad debt expense was $0.2 million compared to a recovery of doubtful accounts of $0.2 million during the prior year due to better than expected collection of receivables during the six months ended July 31, 2013. The increase in insurance expense was driven by increased premiums related to our new insurance carrier. The increase in advertising expense was due to increased costs related to trade shows and promotions. The increase in travel expenses was primarily due to increased travel costs related to the expansion of Canada and corporate initiatives.


•	$1.2 million increase in cost of goods sold, which corresponds to the increase in sales revenue of relatively lower margin items, and increased fuel costs.


•	$1.3 million increase as a result of impairment of long-lived assets for our wholly owned subsidiary in Mexico.


•	Partially offsetting the increases above was a $2.9 million decrease in professional and legal fees due to the additional costs to amend the Credit Facility and consulting fees related to system implementation projects incurred during the three months ended July 31, 2013, which did not recur during the three months ended July 31, 2014,


•	$0.3 million increase in gains on the sale of equipment.


•	$0.3 million decrease in repair and maintenance expenses primarily due to the reduction of certain regulatory compliance costs.

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Europe

Operating expenses for the European segment during the six months ended July 31, 2014 were $11.6 million, an increase of $1.7 million, or 17.6%, compared to the six months ended July 31, 2013. This increase was primarily due to the following:


•	$0.6 million increase in employee related expenses. The headcount in Europe increased by 18 employees, or 24.3%, on July 31, 2014 to 92 employees from 74 employees on July 31, 2013.


•	Depreciation expense increased $0.6 million, as we increased our investment in rental fleet during the prior twelve months.


•	$0.3 million increase in loss on the sale of equipment.


•	$0.2 million increase in facility expenses, primarily due to the expansion of our branch network.


•	Rental expenses increased $0.1 million driven by the increase in rental revenue.

Other Expenses, Net

Consolidated

Other expenses, net during the six months ended July 31, 2014 decreased by $2.9 million, or 12.1%, to $20.8 million from $23.7 million during the six months ended July 31, 2013. This decrease was mainly due to a $3.0 million loss on the extinguishment and modification of debt recorded during the six months ended July 31, 2013 related to the amended Credit Facility. The above decrease was partially offset by an increase of $0.9 million in interest expense due to the $35 million incremental term loan as a result of the Second Amendment to the Credit Facility. Refer to Note 9, “Debt” of the notes to the consolidated condensed financial statements for further details. In addition to the above, foreign currency exchange gains increased by $0.8 million primarily driven by favorable changes in the British Pound Sterling and Mexican Peso.

Income Tax Benefit

Income tax benefit during the six months ended July 31, 2014 increased by $2.3 million, to a benefit of $4.6 million from a benefit of $2.3 million during the six months ended July 31, 2013. The tax benefit increase is primarily due to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction and a discrete item primarily related to future benefit of bad debt impairment recorded during the three months ended July 31, 2014.

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Liquidity and Capital Resources

Liquidity Summary

We have a history of generating higher cash flow from operations than net income 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.

On July 31, 2014 and January 31, 2014, our cash and cash equivalents by geography were the following:



(In thousands)	July 31, 2014		January 31, 2014		$ Change			% Change
United States	$	9,029	$	20,930	$	(11,901	)	(56.9	)%
Europe	3,743		3,041		702			23.1	%
Mexico	—		419		(419		)	(100.0	)%
Canada	535		1,146		(611		)	(53.3	)%
Total cash and cash equivalents	$	13,307	$	25,536	$	(12,229	)	(47.9	)%

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 for financial statement purposes as this cash is considered permanently reinvested outside of the United States. We utilize a variety of 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 the Credit Facility will be sufficient to fund our current operating needs and capital expenditures for at least the next 12 months.

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Debt

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 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 term loan facility maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Amended Senior Term Loan is not repaid or refinanced on or prior to March 2, 2019, (ii) the revolving 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 fiscal year excess cash flow prepayment requirement is in effect beginning in fiscal year 2015 until the maturity date.

Pursuant to the Second Amendment, the Company borrowed $35 million of incremental term loans (the “Incremental Term Loans”), 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 Amended Senior Term Loan under the First Amendment to our Credit Agreement (See Note 9, “Debt”).

Fiscal Quarter Ratio for each future quarter ending:



October 2014	7.00:1.00
January 2015	6.50:1.00
April 2015	6.50:1.00
July 2015	6.50:1.00
October 2015	6.50:1.00
Thereafter	6.00:1.00

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The Credit Facility issued during June 2011, and amended during February 2013 and November 2013, 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 facility also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds.

Senior Unsecured Notes due 2019

On June 1, 2011, we issued $240.0 million of fixed rate 8.25% senior unsecured notes due June 1, 2019. 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.

Interest and Fees

Interest and fees related to our Credit Facility and the Notes were as follows:



	Three Months Ended				Six Months Ended
(in thousands)	July 31, 2014		July 31, 2013		July 31, 2014		July 31, 2013
Credit Facility interest and fees (weighted average interest rate of 4.25% and 4.25%, respectively, and 4.25% and 4.28%, respectively) (1)	$	3,421	$	4,532	$	8,203	$	9,025
Notes interest and fees (2)	6,737		5,198		11,952		10,391
Total interest and fees	$	10,158	$	9,730	$	20,155	$	19,416


(1)	Interest on the Amended Senior Term Loan is payable quarterly based upon an interest rate of 4.25%.


(2)	Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.

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Principal Payments on Debt



(In thousands)	Principal Payments on Debt
Remainder of the fiscal year ending January 31, 2015	$	2,081
2016	4,163
2017	4,163
2018	4,163
2019	4,163
Thereafter	634,414
Total	$	653,147

Sources and Uses of Cash

Our sources and uses of cash for selected line items in our consolidated condensed statement of cash flows were as follows:



	Six Months Ended
(In thousands)	July 31, 2014			July 31, 2013			$ Change

Net loss	$	(3,175	)	$	(7,511	)	$	4,336
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for (recovery of) doubtful accounts, net	93			(71		)	164
Share-based compensation expense	638			1,378			(740		)
Loss on sale of subsidiary	99			—			99
Gain on sale of equipment	(1,085		)	(1,022		)	(63		)
Depreciation and amortization	33,109			30,536			2,573
Amortization of deferred financing costs	1,281			1,149			132
Deferred income taxes	(3,722		)	(763		)	(2,959		)
Amortization of above-market lease	(346		)	(340		)	(6		)
Loss on extinguishment and modification of debt	—			2,999			(2,999		)
Impairment of long-lived assets	1,273			—			1,273
Changes in assets and liabilities:
Accounts receivable	(4,969		)	(3,803		)	(1,166		)
Inventories, net	(1,806		)	322			(2,128		)
Prepaid expenses and other assets	(672		)	(2,042		)	1,370
Accounts payable and other liabilities	(10,615		)	(3,211		)	(7,404		)
Cash provided by operating activities	$	10,103		$	17,621		$	(7,518	)
Cash used in investing activities	(18,654		)	(25,651		)	6,997
Cash used in financing activities	(3,120		)	(2,387		)	(733		)
Effect of foreign currency translation on cash	(558		)	48			(606		)
Net decrease in cash and cash equivalents	$	(12,229	)	$	(10,369	)	$	(1,860	)

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Cash Provided by Operating Activities

Cash flow from operations during the six months ended July 31, 2014 totaled $10.1 million, a decrease of $7.5 million compared to the six months ended July 31, 2013. This decrease was primarily related to the following:


•	The change in accounts payable and other liabilities resulted in a $7.4 million decrease to cash provided by operating activities which was primarily due to reduced capital expenditures compared to the prior fiscal period.


•	The loss on extinguishment and modification of debt resulted in a $3.0 million decrease to cash provided by operating activities as a result of the amended Credit Facility during the six months ended July 31, 2013. Refer to Note 9, “Debt” of the notes to the consolidated condensed financial statements for further details.


•	The change in accounts receivable resulted in a $1.2 million decrease to cash provided by operating activities primarily as a result of the increase in total revenue of 6.1% compared to the six months ended July 31, 2013. Our days-sales-outstanding during the three months ended July 31, 2014, and July 31, 2013, was 75.8 and 75.3, respectively.


•	The change in inventories resulted in a $2.1 million decrease to cash provided by operating activities as total inventories increased 31.4% compared to the six months ended July 31, 2014, primarily as a result of our acquisition of Kaselco during the fourth quarter of fiscal year 2014.

The decreases above were partially offset by the following:


•	Net loss decreased $4.3 million, from a net loss of $7.5 million during the six months ended July 31, 2013 to a net loss of $3.2 million during the six months ended July 31, 2014.


•	The change in depreciation and amortization resulted in a $2.6 million increase, primarily due to asset purchases during the six months ended July 31, 2014.


•	The change in prepaid expenses and other current assets resulted in a $1.4 million increase to cash provided by operating activities primarily as a result of lower prepaid insurance and vendor deposits.


•	The change in impairment of long-lived assets resulted in a $1.3 million increase to cash provided by operating activities primarily as a result of impairment charges for our wholly owned subsidiary in Mexico.

Cash Used In Investing Activities

Cash used in investing activities consists of cash used to purchase property and equipment, partially offset by proceeds from the sale of equipment from our rental fleet. Purchases of property and equipment totaled $20.3 million and $27.9 million during the six months ended July 31, 2014 and July 31, 2013, respectively. Proceeds from equipment sales totaled $1.5 million and $2.3 million during the six months ended July 31, 2014 and July 31, 2013, respectively. We will continue to monitor our capital expenditures to support our branch expansion and to address demand in our key markets.

Cash Used In Financing Activities

Cash used in financing activities during the six months ended July 31, 2014 decreased $0.7 million compared to the six months ended July 31, 2013. This decrease was primarily due to a $1.0 million return of capital from BakerCorp International Holdings, Inc. for stock options exercised and an increase of $0.2 million in repayments on long-term debt for our Credit Facility, offset by a reduction of $0.5 million in payments for deferred financing fees. During the six months ended July 31, 2013, cash used in financing activities was impacted by $0.5 million of professional fees that were included as deferred financing costs as a result of the amended Credit Facility. Refer to Note 9, “Debt” of the notes to the consolidated condensed financial statements for further information.

Effect of Exchange Rate Changes on Cash

The effect of foreign currency translation on cash resulted in a $0.6 million decrease to cash and cash equivalents during the six months ended July 31, 2014.

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Hedging Activities

We have used 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.

We document all relationships between hedging instruments and hedged items, the risk management objective and strategy for undertaking various hedge transactions, the forecasted transaction that has been designated as the hedged item, and how the hedging instrument is expected to reduce the risks related to the hedged item. We analyze our interest rate swaps quarterly to determine if the hedged transaction remains effective or ineffective. We may discontinue hedge accounting for interest rate swaps prospectively if certain criteria are no longer met, the interest rate swap is terminated or exercised, or if we elect to remove the cash flow hedge designation. If hedge accounting is discontinued and the forecasted hedged transaction remains probable of occurring, the previously recognized gain or loss on the interest rate swaps will remain in accumulated other comprehensive income and will be reclassified into earnings during the same period the forecasted hedged transaction affects earnings. Our determination of the fair value of our interest rate swaps was calculated using a discounted cash flow analysis based on the terms of the swap contracts and the observable interest rate curve. We adjust a liability on our balance sheet when the market value of the interest rate swap is different from our basis in the interest rate swap agreements. When an interest rate swap agreement qualifies for hedge accounting under generally accepted accounting principles, we record a charge or credit to other comprehensive income. When an interest rate swap agreement has not been designated as a hedge, or does not meet all of the criteria to be classified as a hedge, we record a net unrealized gain or loss within our consolidated condensed statement of operations.

On July 31, 2014, there were seven swap agreements with a total notional amount of $221.0 million outstanding, six with a five-year term and a notional value totaling $150.0 million with a fixed rate of 2.3%, and one with a three-year term and a notional amount totaling $71.0 million with a fixed rate of 1.6%, which will be reduced to $64.0 million on July 31, 2015, before it terminates on July 29, 2016. On July 31, 2014 and January 31, 2014, the liability recorded related to interest rate swaps was $3.2 million and $4.0 million, respectively, with no unrealized gain or loss recorded in the consolidated condensed statements of operations for the ineffective portion of the change in fair value of the interest rate swap agreements.

Contractual Obligations

There has been no material change to our contractual obligations as disclosed in our 2014 Annual Report except as follows:

During the second quarter of fiscal year 2015, we entered into an operating lease agreement for a facility in Texas effective August 1, 2014. The total lease payments for the 10 year lease term will be $5.1 million prorated for the actual square footage occupied.

Off-Balance Sheet Arrangements

On July 31, 2014, 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.

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Critical Accounting Policies, Estimates, and Judgments

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, doubtful accounts, warranties, inventory valuation, business combination purchase price allocations, our review for impairment of long-lived assets, intangible assets and goodwill, income taxes, and share-based compensation expense. 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 three months ended July 31, 2014 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, 2014.

Recent Accounting Pronouncements

Refer to Note 2, “Accounting Pronouncements” of the consolidated condensed financial statements for a discussion of new and recently adopted 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.

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, 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 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.


•	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.

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•	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.


•	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.


•	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.

Additional risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be different from those expressed or implied in our written or oral forward-looking statements may be found under “Risk Factors” contained in this quarterly report.

These factors and other risk factors disclosed in this quarterly report and elsewhere are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Additionally, there can be no assurance provided that future operating performance will be consistent with the past performance of the Company. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

The forward-looking statements contained in this quarterly report are made only on the date of this quarterly report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Swap Agreements

We seek to reduce earnings and cash flow volatility associated with changes in interest rates through financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. These financial arrangements, or interest rate swap agreements, are the only instruments we use to manage interest rate fluctuations affecting our variable rate debt. We enter into derivative financial arrangements only to the extent that the arrangement meets the objectives described, and we do not engage in such transactions for speculative purposes.

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 France are denominated in the euro, operations in the United Kingdom are denominated in the British pound sterling, and operations in Mexico are denominated in the Mexican peso. 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.

Counterparty Risk

Our interest rate swap financial instruments contain credit risk to the extent that our interest rate swap counterparties may be unable to meet the terms of the agreements. We minimize this risk by limiting our counterparties to highly rated, major financial institutions with good credit ratings. Although possible, management does not expect any material losses as a result of default by other parties. Neither the Company nor the counterparty requires any collateral for the derivative agreements. In estimating the fair value of our derivatives, management considered, among other factors, a valuation analysis performed by an independent third party with extensive expertise and experience.

Item 4. 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 July 31, 2014. There have been no changes in our internal control over financial reporting during the three and six months ended July 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth above under Note 15, “Commitments and Contingencies – Litigation”, contained in the notes to the consolidated condensed financial statements is incorporated herein by reference.

Item 1A. Risk Factors

The reader should carefully consider, in connection with the other information in this report, the factors discussed in Part I, “Item 1A: Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2014. These factors may cause our actual results to differ materially from those stated in forward-looking statements or otherwise contained in this document and elsewhere.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

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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:	September 12, 2014	By:	/s/ Robert Craycraft
			Robert Craycraft
			President and Chief Executive Officer

		By:	/s/ Raymond Aronoff
			Raymond Aronoff
			Chief Financial Officer/Chief Operating Officer

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EXHIBIT INDEX



Exhibit Number		Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company