Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - BakerCorp International, Inc. | bakercorpexhibit312-103120.htm |
EX-32 - EXHIBIT 32 - BakerCorp International, Inc. | bakercorpexhibit32-1031201.htm |
EX-31.1 - EXHIBIT 31.1 - BakerCorp International, Inc. | bakercorpexhibit311-103120.htm |
EX-10.1 - EXHIBIT 10.1 - BakerCorp International, Inc. | bakercorpexhibit101-103120.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
FORM 10-Q
___________________________________________________
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 31, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-181780
___________________________________________________
BAKERCORP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware | 13-4315148 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
7800 N. Dallas Parkway, Suite 500, Plano, Texas | 75024 | |
(Address of principal executive offices) | (Zip Code) |
(888) 882-4895
(Registrant’s telephone number, including area code)
___________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No ý*
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
There is no public market for the registrant’s common stock. There were 100 shares of the registrant’s common stock, par value $0.01 per share, outstanding on December 7, 2015.
TABLE OF CONTENTS
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)
October 31, 2015 | January 31, 2015 | ||||||
(unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 41,086 | $ | 18,665 | |||
Accounts receivable, less allowance for doubtful accounts of $5,033 and $2,981 on October 31, 2015 and January 31, 2015, respectively | 67,587 | 70,758 | |||||
Inventories, net | 8,343 | 7,337 | |||||
Prepaid expenses and other current assets | 5,397 | 5,905 | |||||
Deferred tax assets | 5,776 | 5,776 | |||||
Total current assets | 128,189 | 108,441 | |||||
Property and equipment, net | 345,573 | 368,299 | |||||
Goodwill | 242,750 | 309,714 | |||||
Other intangible assets, net | 408,893 | 430,223 | |||||
Deferred financing costs, net | 472 | 635 | |||||
Other long-term assets | 549 | 541 | |||||
Total assets | $ | 1,126,426 | $ | 1,217,853 | |||
Liabilities and shareholder’s equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 17,017 | $ | 21,189 | |||
Accrued expenses | 25,351 | 20,389 | |||||
Current portion of long-term debt (net of deferred financing costs of $2,658 and $2,543 on October 31, 2015 and January 31, 2015, respectively) | 1,505 | 1,618 | |||||
Total current liabilities | 43,873 | 43,196 | |||||
Long-term debt, net of current portion (net of deferred financing costs of $6,995 and $9,002 on October 31, 2015 and January 31, 2015, respectively) | 636,785 | 637,903 | |||||
Deferred tax liabilities | 173,381 | 186,780 | |||||
Fair value of interest rate swap liabilities | 1,429 | 2,725 | |||||
Share-based compensation liability | 2,023 | 2,836 | |||||
Other long-term liabilities | 2,070 | 2,165 | |||||
Total liabilities | 859,561 | 875,605 | |||||
Commitments and contingencies | — | — | |||||
Shareholder’s equity: | |||||||
Common stock, $0.01 par value; 100,000 shares authorized; 100 shares issued and outstanding on October 31, 2015 and January 31, 2015 | — | — | |||||
Additional paid-in capital | 391,023 | 390,829 | |||||
Accumulated other comprehensive loss | (38,287 | ) | (35,774 | ) | |||
Accumulated deficit | (85,871 | ) | (12,807 | ) | |||
Total shareholder’s equity | 266,865 | 342,248 | |||||
Total liabilities and shareholder’s equity | $ | 1,126,426 | $ | 1,217,853 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
1
BakerCorp International, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations (unaudited)
(In thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | ||||||||||||
Revenue: | |||||||||||||||
Rental revenue | $ | 62,755 | $ | 70,791 | $ | 187,132 | $ | 199,936 | |||||||
Sales revenue | 4,252 | 6,333 | 13,713 | 18,146 | |||||||||||
Service revenue | 11,473 | 11,713 | 34,611 | 33,070 | |||||||||||
Total revenue | 78,480 | 88,837 | 235,456 | 251,152 | |||||||||||
Operating expenses: | |||||||||||||||
Employee related expenses | 25,007 | 28,402 | 82,473 | 83,065 | |||||||||||
Rental expenses | 10,544 | 11,679 | 31,291 | 32,586 | |||||||||||
Repair and maintenance | 2,964 | 3,276 | 8,785 | 10,571 | |||||||||||
Cost of goods sold | 2,691 | 3,674 | 8,420 | 11,182 | |||||||||||
Facility expenses | 7,309 | 7,319 | 21,584 | 20,813 | |||||||||||
Professional fees | 759 | 1,063 | 2,454 | 3,671 | |||||||||||
Management fees | 141 | 162 | 413 | 465 | |||||||||||
Other operating expenses | 4,838 | 5,525 | 12,776 | 14,692 | |||||||||||
Depreciation and amortization | 15,201 | 16,717 | 47,919 | 49,826 | |||||||||||
Gain on sale of equipment | (629 | ) | (1,102 | ) | (1,792 | ) | (2,187 | ) | |||||||
Impairment of goodwill and other intangible assets | 74,248 | — | 74,248 | — | |||||||||||
Impairment of long-lived assets | 2,729 | 2,091 | 3,048 | 3,364 | |||||||||||
Total operating expenses | 145,802 | 78,806 | 291,619 | 228,048 | |||||||||||
(Loss) income from operations | (67,322 | ) | 10,031 | (56,163 | ) | 23,104 | |||||||||
Other expenses: | |||||||||||||||
Interest expense, net | 10,584 | 10,598 | 31,698 | 31,808 | |||||||||||
Foreign currency exchange loss (gain), net | 352 | 394 | 68 | (94 | ) | ||||||||||
Other (income) expense, net | — | (7 | ) | — | 84 | ||||||||||
Total other expenses, net | 10,936 | 10,985 | 31,766 | 31,798 | |||||||||||
Loss before income tax benefit | (78,258 | ) | (954 | ) | (87,929 | ) | (8,694 | ) | |||||||
Income tax benefit | (11,196 | ) | (604 | ) | (14,865 | ) | (5,169 | ) | |||||||
Net loss | $ | (67,062 | ) | $ | (350 | ) | $ | (73,064 | ) | $ | (3,525 | ) |
The accompanying notes are an integral part of these consolidated condensed financial statements.
2
BakerCorp International, Inc. and Subsidiaries
Consolidated Condensed Statements of Comprehensive Loss (unaudited)
(In thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | ||||||||||||
Net loss | $ | (67,062 | ) | $ | (350 | ) | $ | (73,064 | ) | $ | (3,525 | ) | |||
Other comprehensive income (loss), net of tax | |||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $174, $64, $502 and $353, respectively | 276 | 101 | 794 | 591 | |||||||||||
Change in foreign currency translation adjustments | 460 | (9,959 | ) | (3,307 | ) | (11,244 | ) | ||||||||
Other comprehensive income (loss) | 736 | (9,858 | ) | (2,513 | ) | (10,653 | ) | ||||||||
Total comprehensive loss | $ | (66,326 | ) | $ | (10,208 | ) | $ | (75,577 | ) | $ | (14,178 | ) |
The accompanying notes are an integral part of these consolidated condensed financial statements.
3
BakerCorp International, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows (unaudited)
(In thousands)
Nine Months Ended | |||||||
October 31, 2015 | October 31, 2014 | ||||||
Operating activities | |||||||
Net loss | $ | (73,064 | ) | $ | (3,525 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Provision for doubtful accounts | 2,071 | 686 | |||||
Provision for excess and obsolete inventory, net | 15 | (16 | ) | ||||
Share-based compensation expense | 298 | 2,218 | |||||
Loss on sale of subsidiary | — | 99 | |||||
Gain on sale of equipment | (1,792 | ) | (2,187 | ) | |||
Depreciation and amortization | 47,919 | 49,826 | |||||
Amortization of deferred financing costs | 2,048 | 1,942 | |||||
Deferred income taxes | (13,692 | ) | (4,464 | ) | |||
Amortization of above-market lease | (286 | ) | (522 | ) | |||
Impairment of goodwill and other intangible assets | 74,248 | — | |||||
Impairment of long-lived assets | 3,048 | 3,364 | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | 881 | (11,768 | ) | ||||
Inventories | (1,023 | ) | (1,927 | ) | |||
Prepaid expenses and other assets | 454 | 557 | |||||
Accounts payable and other liabilities | 260 | (7,967 | ) | ||||
Net cash provided by operating activities | 41,385 | 26,316 | |||||
Investing activities | |||||||
Purchases of property and equipment | (18,439 | ) | (29,769 | ) | |||
Proceeds from sale of equipment | 2,891 | 3,063 | |||||
Proceeds from sale of subsidiary | — | 100 | |||||
Net cash used in investing activities | (15,548 | ) | (26,606 | ) | |||
Financing activities | |||||||
Repayment of long-term debt | (3,122 | ) | (3,122 | ) | |||
Return of capital to BakerCorp International Holdings, Inc. | (126 | ) | (1,717 | ) | |||
Net cash used in financing activities | (3,248 | ) | (4,839 | ) | |||
Effect of foreign currency translation on cash | (168 | ) | (606 | ) | |||
Net increase (decrease) in cash and cash equivalents | 22,421 | (5,735 | ) | ||||
Cash and cash equivalents, beginning of period | 18,665 | 25,536 | |||||
Cash and cash equivalents, end of period | $ | 41,086 | $ | 19,801 | |||
Supplemental disclosure of cash flow information | |||||||
Cash paid during the period for: | |||||||
Interest | $ | 24,767 | $ | 24,989 | |||
Income taxes | $ | 1,370 | $ | 1,004 | |||
Non-cash financing and investing activities: | |||||||
Return of capital to BakerCorp International Holdings, Inc. related to a settlement of options for shares of common stock in BakerCorp International Holdings Inc. | $ | 791 | $ | — |
The accompanying notes are an integral part of these consolidated condensed financial statements.
4
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 24 states in the United States as well as branches in Canada, France, Germany, the Netherlands and the United Kingdom. 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, 2015, included in our 2015 Annual Report on Form 10-K filed with the SEC on April 20, 2015, referred to as our 2015 Annual Report. Certain prior-period amounts have been reclassified to conform to the current financial presentation.
The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial position for the interim periods. The results of operations for the three and nine months ended October 31, 2015 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 allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, income taxes, share-based compensation (expense and liability), and derivatives. Our estimates, judgments, and assumptions are based on historical experience, future expectations, and other factors which we believe to be reasonable. Actual results 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.
5
Note 2. Accounting Pronouncements
Recently Issued Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in the balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by ASU 2015-17. For nonpublic business entities, ASU 2015-17 is effective for reporting periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 31, 2018 and may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted. Other than the revised balance sheet presentation of deferred tax assets from a current to a noncurrent asset and related disclosures, adoption of the standard is not expected to have an impact on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are identified, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. For nonpublic business entities, ASU 2015-16 is effective for reporting periods beginning after December 15, 2016, and interim periods in annual periods beginning after December 31, 2017 and is applied prospectively. Early adoption is permitted. Adoption of the standard is not expected to have an impact on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU No. 2015-11”). ASU No. 2015-11 requires inventory to be measured “at the lower of cost and net realizable value.” Net realizable value is defined as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. For nonpublic business entities, ASU No. 2015-11 is effective prospectively for annual periods beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact that the adoption of these provisions will have on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU No. 2015-05”). ASU No. 2015-05 amends ASC 350, “Intangibles - Goodwill and Other.” The amendments provide guidance as to whether a cloud computing arrangement includes a software license and, based on that determination, how to account for such arrangements. The amendments may be applied on either a prospective or retrospective basis. The provisions are effective for annual periods beginning after December 15, 2017, and interim periods in annual periods beginning after December 31, 2018. Early adoption is permitted. We are currently evaluating the impact that the adoption of these provisions will have on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). ASU No. 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. The update requires retrospective application and represents a change in accounting principle. ASU 2015-03 does not specifically address requirements for the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB issued ASU 2015-15, “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” clarifying that debt issuance costs related to line-of-credit arrangements could be presented as an asset and amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The standard is effective for nonpublic entities for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. Other than the revised balance sheet presentation of debt issuance costs from an asset to a deduction from the carrying amount of the debt liability and related disclosures, the adoption of the standard is not expected to have an impact on our consolidated financial statements.
6
During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). ASU No. 2014-09 will require companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU No. 2014-09 allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. A decision about which method to use will affect a company’s implementation plans. The standard is effective for non-public entities for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2014-09 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 October 31, 2015:
(In thousands) | Unrealized Loss on Interest Rate Swap Agreements (1) | Change in Foreign Currency Translation Adjustments | Total | ||||||||
Balance at July 31, 2015 | $ | (1,158 | ) | $ | (37,865 | ) | $ | (39,023 | ) | ||
Other comprehensive income before reclassifications | 276 | 460 | 736 | ||||||||
Net other comprehensive income | 276 | 460 | 736 | ||||||||
Balance at October 31, 2015 | $ | (882 | ) | $ | (37,405 | ) | $ | (38,287 | ) |
(1) Unrealized income on interest rate swap agreements is net of tax expense of $174 for the three months ended October 31, 2015.
The following table includes the components of accumulated other comprehensive loss, net of tax, for the three months ended October 31, 2014:
(In thousands) | Unrealized Loss on Interest Rate Swap Agreements (1) | Change in Foreign Currency Translation Adjustments | Total | ||||||||
Balance at July 31, 2014 | $ | (1,971 | ) | $ | (9,532 | ) | $ | (11,503 | ) | ||
Other comprehensive income (loss) before reclassifications | 101 | (9,959 | ) | (9,858 | ) | ||||||
Net other comprehensive income (loss) | 101 | (9,959 | ) | (9,858 | ) | ||||||
Balance at October 31, 2014 | $ | (1,870 | ) | $ | (19,491 | ) | $ | (21,361 | ) |
(1) Unrealized income on interest rate swap agreements is net of tax expense of $64 for the three months ended October 31, 2014.
The following table includes the components of accumulated other comprehensive loss, net of tax, for the nine months ended October 31, 2015:
(In thousands) | Unrealized Loss on Interest Rate Swap Agreements (1) | Change in Foreign Currency Translation Adjustments | Total | ||||||||
Balance at January 31, 2015 | $ | (1,676 | ) | $ | (34,098 | ) | $ | (35,774 | ) | ||
Other comprehensive income (loss) before reclassifications | 794 | (3,307 | ) | (2,513 | ) | ||||||
Net other comprehensive income (loss) | 794 | (3,307 | ) | (2,513 | ) | ||||||
Balance at October 31, 2015 | $ | (882 | ) | $ | (37,405 | ) | $ | (38,287 | ) |
(1) Unrealized income on interest rate swap agreements is net of tax expense of $502 for the nine months ended October 31, 2015.
7
The following table includes the components of accumulated other comprehensive loss, net of tax, for the nine months ended October 31, 2014:
(In thousands) | Unrealized Loss on Interest Rate Swap Agreements (1) | Change in Foreign Currency Translation Adjustments | Total | ||||||||
Balance at January 31, 2014 | $ | (2,461 | ) | $ | (8,247 | ) | $ | (10,708 | ) | ||
Other comprehensive income (loss) before reclassifications | 591 | (11,244 | ) | (10,653 | ) | ||||||
Net other comprehensive income (loss) | 591 | (11,244 | ) | (10,653 | ) | ||||||
Balance at October 31, 2014 | $ | (1,870 | ) | $ | (19,491 | ) | $ | (21,361 | ) |
(1) Unrealized income on interest rate swap agreements is net of tax expense of $353 for the nine months ended October 31, 2014.
Note 4. Inventories, Net
Inventories, net consisted of the following on October 31, 2015 and January 31, 2015:
(In thousands) | October 31, 2015 | January 31, 2015 | |||||
Finished goods | $ | 3,558 | $ | 4,733 | |||
Work-in-process | 1,338 | 595 | |||||
Components | 4,125 | 2,672 | |||||
Less: inventory reserve | (678 | ) | (663 | ) | |||
Inventories, net | $ | 8,343 | $ | 7,337 |
Note 5. Property and Equipment, Net
Property and equipment, net consisted of the following on October 31, 2015:
(In thousands) | Cost | Accumulated Depreciation | Net Carrying Amount | ||||||||
Assets held for rent: | |||||||||||
Secondary containment | $ | 4,929 | $ | (3,768 | ) | $ | 1,161 | ||||
Boxes | 28,030 | (11,907 | ) | 16,123 | |||||||
Filtration | 10,475 | (4,568 | ) | 5,907 | |||||||
Generators and light towers | 316 | (208 | ) | 108 | |||||||
Pipes, hoses and fittings | 19,609 | (15,008 | ) | 4,601 | |||||||
Non-steel containment | 6,924 | (2,004 | ) | 4,920 | |||||||
Pumps | 54,793 | (29,449 | ) | 25,344 | |||||||
Shoring | 3,836 | (2,685 | ) | 1,151 | |||||||
Steel containment | 333,203 | (73,882 | ) | 259,321 | |||||||
Tank trailers | 1,781 | (1,490 | ) | 291 | |||||||
Construction in progress | 976 | — | 976 | ||||||||
Total assets held for rent | 464,872 | (144,969 | ) | 319,903 | |||||||
Assets held for use: | |||||||||||
Leasehold improvements | 3,426 | (2,075 | ) | 1,351 | |||||||
Machinery and equipment | 39,615 | (24,175 | ) | 15,440 | |||||||
Office furniture and equipment | 4,873 | (3,379 | ) | 1,494 | |||||||
Software | 10,680 | (5,577 | ) | 5,103 | |||||||
Construction in progress | 2,282 | — | 2,282 | ||||||||
Total assets held for use | 60,876 | (35,206 | ) | 25,670 | |||||||
Total | $ | 525,748 | $ | (180,175 | ) | $ | 345,573 |
8
Property and equipment, net consisted of the following on January 31, 2015:
(In thousands) | Cost | Accumulated Depreciation | Net Carrying Amount | ||||||||
Assets held for rent: | |||||||||||
Secondary containment | $ | 4,594 | $ | (3,212 | ) | $ | 1,382 | ||||
Boxes | 26,318 | (10,061 | ) | 16,257 | |||||||
Filtration | 9,903 | (4,159 | ) | 5,744 | |||||||
Generators and light towers | 279 | (230 | ) | 49 | |||||||
Pipes, hoses and fittings | 16,677 | (11,994 | ) | 4,683 | |||||||
Non-steel containment | 6,851 | (1,668 | ) | 5,183 | |||||||
Pumps | 52,804 | (24,742 | ) | 28,062 | |||||||
Shoring | 4,068 | (2,670 | ) | 1,398 | |||||||
Steel containment | 331,940 | (59,258 | ) | 272,682 | |||||||
Tank trailers | 1,856 | (1,303 | ) | 553 | |||||||
Construction in progress | 5,890 | — | 5,890 | ||||||||
Total assets held for rent | 461,180 | (119,297 | ) | 341,883 | |||||||
Assets held for use: | |||||||||||
Leasehold improvements | 3,001 | (1,786 | ) | 1,215 | |||||||
Machinery and equipment | 35,949 | (20,440 | ) | 15,509 | |||||||
Office furniture and equipment | 5,439 | (3,626 | ) | 1,813 | |||||||
Software | 7,163 | (3,247 | ) | 3,916 | |||||||
Construction in progress | 3,963 | — | 3,963 | ||||||||
Total assets held for use | 55,515 | (29,099 | ) | 26,416 | |||||||
Total | $ | 516,695 | $ | (148,396 | ) | $ | 368,299 |
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the related carrying value of the asset to its estimated fair value.
During the three months ended April 30, 2015, we reassessed our plans for the use of certain internally developed software and decided to shift to a different platform which will provide the same services at a lower maintenance cost. We wrote down the value of the internally developed software as no future benefits were expected to be realized. Consequently, during the three months ended April 30, 2015, we recorded an impairment charge of $0.3 million in our North American segment, which represented the remaining net book value of the internally developed software.
During the three months ended October 31, 2015, we determined that the limited sales volume for certain aged property and equipment was a potential indicator of impairment. We determined that the net book value of these assets exceeded the assets’ estimated fair value. Consequently, during the three months ended October 31, 2015, we recorded an impairment charge of $2.7 million in our North American segment.
In addition, due to certain indicators of impairment identified during our interim impairment test of goodwill (see Note 6), we assessed our long-lived assets for impairment. We tested the property and equipment for recoverability by comparing the sum of undiscounted cash flows to the carrying value of the North American reporting unit asset group and concluded there were no remaining indicators of impairment.
Depreciation and amortization expense related to property and equipment for the three months ended October 31, 2015 and October 31, 2014 was $11.2 million and $12.6 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended October 31, 2015 and October 31, 2014 was $35.7 million and $37.5 million, respectively.
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Note 6. Goodwill and Other Intangible Assets, Net
Goodwill
Goodwill by reportable segment and reporting units on October 31, 2015 and January 31, 2015 and the changes in the carrying amount of goodwill during the nine months ended October 31, 2015 were the following:
(In thousands) | North America | Europe | Total | ||||||||
Balance at January 31, 2015 | $ | 257,052 | $ | 52,662 | $ | 309,714 | |||||
Impairments | (65,711 | ) | — | (65,711 | ) | ||||||
Adjustments (1) | — | (1,253 | ) | (1,253 | ) | ||||||
Balance at October 31, 2015 | $ | 191,341 | $ | 51,409 | $ | 242,750 |
(1) | The adjustments to goodwill were the result of fluctuations in foreign currency exchange rates used to translate the balance into U.S. dollars. |
We evaluate the carrying value of goodwill annually on November 1st during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. In evaluating goodwill, a two-step goodwill impairment test is applied to each reporting unit.
In the first step of the impairment test, we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. We estimate the fair value of our reporting units based on income and market approaches. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured (the second step or “Step 2”). Any change in the assumptions input into the fair value model, which include market-driven assumptions, could result in future impairments.
On October 1, 2015, we performed an interim impairment test due to deterioration in operating results, a revised forecast and negative industry trends. Under the first step of the impairment test, we determined the carrying value of the North American reporting unit exceeded fair value. For the European reporting unit, there was no indication of potential goodwill impairment. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. Based on our preliminary analysis, we recorded a non-cash goodwill impairment charge of $65.7 million in our North American reporting unit. This impairment charge, which is included under the caption “Impairment of goodwill and other intangible assets” in our consolidated statements of operations for the three and nine months ended October 31, 2015, does not impact our operations, compliance with our debt covenants or our cash flows. No impairment charges were recorded for our European reporting unit.
In calculating the fair value of our North American reporting unit under the first step, we gave equal weight to the income approach, which analyzed projected discounted cash flows, and the market approach, which considered comparable public companies as well as comparable industry transactions. Under the income approach, the following Level 3 estimates and assumptions were used in the discounted cash flow analysis:
• | Long-term EBITDA margin range of 29.3% to 32.8%, reflecting our historical and forecasted profit margins; |
• | Long-term revenue growth rate range of 3.0% to 5.2% based on long-term nominal growth rate potential; |
• | Assumptions regarding future capital expenditures reflective of maintaining our rental fleet under normalized operations; and |
• | A discount rate of 9.0% based on our weighted average cost of capital. |
Additionally, under the market approach, we used other significant observable market inputs including various peer company comparisons and industry transaction data. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the step one analysis for the reporting unit.
The completion of Step 2 of the goodwill impairment test for our North American reporting unit is subject to the finalization of the fair value of property and equipment, other intangible assets, deferred taxes and leases which we expect to complete prior to filing our 2016 Annual Report on Form 10-K. We believe that the preliminary estimate of the goodwill impairment is reasonable and represents our best estimate as of the date thereof based on assumptions that are subject to inherent uncertainty. There can be no assurance that no material adjustments to the preliminary estimate will be required as Step 2 is finalized. Following the completion of Step 2, we will adjust our preliminary estimate, if necessary, and record any required adjustment in our consolidated financial statements for the fiscal year ended January 31, 2016.
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Other Intangible Assets, Net
The components of other intangible assets, net on October 31, 2015 and January 31, 2015 were the following:
October 31, 2015 | January 31, 2015 | |||||||||||||||||||||||
(In thousands) | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||
Carrying amount: | ||||||||||||||||||||||||
Customer relationships (25 years) (1) | $ | 400,970 | $ | (70,838 | ) | $ | 330,132 | $ | 401,403 | $ | (58,873 | ) | $ | 342,530 | ||||||||||
Customer backlog (2 years) | 200 | (200 | ) | — | 200 | (120 | ) | 80 | ||||||||||||||||
Developed technology (11 years) (1) | 1,641 | (282 | ) | 1,359 | 1,647 | (171 | ) | 1,476 | ||||||||||||||||
Trade name (Indefinite) (2) | 77,402 | — | 77,402 | 86,137 | — | 86,137 | ||||||||||||||||||
Total carrying amount | $ | 480,213 | $ | (71,320 | ) | $ | 408,893 | $ | 489,387 | $ | (59,164 | ) | $ | 430,223 |
(1) | The decrease in the gross intangible assets balance on October 31, 2015 compared to January 31, 2015 was the result of fluctuations in the foreign currency exchange rates used to translate foreign intangible asset balances into U.S. dollars. |
(2) | $8.5 million of the total decrease in the gross intangible assets balance on October 31, 2015 compared to January 31, 2015 is due to the impairment charge recorded during the three months ended October 31, 2015 (see further details below). The remaining decrease was the result of fluctuations in the foreign currency exchange rates used to translate foreign intangible asset balances into U.S. dollars. |
We evaluate the carrying value of our indefinite-lived intangible asset (trade name) annually during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. To test our indefinite-lived intangible asset for impairment, we compare the fair value of our indefinite-lived intangible asset to carrying value. We estimate the fair value using an income approach using the asset’s projected discounted cash flows. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than the carrying value.
We assess the impairment of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The asset is impaired if its carrying value exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors. The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we must make assumptions regarding estimated future cash flows, discount rates and other factors.
Due to certain indicators of impairment identified during our October 1, 2015 interim impairment test of goodwill, we assessed our indefinite and definite-lived intangible assets for impairment. Based on our analysis, we preliminarily concluded that the carrying value of our indefinite-lived intangible asset (trade name) exceeded its fair value and recorded an impairment charge of $8.5 million in our North American reporting unit. This impairment charge, which is included under the caption “Impairment of goodwill and other intangible assets” in our consolidated statements of operations for the three and nine months ended October 31, 2015, does not impact our operations, compliance with our debt covenants or our cash flows. We estimated the fair value of our trade name using the relief-from-royalty method, which uses several significant assumptions, including an estimate of useful life and revenue projections that consider historical and estimated future results, general economic and market conditions, as well as the impact of planned business and operational strategies. The following estimates and assumptions were also used in the relief-from-royalty method:
• | Royalty rate of 2.0% based on market observed royalty rates; and |
• | A discount rate of 10.0% based on the required rate of return for the trade name asset. |
As of October 31, 2015, there was no impairment of our definite-lived intangible assets.
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Amortization expense related to intangible assets for the three months ended October 31, 2015 and October 31, 2014 was $4.0 million and $4.1 million, respectively. Amortization expense related to intangible assets for the nine months ended October 31, 2015 and October 31, 2014 was $12.2 million and $12.3 million, respectively. Estimated amortization expense for the fiscal periods ending January 31 is as follows:
(In thousands) | Estimated Amortization Expense | ||
Remainder of the fiscal year ending January 31, 2016 | $ | 4,047 | |
2017 | 16,188 | ||
2018 | 16,188 | ||
2019 | 16,188 | ||
2020 | 16,188 | ||
Thereafter | 262,692 | ||
Total | $ | 331,491 |
Note 7. Accrued Expenses
Accrued expenses consisted of the following:
(In thousands) | October 31, 2015 | January 31, 2015 | |||||
Accrued compensation | $ | 10,240 | $ | 11,732 | |||
Accrued insurance | 1,077 | 29 | |||||
Accrued interest | 8,247 | 3,350 | |||||
Accrued professional fees | 522 | 382 | |||||
Accrued taxes | 4,031 | 4,011 | |||||
Accrued above market lease liability | 154 | 325 | |||||
Other accrued expenses | 1,080 | 560 | |||||
Total accrued expenses | $ | 25,351 | $ | 20,389 |
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Note 8. Fair Value Measurements
Instruments Measured at Fair Value on a Recurring Basis
Instruments measured at fair value on a recurring basis are summarized below:
October 31, 2015 | |||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||
Liabilities | |||||||||||||||
Interest rate swap liabilities | $ | 1,429 | $ | — | $ | 1,429 | $ | — | |||||||
Share-based compensation liability | 2,023 | — | — | 2,023 | |||||||||||
Total | $ | 3,452 | $ | — | $ | 1,429 | $ | 2,023 |
January 31, 2015 | |||||||||||||||
(In thousands) | Total | Level 1 | Level 2 | Level 3 | |||||||||||
Liabilities | |||||||||||||||
Interest rate swap liabilities | $ | 2,725 | $ | — | $ | 2,725 | $ | — | |||||||
Share-based compensation liability | 2,836 | — | — | 2,836 | |||||||||||
Total | $ | 5,561 | $ | — | $ | 2,725 | $ | 2,836 |
As discussed in Note 10, “Derivatives,” we had interest rate swap contracts with a total notional principal of $214.0 million outstanding on October 31, 2015. 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. During the nine months ended October 31, 2015, there were no transfers in or out of Level 1, Level 2, or Level 3 financial instruments.
On October 31, 2015 and January 31, 2015, the weighted average fixed interest rate of our interest rate swap contracts were 2.1% and 2.1%, respectively, and the weighted average remaining life was 0.7 years and 1.5 years, respectively. Interest expense related to our interest rate swap contracts during the three months ended October 31, 2015 and October 31, 2014 was $0.4 million and $0.5 million, respectively, and during the nine months ended October 31, 2015 and October 31, 2014 was $1.4 million and $1.4 million, respectively.
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. |
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• | 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 the stock option grant. |
We determined that a +/-10% change in the above assumptions would have a $0.4 million increase or decrease to our reported net loss for the three months ended October 31, 2015.
The following table provides 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 nine months ended October 31, 2015:
Three Months Ended October 31, 2015 | ||||
Level 3 | ||||
(In thousands) | Share-based Compensation Liability | |||
Beginning balance on July 31, 2015 | $ | 2,395 | ||
Total income included in operating expense | (340 | ) | ||
Cash settlement of stock options exercised | (32 | ) | ||
Balance at October 31, 2015 | $ | 2,023 |
Nine Months Ended October 31, 2015 | ||||
Level 3 | ||||
(In thousands) | Share-based Compensation Liability | |||
Beginning balance on January 31, 2015 | $ | 2,836 | ||
Total income included in operating expense | (781 | ) | ||
Cash settlement of stock options exercised | (32 | ) | ||
Balance at October 31, 2015 | $ | 2,023 |
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.
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 October 31, 2015 and January 31, 2015, the fair values of our senior notes and senior term loan were $192.0 million and $369.2 million, respectively, and $182.4 million and $380.2 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. During the three months ended October 31, 2015, we updated our internal forecasts, resulting in impairment charges to write down certain property and equipment, goodwill and indefinite-lived intangible assets (see Note 5 and 6). The Company determined the fair values using income and market approaches. The estimation of fair value and cash flows used in the fair value measurements required the use of significant unobservable inputs, and as a result, the fair value measurements were classified as Level 3.
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Note 9. Debt
Long-term debt consisted of the following:
(In thousands) | October 31, 2015 | January 31, 2015 | |||||
Senior term loan (LIBOR margin of 3.0%, and interest rate of 4.25%) | $ | 407,943 | $ | 411,066 | |||
Revolving loan | — | — | |||||
Senior unsecured notes | 240,000 | 240,000 | |||||
Total debt | 647,943 | 651,066 | |||||
Less deferred financing costs | (9,653 | ) | (11,545 | ) | |||
Total debt less deferred financing costs | 638,290 | 639,521 | |||||
Less current portion (net of current portion of deferred financing costs of $2,658 and $2,543, respectively) | (1,505 | ) | (1,618 | ) | |||
Long-term debt, net of current portion (net of long-term portion of deferred financing costs of $6,995 and $9,002, respectively) | $ | 636,785 | $ | 637,903 |
On June 1, 2011, we (i) entered into a $435.0 million senior secured credit facility (the “Credit Facility”), consisting of a $390.0 million term loan facility (the “Senior Term Loan”) and a $45.0 million revolving credit facility (the “Revolving Credit Facility”) ($45.0 million available on October 31, 2015) and (ii) issued $240.0 million in aggregate principal amount of senior unsecured notes due 2019 (the “Notes”).
Credit Facility
On February 7, 2013, we entered into a first amendment to our Credit Facility (the “First Amendment”), to refinance our Credit Facility. Pursuant to the First Amendment, we borrowed $384.2 million of term loans (the “Amended Senior Term Loan”) to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Amended Senior Term Loan is not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to our ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to our Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term 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 term loans under the Credit Facility.
The Credit Facility, as 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, 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 October 31, 2015, we did not have an outstanding balance on the Revolving Credit Facility; therefore, on October 31, 2015, we were not subject to a leverage test. Additionally, on October 31, 2015, we were in compliance with all of our requirements and covenant tests under the Credit Facility.
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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
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 $0.6 million and $0.7 million of deferred financing costs during the three months ended October 31, 2015 and October 31, 2014, respectively, and $2.0 million and $1.9 million during the nine months ended October 31, 2015 and October 31, 2014, respectively.
Interest and fees related to our Credit Facility and the Notes were as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | |||||||||||||
Credit Facility interest and fees(1) | $ | 4,845 | $ | 4,928 | $ | 14,496 | $ | 13,131 | |||||||||
Notes interest and fees (2) | 5,253 | 5,227 | 15,739 | 17,180 | |||||||||||||
Total interest and fees | $ | 10,098 | $ | 10,155 | $ | 30,235 | $ | 30,311 |
(1) Interest on the Amended 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%.
Principal Payments on Debt
On October 31, 2015, 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, 2016 | $ | 1,040 | |
2017 | 4,163 | ||
2018 | 4,163 | ||
2019 | 4,163 | ||
2020 | 634,414 | ||
Total | $ | 647,943 |
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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 | October 31, 2015 | January 31, 2015 | |||||||||
Interest rate swaps effective July 2011, expires July 2016 (1) | 150,000 | 2.346% | $ | 1,239 | $ | 2,380 | |||||||
Interest rate swap, effective July 2014, expires July 2016 (1)(2) | 64,000 | 1.639% | 190 | 345 | |||||||||
$ | 1,429 | $ | 2,725 |
(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 original notional amount of $71.0 million was reduced to $64.0 million on July 31, 2015. |
The interest rate swap agreements have been designated as cash flow hedges of our interest rate risk and recorded at estimated fair values on October 31, 2015 and January 31, 2015. 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”).
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 nine months ended October 31, 2015, 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 (loss) recognized in OCI for our derivative instruments designated as cash flow hedges was the following:
Three Months Ended | Nine Months Ended | ||||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | |||||||||||||
Unrealized gain, before income tax expense | $ | 450 | $ | 165 | $ | 1,296 | $ | 944 | |||||||||
Income tax expense | 174 | 64 | 502 | 353 | |||||||||||||
Total | $ | 276 | $ | 101 | $ | 794 | $ | 591 |
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Note 11. Income Taxes
The income tax benefit for the three and nine months ended October 31, 2015 and October 31, 2014 is based on the estimated effective tax rate for the entire fiscal year. The estimated effective tax rate is subject to adjustment in subsequent quarterly periods as our estimates of pre-tax income and loss for the year fluctuate, including changes in the geographic mix of pre-tax income and loss.
The effective income tax rates for the three and nine months ended October 31, 2015 were a benefit of 14.3% and 16.9%, respectively, compared to a benefit for the three and nine months ended October 31, 2014 of 63.3% and 59.5%, 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 nine months ended October 31, 2015 and October 31, 2014 primarily relates to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction and discrete items primarily related to a tax benefit for bad debt impairment recorded during the nine months ended October 31, 2014 and impairment of non-deductible goodwill recorded during the three months ended October 31,2015.
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized. 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 October 31, 2015.
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.
The federal examination by the Internal Revenue Service for the fiscal years ended January 31, 2011 through January 31, 2012 was completed during the nine months ended October 31, 2015. Any impact from the audit, including reversal of previously accrued unrecognized tax benefit and associated interest and penalties, was included in the financial statements for the nine months ended October 31, 2015.
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
During June 2011, BakerCorp International Holdings (“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 October 31, 2015, there were 173,313 shares available for grant. The amended 2011 Plan permits the granting of BCI Holdings stock options, nonqualified stock options and restricted stock to eligible employees and non-employee directors and consultants.
The following table summarizes stock option activity during the nine months ended October 31, 2015:
Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value (in thousands)(1) | Weighted Average Term Remaining (in years) | Weighted Average Grant Date Fair Value | ||||||||||||
Outstanding, January 31, 2015 | 886,209 | $ | 201.22 | $ | 6,330 | 7.6 | ||||||||||
Granted | 5,000 | $ | 176.00 | $ | 35.79 | |||||||||||
Exercised | (21,046 | ) | $ | 45.10 | $ | 965 | ||||||||||
Forfeited/cancelled/expired | (39,563 | ) | $ | 186.89 | ||||||||||||
Outstanding, October 31, 2015 | 830,600 | $ | 205.71 | $ | 3,479 | 7.0 | ||||||||||
Vested and expected to vest, October 31, 2015 | 357,487 | $ | 150.08 | $ | 3,469 | 5.3 | ||||||||||
Exercisable, October 31, 2015 | 272,437 | $ | 141.57 | $ | 3,448 | 5.3 |
(1) | 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 October 31, 2015. 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 October 31, 2015, there was $2.4 million of unrecognized pre-tax share-based compensation expense, excluding the options granted to the CEO, related to non-vested stock options, which we expect to recognize over a weighted average period of 2.8 years. The total fair value of options vested during the three and nine months ended October 31, 2015 is $0.5 million and $1.6 million, respectively. The total fair value of options vested during the three and nine months ended October 31, 2014 is $0.8 million and $2.0 million, respectively. On October 31, 2015, the total unrecognized share-based compensation expense for the CEO’s options was $10.6 million. During the nine months ended October 31, 2015, we did not recognize any share-based compensation expense related to the CEO’s options.
The share-based compensation expense included within employee related expenses in our consolidated statement of operations was the following:
Three Months Ended | Nine Months Ended | ||||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | |||||||||||||
Non-cash share-based compensation (income) expense (1) | $ | (219 | ) | $ | 1,580 | $ | 298 | $ | 2,218 |
(1) | We remeasured certain options classified as liability awards and recorded decreases to non-cash share-based compensation expense of $0.3 million and $0.8 million during the three and nine months ended October 31, 2015, respectively, and increases to non-cash share-based compensation expense of $1.0 million and $0.5 million during the three and nine months ended October 31, 2014, respectively. |
The fair value of BCI Holdings stock options issued and classified as equity awards was determined using the Black-Scholes options pricing model utilizing the following weighted-average assumptions for each respective period:
Nine Months Ended | |||||
October 31, 2015 | October 31, 2014 | ||||
Expected volatility | 45 | % | 50 | % | |
Expected dividends | — | % | — | % | |
Expected term | 6.4 years | 6.6 years | |||
Risk-free interest rate | 1.6 | % | 2.1 | % |
19
Liability Awards
We account for certain option awards as liability awards, as we determined cash settlement upon exercise is probable. We remeasured the fair value of these options on October 31, 2015 and decreased our liability to $2.0 million from the $2.8 million recognized on January 31, 2015. The quarterly re-measurement resulted in a decrease to our non-cash share-based compensation expense of $0.3 million and $0.8 million during the three and nine months ended October 31, 2015, respectively.
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:
Nine Months Ended | |||||
October 31, 2015 | October 31, 2014 | ||||
Expected volatility | 45 | % | 50 | % | |
Expected dividends | — | % | — | % | |
Expected term | 3.1 years | 3.2 years | |||
Risk-free interest rate | 1.0 | % | 1.0 | % |
Note 13. Segment Reporting
We conduct our operations through entities located in the United States, Canada, France, Germany, the Netherlands and the United Kingdom. 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 and the United Kingdom that provide equipment and services to customers in a number of European countries. |
20
Selected statement of operations information for our reportable segments is the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | ||||||||||||
Revenue | ||||||||||||||||
United States | $ | 68,862 | $ | 78,114 | $ | 206,546 | $ | 219,976 | ||||||||
Other North America | 1,925 | 2,028 | 5,287 | 5,835 | ||||||||||||
North America | 70,787 | 80,142 | 211,833 | 225,811 | ||||||||||||
Europe | 7,693 | 8,695 | 23,623 | 25,341 | ||||||||||||
Total revenue | $ | 78,480 | $ | 88,837 | $ | 235,456 | $ | 251,152 | ||||||||
Depreciation and amortization | ||||||||||||||||
North America | $ | 14,068 | $ | 15,221 | $ | 44,519 | $ | 45,781 | ||||||||
Europe | 1,133 | 1,496 | 3,400 | 4,045 | ||||||||||||
Total depreciation and amortization | $ | 15,201 | $ | 16,717 | $ | 47,919 | $ | 49,826 | ||||||||
Interest expense, net | ||||||||||||||||
North America | $ | 10,584 | $ | 10,598 | $ | 31,698 | $ | 31,808 | ||||||||
Europe | — | — | — | — | ||||||||||||
Total interest expense, net | $ | 10,584 | $ | 10,598 | $ | 31,698 | $ | 31,808 | ||||||||
Income tax (benefit) expense | ||||||||||||||||
North America | $ | (11,301 | ) | $ | (900 | ) | $ | (15,502 | ) | $ | (5,792 | ) | ||||
Europe | 105 | 296 | 637 | 623 | ||||||||||||
Total income tax benefit | $ | (11,196 | ) | $ | (604 | ) | $ | (14,865 | ) | $ | (5,169 | ) | ||||
Net (loss) income | ||||||||||||||||
North America (1) | $ | (67,681 | ) | $ | (1,564 | ) | $ | (75,818 | ) | $ | (6,856 | ) | ||||
Europe (1) | 619 | 1,214 | 2,754 | 3,331 | ||||||||||||
Total net (loss) income | $ | (67,062 | ) | $ | (350 | ) | $ | (73,064 | ) | $ | (3,525 | ) |
(1) | During the three and nine months ended October 31, 2015 and October 31, 2014, we included $1.2 million and $1.1 million, respectively, and $4.0 million and $4.0 million, respectively, of intersegment expense allocations from North America to Europe. |
Total asset and long-lived asset information is the following:
(In thousands) | October 31, 2015 | January 31, 2015 | |||||
Total assets | |||||||
United States | $ | 1,002,311 | $ | 1,093,824 | |||
Other North America | 10,419 | 10,707 | |||||
North America | 1,012,730 | 1,104,531 | |||||
Europe | 113,696 | 113,322 | |||||
Total assets | $ | 1,126,426 | $ | 1,217,853 | |||
Long-lived assets | |||||||
United States | $ | 287,304 | $ | 307,655 | |||
Other North America | 11,890 | 12,295 | |||||
North America | 299,194 | 319,950 | |||||
Europe | 46,379 | 48,349 | |||||
Total long-lived assets | $ | 345,573 | $ | 368,299 |
21
Note 14. Related Party Transactions
From time to time, we may enter into transactions with related parties. The accounting policies that we apply to our transactions with related parties are consistent with those applied in transactions with independent third parties.
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 $0.1 million and $0.2 million during the three months ended October 31, 2015 and October 31, 2014, respectively, and $0.4 million and $0.5 million during the nine months ended October 31, 2015 and October 31, 2014, 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. Subsequent Event
In November 2015, we commenced an exchange offer to allow certain employees and all non-employee members of our board of directors the opportunity to exchange, on a grant-by-grant basis, their eligible options for new stock options that the Company granted under its 2011 Plan. Generally, most of the employees with outstanding options are eligible to participate in the program, which expires on December 29, 2015. Each new stock option has a maximum term that is equal to the remaining term of the corresponding eligible option. Each new stock option becomes fully vested and exercisable only upon the consummation of a Change in Control (as defined in the 2011 Plan) or an initial public offering of our common stock (“IPO”) and only if the employee remains employed at that time. This is the case even if the eligible options were fully vested on the date of the exchange.
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.
22
Immaterial Error Corrections
During the fourth quarter of fiscal year 2015, we identified errors related to our previously reported condensed consolidating cash flows presented in our notes to the consolidated financial statements. In accordance with Accounting Standards Codification Topic No. 250, “Accounting Changes and Error Corrections” (“ASC No. 250”), we evaluated the materiality of the errors from quantitative and qualitative perspectives and concluded that the errors were not material to any of our prior period financial statements. In accordance with ASC No. 250, we adjusted for these errors by revising our condensed consolidating statements of cash flows for the nine months ended October 31, 2014. There was no effect on the consolidated financial statements other than the notes to the consolidated financial statements as disclosed below. The effect of the immaterial error corrections on the condensed consolidating statements of cash flows for the nine months ended October 31, 2014 is summarized below.
(in thousands) | Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | ||||||||||||||
For the Nine Months Ended October 31, 2014 | |||||||||||||||||||
Net cash flows provided by (used in) operating activities as previously reported | $ | 25,988 | $ | 56,525 | $ | 3,951 | $ | (60,148 | ) | $ | 26,316 | ||||||||
Adjustments: | |||||||||||||||||||
Equity in net earnings of subsidiaries, net of taxes | (51,952 | ) | (8,196 | ) | — | 60,148 | — | ||||||||||||
Net cash flows (used in) provided by operating activities as adjusted | (25,964 | ) | 48,329 | 3,951 | — | 26,316 | |||||||||||||
Net cash flows used in investing activities as previously and currently reported (no change) | — | (20,230 | ) | (6,376 | ) | — | (26,606 | ) | |||||||||||
Net cash flows (used in) provided by financing activities as previously reported | (25,988 | ) | (43,782 | ) | 2,498 | 62,433 | (4,839 | ) | |||||||||||
Adjustments: | |||||||||||||||||||
Intercompany investments and loans | 51,952 | 8,196 | — | (60,148 | ) | — | |||||||||||||
Net cash flows provided by (used in) financing activities as adjusted | 25,964 | (35,586 | ) | 2,498 | 2,285 | (4,839 | ) | ||||||||||||
Effect of foreign currency translation on cash as previously and currently reported (no change) | — | — | 1,679 | (2,285 | ) | (606 | ) | ||||||||||||
Net change in cash and cash equivalents as previously and currently reported (no change) | $ | — | $ | (7,487 | ) | $ | 1,752 | $ | — | $ | (5,735 | ) |
23
Condensed Consolidating Balance Sheet
October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 30,536 | $ | 10,550 | $ | — | $ | 41,086 | |||||||||
Accounts receivable, net | — | 56,925 | 10,662 | — | 67,587 | ||||||||||||||
Inventories, net | — | 8,300 | 43 | — | 8,343 | ||||||||||||||
Prepaid expenses and other current assets | 299 | 3,928 | 1,170 | — | 5,397 | ||||||||||||||
Deferred tax assets | — | 5,776 | — | — | 5,776 | ||||||||||||||
Total current assets | 299 | 105,465 | 22,425 | — | 128,189 | ||||||||||||||
Property and equipment, net | — | 287,304 | 58,269 | — | 345,573 | ||||||||||||||
Goodwill | — | 191,341 | 51,409 | — | 242,750 | ||||||||||||||
Other intangible assets, net | — | 385,952 | 22,941 | — | 408,893 | ||||||||||||||
Deferred tax assets | 34,316 | 50,396 | 170 | (84,882 | ) | — | |||||||||||||
Deferred financing costs, net | 472 | — | — | — | 472 | ||||||||||||||
Other long-term assets | — | 409 | 140 | — | 549 | ||||||||||||||
Investment in subsidiaries | 510,738 | 110,987 | — | (621,725 | ) | — | |||||||||||||
Total assets | $ | 545,825 | $ | 1,131,854 | $ | 155,354 | $ | (706,607 | ) | $ | 1,126,426 | ||||||||
Liabilities and shareholder’s equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 34 | $ | 15,733 | $ | 1,250 | $ | — | $ | 17,017 | |||||||||
Accrued expenses | 8,254 | 15,135 | 1,962 | — | 25,351 | ||||||||||||||
Current portion of long-term debt, net | 1,505 | — | — | — | 1,505 | ||||||||||||||
Intercompany balances | (371,002 | ) | 338,334 | 32,668 | — | — | |||||||||||||
Total current liabilities | (361,209 | ) | 369,202 | 35,880 | — | 43,873 | |||||||||||||
Long-term debt, net of current portion | 636,785 | — | — | — | 636,785 | ||||||||||||||
Deferred tax liabilities | 1,955 | 247,872 | 8,436 | (84,882 | ) | 173,381 | |||||||||||||
Fair value of interest rate swap liabilities | 1,429 | — | — | — | 1,429 | ||||||||||||||
Share-based compensation liability | — | 2,023 | — | — | 2,023 | ||||||||||||||
Other long-term liabilities | — | 2,019 | 51 | — | 2,070 | ||||||||||||||
Total liabilities | 278,960 | 621,116 | 44,367 | (84,882 | ) | 859,561 | |||||||||||||
Total shareholder’s equity | 266,865 | 510,738 | 110,987 | (621,725 | ) | 266,865 | |||||||||||||
Total liabilities and shareholder’s equity | $ | 545,825 | $ | 1,131,854 | $ | 155,354 | $ | (706,607 | ) | $ | 1,126,426 |
24
Condensed Consolidating Balance Sheet
January 31, 2015
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Assets | |||||||||||||||||||
Current assets | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 14,407 | $ | 4,258 | $ | — | $ | 18,665 | |||||||||
Accounts receivable, net | — | 61,640 | 9,118 | — | 70,758 | ||||||||||||||
Inventories, net | — | 7,333 | 4 | — | 7,337 | ||||||||||||||
Prepaid expenses and other current assets | 227 | 2,313 | 3,365 | — | 5,905 | ||||||||||||||
Deferred tax assets | — | 5,776 | — | — | 5,776 | ||||||||||||||
Total current assets | 227 | 91,469 | 16,745 | — | 108,441 | ||||||||||||||
Property and equipment, net | — | 307,655 | 60,644 | — | 368,299 | ||||||||||||||
Goodwill | — | 257,052 | 52,662 | — | 309,714 | ||||||||||||||
Other intangible assets, net | — | 406,160 | 24,063 | — | 430,223 | ||||||||||||||
Deferred tax assets | 31,762 | 50,198 | 176 | (82,136 | ) | — | |||||||||||||
Deferred financing costs, net | 635 | — | — | — | 635 | ||||||||||||||
Other long-term assets | — | 396 | 145 | — | 541 | ||||||||||||||
Investment in subsidiaries | 576,966 | 110,967 | — | (687,933 | ) | — | |||||||||||||
Total assets | $ | 609,590 | $ | 1,223,897 | $ | 154,435 | $ | (770,069 | ) | $ | 1,217,853 | ||||||||
Liabilities and shareholder’s equity | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | 56 | $ | 19,887 | $ | 1,246 | $ | — | $ | 21,189 | |||||||||
Accrued expenses | 3,359 | 14,483 | 2,547 | — | 20,389 | ||||||||||||||
Current portion of long-term debt, net | 1,618 | — | — | — | 1,618 | ||||||||||||||
Intercompany balances | (380,274 | ) | 349,296 | 30,978 | — | — | |||||||||||||
Total current liabilities | (375,241 | ) | 383,666 | 34,771 | — | 43,196 | |||||||||||||
Long-term debt, net of current portion | 637,903 | — | — | — | 637,903 | ||||||||||||||
Deferred tax liabilities | 1,955 | 258,309 | 8,652 | (82,136 | ) | 186,780 | |||||||||||||
Fair value of interest rate swap liabilities | 2,725 | — | — | — | 2,725 | ||||||||||||||
Share-based compensation liability | — | 2,836 | — | — | 2,836 | ||||||||||||||
Other long-term liabilities | — | 2,120 | 45 | — | 2,165 | ||||||||||||||
Total liabilities | 267,342 | 646,931 | 43,468 | (82,136 | ) | 875,605 | |||||||||||||
Total shareholder’s equity | 342,248 | 576,966 | 110,967 | (687,933 | ) | 342,248 | |||||||||||||
Total liabilities and shareholder’s equity | $ | 609,590 | $ | 1,223,897 | $ | 154,435 | $ | (770,069 | ) | $ | 1,217,853 |
25
Condensed Consolidating Statement of Operations
For the Three Months Ended October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 68,861 | $ | 9,619 | $ | — | $ | 78,480 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 31 | 22,206 | 2,770 | — | 25,007 | ||||||||||||||
Rental expense | — | 9,488 | 1,056 | — | 10,544 | ||||||||||||||
Repair and maintenance | — | 2,791 | 173 | — | 2,964 | ||||||||||||||
Cost of goods sold | — | 2,615 | 76 | — | 2,691 | ||||||||||||||
Facility expense | 9 | 6,582 | 718 | — | 7,309 | ||||||||||||||
Professional fees | 9 | 653 | 97 | — | 759 | ||||||||||||||
Management fees | — | 141 | — | — | 141 | ||||||||||||||
Other operating expenses | 123 | 2,994 | 1,721 | — | 4,838 | ||||||||||||||
Depreciation and amortization | — | 13,777 | 1,424 | — | 15,201 | ||||||||||||||
Gain on sale of equipment | — | (616 | ) | (13 | ) | — | (629 | ) | |||||||||||
Impairment of goodwill and other intangible assets | — | 74,248 | — | — | 74,248 | ||||||||||||||
Impairment of long-lived assets | — | 2,713 | 16 | — | 2,729 | ||||||||||||||
Total operating expenses | 172 | 137,592 | 8,038 | — | 145,802 | ||||||||||||||
(Loss) income from operations | (172 | ) | (68,731 | ) | 1,581 | — | (67,322 | ) | |||||||||||
Other expenses: | |||||||||||||||||||
Interest expense, net | 10,580 | 4 | — | — | 10,584 | ||||||||||||||
Foreign currency exchange loss, net | — | 72 | 280 | — | 352 | ||||||||||||||
Total other expenses, net | 10,580 | 76 | 280 | — | 10,936 | ||||||||||||||
(Loss) income before income tax (benefit) expense | (10,752 | ) | (68,807 | ) | 1,301 | — | (78,258 | ) | |||||||||||
Income tax (benefit) expense | (1,031 | ) | (10,282 | ) | 117 | — | (11,196 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (9,721 | ) | (58,525 | ) | 1,184 | — | (67,062 | ) | |||||||||||
Equity in net earnings of subsidiaries | (57,341 | ) | 1,184 | — | 56,157 | — | |||||||||||||
Net (loss) income | $ | (67,062 | ) | $ | (57,341 | ) | $ | 1,184 | $ | 56,157 | $ | (67,062 | ) |
26
Condensed Consolidating Statement of Operations
For the Three Months Ended October 31, 2014 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 78,115 | $ | 10,722 | $ | — | $ | 88,837 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 40 | 25,514 | 2,848 | — | 28,402 | ||||||||||||||
Rental expense | — | 10,607 | 1,072 | — | 11,679 | ||||||||||||||
Repair and maintenance | — | 3,197 | 79 | — | 3,276 | ||||||||||||||
Cost of goods sold | — | 3,645 | 29 | — | 3,674 | ||||||||||||||
Facility expense | 4 | 6,432 | 883 | — | 7,319 | ||||||||||||||
Professional fees | 10 | 985 | 68 | — | 1,063 | ||||||||||||||
Management fees | — | 162 | — | — | 162 | ||||||||||||||
Other operating expenses | 173 | 3,561 | 1,791 | — | 5,525 | ||||||||||||||
Depreciation and amortization | — | 14,910 | 1,807 | — | 16,717 | ||||||||||||||
Gain on sale of equipment | — | (1,087 | ) | (15 | ) | — | (1,102 | ) | |||||||||||
Impairment of long-lived assets | — | 2,091 | — | — | 2,091 | ||||||||||||||
Total operating expenses | 227 | 70,017 | 8,562 | — | 78,806 | ||||||||||||||
(Loss) income from operations | (227 | ) | 8,098 | 2,160 | — | 10,031 | |||||||||||||
Other expenses: | |||||||||||||||||||
Interest expense (income), net | 10,646 | (47 | ) | (1 | ) | — | 10,598 | ||||||||||||
Foreign currency exchange gain, net | — | 322 | 72 | — | 394 | ||||||||||||||
Other expense, net | — | (7 | ) | — | — | (7 | ) | ||||||||||||
Total other expenses, net | 10,646 | 268 | 71 | — | 10,985 | ||||||||||||||
(Loss) income before income tax (benefit) expense | (10,873 | ) | 7,830 | 2,089 | — | (954 | ) | ||||||||||||
Income tax (benefit) expense | (1,005 | ) | 100 | 301 | — | (604 | ) | ||||||||||||
(Loss) income before equity in net earnings of subsidiaries | (9,868 | ) | 7,730 | 1,788 | — | (350 | ) | ||||||||||||
Equity in net earnings of subsidiaries | 9,518 | 1,788 | — | (11,306 | ) | — | |||||||||||||
Net (loss) income | $ | (350 | ) | $ | 9,518 | $ | 1,788 | $ | (11,306 | ) | $ | (350 | ) |
27
Condensed Consolidating Statement of Operations
For the Nine Months Ended October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 206,546 | $ | 28,910 | $ | — | $ | 235,456 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 102 | 73,711 | 8,660 | — | 82,473 | ||||||||||||||
Rental expense | — | 28,347 | 2,944 | — | 31,291 | ||||||||||||||
Repair and maintenance | — | 8,250 | 535 | — | 8,785 | ||||||||||||||
Cost of goods sold | — | 8,176 | 244 | — | 8,420 | ||||||||||||||
Facility expense | 24 | 19,380 | 2,180 | — | 21,584 | ||||||||||||||
Professional fees | 27 | 2,229 | 198 | — | 2,454 | ||||||||||||||
Management fees | — | 413 | — | — | 413 | ||||||||||||||
Other operating expenses | 412 | 6,624 | 5,740 | — | 12,776 | ||||||||||||||
Depreciation and amortization | — | 43,617 | 4,302 | — | 47,919 | ||||||||||||||
Gain on sale of equipment | — | (1,704 | ) | (88 | ) | — | (1,792 | ) | |||||||||||
Impairment of goodwill and other intangible assets | — | 74,248 | — | — | 74,248 | ||||||||||||||
Impairment of long-lived assets | — | 3,032 | 16 | — | 3,048 | ||||||||||||||
Total operating expenses | 565 | 266,323 | 24,731 | — | 291,619 | ||||||||||||||
(Loss) income from operations | (565 | ) | (59,777 | ) | 4,179 | — | (56,163 | ) | |||||||||||
Other expenses: | |||||||||||||||||||
Interest expense, net | 31,683 | 15 | — | — | 31,698 | ||||||||||||||
Foreign currency exchange loss (gain), net | — | 210 | (142 | ) | — | 68 | |||||||||||||
Total other expenses (income), net | 31,683 | 225 | (142 | ) | — | 31,766 | |||||||||||||
(Loss) income before income tax (benefit) expense | (32,248 | ) | (60,002 | ) | 4,321 | — | (87,929 | ) | |||||||||||
Income tax (benefit) expense | (3,056 | ) | (12,423 | ) | 614 | — | (14,865 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (29,192 | ) | (47,579 | ) | 3,707 | — | (73,064 | ) | |||||||||||
Equity in net earnings of subsidiaries | (43,872 | ) | 3,707 | — | 40,165 | — | |||||||||||||
Net (loss) income | $ | (73,064 | ) | $ | (43,872 | ) | $ | 3,707 | $ | 40,165 | $ | (73,064 | ) |
28
Condensed Consolidating Statement of Operations
For the Nine Months Ended October 31, 2014 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Revenue | $ | — | $ | 219,977 | $ | 31,175 | $ | — | $ | 251,152 | |||||||||
Operating expenses: | |||||||||||||||||||
Employee related expenses | 124 | 74,101 | 8,840 | — | 83,065 | ||||||||||||||
Rental expense | — | 29,617 | 2,969 | — | 32,586 | ||||||||||||||
Repair and maintenance | — | 9,967 | 604 | — | 10,571 | ||||||||||||||
Cost of goods sold | — | 11,106 | 76 | — | 11,182 | ||||||||||||||
Facility expense | 15 | 18,220 | 2,578 | — | 20,813 | ||||||||||||||
Professional fees | 70 | 3,436 | 165 | — | 3,671 | ||||||||||||||
Management fees | — | 465 | — | — | 465 | ||||||||||||||
Other operating expenses | 496 | 8,433 | 5,763 | — | 14,692 | ||||||||||||||
Depreciation and amortization | — | 44,894 | 4,932 | — | 49,826 | ||||||||||||||
(Gain) loss on sale of equipment | — | (2,384 | ) | 197 | — | (2,187 | ) | ||||||||||||
Impairment of long-lived assets | — | 2,880 | 484 | — | 3,364 | ||||||||||||||
Total operating expenses | 705 | 200,735 | 26,608 | — | 228,048 | ||||||||||||||
(Loss) income from operations | (705 | ) | 19,242 | 4,567 | — | 23,104 | |||||||||||||
Other expenses: | |||||||||||||||||||
Interest expense (income), net | 31,758 | 56 | (6 | ) | — | 31,808 | |||||||||||||
Foreign currency exchange loss (gain), net | — | 84 | (178 | ) | — | (94 | ) | ||||||||||||
Other expense, net | — | 84 | — | — | 84 | ||||||||||||||
Total other expenses (income), net | 31,758 | 224 | (184 | ) | — | 31,798 | |||||||||||||
(Loss) income before income tax benefit | (32,463 | ) | 19,018 | 4,751 | — | (8,694 | ) | ||||||||||||
Income tax (benefit) expense | (2,962 | ) | (2,860 | ) | 653 | — | (5,169 | ) | |||||||||||
(Loss) income before equity in net earnings of subsidiaries | (29,501 | ) | 21,878 | 4,098 | — | (3,525 | ) | ||||||||||||
Equity in net earnings of subsidiaries | 25,976 | 4,098 | — | (30,074 | ) | — | |||||||||||||
Net (loss) income | $ | (3,525 | ) | $ | 25,976 | $ | 4,098 | $ | (30,074 | ) | $ | (3,525 | ) |
29
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Three Months Ended October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (67,062 | ) | $ | (57,341 | ) | $ | 1,184 | $ | 56,157 | $ | (67,062 | ) | ||||||
Other comprehensive income, net of tax: | |||||||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $174 | 276 | — | — | — | 276 | ||||||||||||||
Change in foreign currency translation adjustments | — | — | 460 | — | 460 | ||||||||||||||
Other comprehensive income | 276 | — | 460 | — | 736 | ||||||||||||||
Total comprehensive (loss) income | $ | (66,786 | ) | $ | (57,341 | ) | $ | 1,644 | $ | 56,157 | $ | (66,326 | ) |
30
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Three Months Ended October 31, 2014 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (350 | ) | $ | 9,518 | $ | 1,788 | $ | (11,306 | ) | $ | (350 | ) | ||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $64 | 101 | — | — | — | 101 | ||||||||||||||
Change in foreign currency translation adjustments | — | — | (9,959 | ) | — | (9,959 | ) | ||||||||||||
Other comprehensive income (loss) | 101 | — | (9,959 | ) | — | (9,858 | ) | ||||||||||||
Total comprehensive (loss) income | $ | (249 | ) | $ | 9,518 | $ | (8,171 | ) | $ | (11,306 | ) | $ | (10,208 | ) |
31
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Nine Months Ended October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (73,064 | ) | $ | (43,872 | ) | $ | 3,707 | $ | 40,165 | $ | (73,064 | ) | ||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $502 | 794 | — | — | — | 794 | ||||||||||||||
Change in foreign currency translation adjustments | — | — | (3,307 | ) | — | (3,307 | ) | ||||||||||||
Other comprehensive income (loss) | 794 | — | (3,307 | ) | — | (2,513 | ) | ||||||||||||
Total comprehensive (loss) income | $ | (72,270 | ) | $ | (43,872 | ) | $ | 400 | $ | 40,165 | $ | (75,577 | ) |
32
Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Nine Months Ended October 31, 2014 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Net (loss) income | $ | (3,525 | ) | $ | 25,976 | $ | 4,098 | $ | (30,074 | ) | $ | (3,525 | ) | ||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||
Unrealized gain on interest rate swap agreements, net of tax expense of $353 | 591 | — | — | — | 591 | ||||||||||||||
Change in foreign currency translation adjustments | — | — | (11,244 | ) | — | (11,244 | ) | ||||||||||||
Other comprehensive income (loss) | 591 | — | (11,244 | ) | — | (10,653 | ) | ||||||||||||
Total comprehensive (loss) income | $ | (2,934 | ) | $ | 25,976 | $ | (7,146 | ) | $ | (30,074 | ) | $ | (14,178 | ) |
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Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended October 31, 2015 (unaudited)
(In thousands)
Parent | Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total | |||||||||||||||
Operating activities | |||||||||||||||||||
Net (loss) income | $ | (73,064 | ) | $ | (43,872 | ) | $ | 3,707 | $ | 40,165 | $ | (73,064 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||||
Provision for doubtful accounts | — | 2,040 | 31 | — | 2,071 | ||||||||||||||
Provision for excess and obsolete inventory | — | 15 | — | — | 15 | ||||||||||||||
Share-based compensation expense | 102 | 196 | — | — | 298 | ||||||||||||||
Gain on sale of equipment | — | (1,704 | ) | (88 | ) | — | (1,792 | ) | |||||||||||
Depreciation and amortization | — | 43,617 | 4,302 | — | 47,919 | ||||||||||||||
Amortization of deferred financing costs | 2,048 | — | — | — | 2,048 | ||||||||||||||
Deferred income taxes | (3,056 | ) | (10,636 | ) | — | — | (13,692 | ) | |||||||||||
Amortization of above market lease | — | (286 | ) | — | — | (286 | ) | ||||||||||||
Impairment of goodwill and other intangible assets | — | 74,248 | — | — | 74,248 | ||||||||||||||
Impairment of long-lived assets | — | 3,032 | 16 | — | 3,048 | ||||||||||||||
Equity in net earnings of subsidiaries, net of taxes | 43,872 | (3,707 | ) | — | (40,165 | ) | — | ||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Accounts receivable | — | 2,676 | (1,795 | ) | — | 881 | |||||||||||||
Inventories | — | (982 | ) | (41 | ) | — | (1,023 | ) | |||||||||||
Prepaid expenses and other assets | (67 | ) | (1,628 | ) | 2,149 | — | 454 | ||||||||||||
Accounts payable and other liabilities | 4,875 | (4,110 | ) | (505 | ) | — | 260 | ||||||||||||
Net cash (used in) provided by operating activities | (25,290 | ) | 58,899 | 7,776 | — | 41,385 | |||||||||||||
Investing activities | |||||||||||||||||||
Purchases of property and equipment | — | (16,043 | ) | (2,396 | ) | — | (18,439 | ) | |||||||||||
Proceeds from sale of equipment | — | 2,665 | 226 | — | 2,891 | ||||||||||||||
Net cash used in investing activities | — | (13,378 | ) | (2,170 | ) | — | (15,548 | ) | |||||||||||
Financing activities | |||||||||||||||||||
Intercompany investments and loans | 28,538 | (29,392 | ) | 215 | 639 | — | |||||||||||||
Repayments of long-term debt | (3,122 | ) | — | — | — | (3,122 | ) | ||||||||||||
Return of capital to BakerCorp International Holdings, Inc. | (126 | ) | — | — | — | (126 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 25,290 | (29,392 | ) | 215 | 639 | (3,248 | ) | ||||||||||||
Effect of foreign currency translation on cash | — | — | 471 | (639 | ) | (168 | ) | ||||||||||||
Net increase in cash and cash equivalents | — | 16,129 | 6,292 | — | 22,421 | ||||||||||||||
Cash and cash equivalents, beginning of period | — | 14,407 | 4,258 | — | 18,665 | ||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 30,536 | $ | 10,550 | $ | — | $ | 41,086 |
34
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended October 31, 2014 (unaudited)
(In thousands)
Parent (1) | Guarantors (1) | Non- Guarantor Subsidiaries | Eliminations (1) | Total | |||||||||||||||
Operating activities | |||||||||||||||||||
Net (loss) income | $ | (3,525 | ) | $ | 25,976 | $ | 4,098 | $ | (30,074 | ) | $ | (3,525 | ) | ||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||||
Provision for doubtful accounts, net | — | 843 | (157 | ) | — | 686 | |||||||||||||
Provision for excess and obsolete inventory | — | (16 | ) | — | — | (16 | ) | ||||||||||||
Share-based compensation expense | 124 | 2,094 | — | — | 2,218 | ||||||||||||||
Loss on sale of subsidiary | — | 99 | — | — | 99 | ||||||||||||||
(Gain) loss on sale of equipment | — | (2,384 | ) | 197 | — | (2,187 | ) | ||||||||||||
Depreciation and amortization | — | 44,894 | 4,932 | — | 49,826 | ||||||||||||||
Amortization of deferred financing costs | 1,942 | — | — | — | 1,942 | ||||||||||||||
Deferred income taxes | (2,961 | ) | (1,344 | ) | (159 | ) | — | (4,464 | ) | ||||||||||
Amortization of above market lease | — | (522 | ) | — | — | (522 | ) | ||||||||||||
Impairment of long-lived assets | — | 2,880 | 484 | — | 3,364 | ||||||||||||||
Equity in net earnings of subsidiaries, net of taxes | (25,976 | ) | (4,098 | ) | — | 30,074 | — | ||||||||||||
Changes in assets and liabilities: | |||||||||||||||||||
Accounts receivable | — | (8,685 | ) | (3,083 | ) | — | (11,768 | ) | |||||||||||
Inventories | — | (1,926 | ) | (1 | ) | (1,927 | ) | ||||||||||||
Prepaid expenses and other current assets | (14 | ) | 432 | 139 | — | 557 | |||||||||||||
Accounts payable and other liabilities | 4,446 | (9,914 | ) | (2,499 | ) | — | (7,967 | ) | |||||||||||
Net cash (used in) provided by operating activities | (25,964 | ) | 48,329 | 3,951 | — | 26,316 | |||||||||||||
Investing activities | |||||||||||||||||||
Purchases of property and equipment | — | (22,951 | ) | (6,818 | ) | — | (29,769 | ) | |||||||||||
Proceeds from sale of equipment | — | 2,621 | 442 | — | 3,063 | ||||||||||||||
Proceeds from sale of subsidiary | — | 100 | — | — | 100 | ||||||||||||||
Net cash used in investing activities | — | (20,230 | ) | (6,376 | ) | — | (26,606 | ) | |||||||||||
Financing activities | |||||||||||||||||||
Intercompany investments and loans | 30,803 | (35,586 | ) | 2,498 | 2,285 | — | |||||||||||||
Repayment of long-term debt | (3,122 | ) | — | — | — | (3,122 | ) | ||||||||||||
Return of capital to BakerCorp International Holdings, Inc. | (1,717 | ) | — | — | — | (1,717 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 25,964 | (35,586 | ) | 2,498 | 2,285 | (4,839 | ) | ||||||||||||
Effect of foreign currency translation on cash | — | — | 1,679 | (2,285 | ) | (606 | ) | ||||||||||||
Net (decrease) increase in cash and cash equivalents | — | (7,487 | ) | 1,752 | — | (5,735 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | — | 20,930 | 4,606 | — | 25,536 | ||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 13,443 | $ | 6,358 | $ | — | $ | 19,801 |
(1) | Amounts have been adjusted to reflect the effect of immaterial error corrections. |
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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, 2015. 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 24,500 units, including steel tanks, polyethylene tanks, modular tanks, roll-off boxes, pumps, pipes, hoses and fittings, filtration, tank trailers, berms, and trench shoring equipment.
We serve customers in over 15 industries, including oil and gas, industrial and environmental services, environmental remediation, construction, chemicals, transportation, power, and municipal works. During the nine months ended October 31, 2015, no single customer accounted for more than 10% of our total revenue.
The demand for our services serving the upstream segment of the oil and gas industry, which comprised 13.7% and 16.1% of our total revenue for the three and nine months ended October 31, 2015, respectively, depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile and the substantial reductions in crude oil prices that began in October 2014, and continued into 2015, have resulted in a decline in the level of drilling and production activity, reducing the demand for containment solutions in the basins in which we operate. During the three and nine months ended October 31, 2015, we recorded charges totaling $74.2 million associated with the impairment of a portion of our goodwill and other intangible assets within our North American segment as a result of the sustained decline in oil prices in recent months, together with the projected market expectations of a slow recovery of such
prices, making it more likely than not that the fair value of these assets had decreased below their respective carrying values. A further reduction in crude oil and natural gas prices could lead to continued declines in the level of production activity and demand for our services, which could result in the recognition of additional impairment charges on our goodwill, intangible assets and property and equipment associated with our North American operations.
36
Revenue growth is generated primarily by increasing the efficiency, scope and scale of our rental fleet and related services to meet demand. 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 address increasing demand of our products and services. |
• | Improve the average daily rental rate that we earn from our products and services by acting as a solution provider 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 and invest in additional product lines and service offerings that complement and enhance our current capabilities. |
• | Evaluate and expand our market presence domestically and into new markets internationally. When we expand our market presence, an upfront investment in equipment, facilities, and new staff will be required. 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. |
• | Evaluate the branch and product line structure and profitability to determine whether customers at certain locations may be served in a more profitable manner. |
Geographic Operating Performance
Our branches and employees by reportable segment on October 31, 2015 and October 31, 2014 were the following:
October 31, 2015 | October 31, 2014 | Change | ||||||
Branches: | ||||||||
Number of branches-North American Segment (1) | 52 | 67 | (15 | ) | ||||
Number of branches-European Segment | 11 | 12 | (1 | ) | ||||
Total branches | 63 | 79 | (16 | ) | ||||
Employees: | ||||||||
Number of employees-North American Segment | 879 | 931 | (52 | ) | ||||
Number of employees-European Segment | 115 | 102 | 13 | |||||
Total employees | 994 | 1,033 | (39 | ) |
(1) | Of the total decrease of 15 branches in the North American Segment from 67 as of October 31, 2014 to 52 as of October 31, 2015, 12 branches were consolidated into other branches for reporting purposes and 3 branches were closed. |
Our operations are managed from our corporate headquarters, which is located in Plano, Texas. The majority of our operations, resources, property, and equipment are located in North America, and predominantly in the United States. The United States and Canada comprise our North American segment. We had four branches in Canada on October 31, 2015. Our equipment has the capability to be utilized for multiple applications within North America. We incentivize our local managers to maximize return on assets under their control and 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 October 31, 2015, we had $299.2 million of net property and equipment located in North America.
We serve customers in our European segment from branches located in the Netherlands, Germany, France and the United Kingdom. Our European operations are headquartered in the Netherlands. Our equipment is transferred between European countries to serve customers as demand dictates. On October 31, 2015, we had $46.4 million of net property and equipment located in Europe.
37
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. |
• | Available Rental Fleet – The available rental fleet, as we define it, is the average number of equipment items within our fleet that we individually track. |
Seasonality
Demand from our customers has historically been higher during the second half of our fiscal year compared to the first half of the year. The peak demand period for our products and services typically occurs during the months of August through November. This peak demand period is driven by certain customers that need to complete maintenance work and other specific projects before the onset of colder weather. Because much of our revenue is derived from storing or moving liquids, the impact of weather may hinder the ability of our customers to fully utilize our equipment. This is particularly the case for customers with project locations in regions that are subject to freezing temperatures during winter.
38
Consolidated Condensed Statements of Operations (unaudited)
The following table presents our results for the three and nine months ended October 31, 2015 and October 31, 2014:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | |||||||||||||||||||||||||
(In thousands, except percentages) | Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | Amount | % of Revenue | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Rental revenue | $ | 62,755 | 80.0 | % | $ | 70,791 | 79.7 | % | $ | 187,132 | 79.5 | % | $ | 199,936 | 79.6 | % | ||||||||||||
Sales revenue | 4,252 | 5.4 | % | 6,333 | 7.1 | % | 13,713 | 5.8 | % | 18,146 | 7.2 | % | ||||||||||||||||
Service revenue | 11,473 | 14.6 | % | 11,713 | 13.2 | % | 34,611 | 14.7 | % | 33,070 | 13.2 | % | ||||||||||||||||
Total revenue | 78,480 | 100.0 | % | 88,837 | 100.0 | % | 235,456 | 100.0 | % | 251,152 | 100.0 | % | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Employee related expenses | 25,007 | 31.8 | % | 28,402 | 32.0 | % | 82,473 | 35.0 | % | 83,065 | 33.1 | % | ||||||||||||||||
Rental expenses | 10,544 | 13.4 | % | 11,679 | 13.1 | % | 31,291 | 13.3 | % | 32,586 | 13.0 | % | ||||||||||||||||
Repair and maintenance | 2,964 | 3.8 | % | 3,276 | 3.7 | % | 8,785 | 3.7 | % | 10,571 | 4.2 | % | ||||||||||||||||
Cost of goods sold | 2,691 | 3.4 | % | 3,674 | 4.1 | % | 8,420 | 3.6 | % | 11,182 | 4.5 | % | ||||||||||||||||
Facility expenses | 7,309 | 9.3 | % | 7,319 | 8.2 | % | 21,584 | 9.2 | % | 20,813 | 8.3 | % | ||||||||||||||||
Professional fees | 759 | 1.0 | % | 1,063 | 1.2 | % | 2,454 | 1.1 | % | 3,671 | 1.5 | % | ||||||||||||||||
Management fees | 141 | 0.2 | % | 162 | 0.2 | % | 413 | 0.2 | % | 465 | 0.2 | % | ||||||||||||||||
Other operating expenses | 4,838 | 6.2 | % | 5,525 | 6.2 | % | 12,776 | 5.4 | % | 14,692 | 5.8 | % | ||||||||||||||||
Depreciation and amortization | 15,201 | 19.4 | % | 16,717 | 18.8 | % | 47,919 | 20.4 | % | 49,826 | 19.8 | % | ||||||||||||||||
Gain on sale of equipment | (629 | ) | (0.8 | )% | (1,102 | ) | (1.2 | )% | (1,792 | ) | (0.8 | )% | (2,187 | ) | (0.9 | )% | ||||||||||||
Impairment of goodwill and other intangible assets | 74,248 | 94.6 | % | — | — | % | 74,248 | 31.5 | % | — | — | % | ||||||||||||||||
Impairment of long-lived assets | 2,729 | 3.5 | % | 2,091 | 2.4 | % | 3,048 | 1.3 | % | 3,364 | 1.3 | % | ||||||||||||||||
Total operating expenses | 145,802 | 185.8 | % | 78,806 | 88.7 | % | 291,619 | 123.9 | % | 228,048 | 90.8 | % | ||||||||||||||||
(Loss) income from operations | (67,322 | ) | (85.8 | )% | 10,031 | 11.3 | % | (56,163 | ) | (23.9 | )% | 23,104 | 9.2 | % | ||||||||||||||
Other expense: | ||||||||||||||||||||||||||||
Interest expense, net | 10,584 | 13.5 | % | 10,598 | 11.9 | % | 31,698 | 13.5 | % | 31,808 | 12.7 | % | ||||||||||||||||
Foreign currency exchange loss (gain), net | 352 | 0.4 | % | 394 | 0.5 | % | 68 | — | % | (94 | ) | — | % | |||||||||||||||
Other (income) expense, net | — | — | % | (7 | ) | — | % | — | — | % | 84 | — | % | |||||||||||||||
Total other expenses, net | 10,936 | 13.9 | % | 10,985 | 12.4 | % | 31,766 | 13.5 | % | 31,798 | 12.7 | % | ||||||||||||||||
Loss before income taxes | (78,258 | ) | (99.7 | )% | (954 | ) | (1.1 | )% | (87,929 | ) | (37.4 | )% | (8,694 | ) | (3.5 | )% | ||||||||||||
Income tax benefit | (11,196 | ) | (14.3 | )% | (604 | ) | (0.7 | )% | (14,865 | ) | (6.3 | )% | (5,169 | ) | (2.1 | )% | ||||||||||||
Net loss | $ | (67,062 | ) | (85.4 | )% | $ | (350 | ) | (0.4 | )% | $ | (73,064 | ) | (31.1 | )% | $ | (3,525 | ) | (1.4 | )% |
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Non-U.S. GAAP Financial Measures
The following is a reconciliation of our net loss to EBITDA and Adjusted EBITDA for the three and nine months ended October 31, 2015 and October 31, 2014:
Three Months Ended | Nine Months Ended | ||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | |||||||||||
Net loss | $ | (67,062 | ) | $ | (350 | ) | $ | (73,064 | ) | $ | (3,525 | ) | |||
Interest expense, net | 10,584 | 10,598 | 31,698 | 31,808 | |||||||||||
Income tax benefit | (11,196 | ) | (604 | ) | (14,865 | ) | (5,169 | ) | |||||||
Depreciation and amortization | 15,201 | 16,717 | 47,919 | 49,826 | |||||||||||
EBITDA | $ | (52,473 | ) | $ | 26,361 | $ | (8,312 | ) | $ | 72,940 | |||||
Foreign currency exchange loss (gain), net | 352 | 394 | 68 | (94 | ) | ||||||||||
Financing related costs | 2 | 32 | 53 | 110 | |||||||||||
Severance related costs | 37 | 101 | 749 | 696 | |||||||||||
Sponsor management fees | 141 | 162 | 413 | 465 | |||||||||||
Share-based compensation (income) expense | (219 | ) | 1,580 | 298 | 2,218 | ||||||||||
Impairment of goodwill and other intangible assets | 74,248 | — | 74,248 | — | |||||||||||
Impairment of long-lived assets | 2,729 | 2,091 | 3,048 | 3,364 | |||||||||||
Branch closure and consolidation costs | 106 | — | 614 | — | |||||||||||
Software license and other fees related to impaired asset | 557 | — | 917 | — | |||||||||||
Other | 327 | 608 | 1,048 | 1,374 | |||||||||||
Adjusted EBITDA (1)(2) | $ | 25,807 | $ | 31,329 | $ | 73,144 | $ | 81,073 | |||||||
Adjusted EBITDA margin | 32.9 | % | 35.3 | % | 31.1 | % | 32.3 | % |
(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. |
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Results of Operations
Three Months Ended - October 31, 2015 compared to October 31, 2014
Three Months Ended | ||||||||||||||
(In thousands, except Operating Data) | October 31, 2015 | October 31, 2014 | $ Change | % Change | ||||||||||
North America | ||||||||||||||
Rental revenue | $ | 55,800 | $ | 62,764 | $ | (6,964 | ) | (11.1 | )% | |||||
Sales revenue | 4,252 | 6,332 | (2,080 | ) | (32.8 | )% | ||||||||
Service revenue | 10,735 | 11,046 | (311 | ) | (2.8 | )% | ||||||||
Total North America revenue | 70,787 | 80,142 | (9,355 | ) | (11.7 | )% | ||||||||
Europe | ||||||||||||||
Rental revenue | 6,955 | 8,027 | (1,072 | ) | (13.4 | )% | ||||||||
Sales revenue | — | 1 | (1 | ) | (100.0 | )% | ||||||||
Service revenue | 738 | 667 | 71 | 10.6 | % | |||||||||
Total European revenue | 7,693 | 8,695 | (1,002 | ) | (11.5 | )% | ||||||||
Total Consolidated Revenue | $ | 78,480 | $ | 88,837 | $ | (10,357 | ) | (11.7 | )% | |||||
Operating Data: | ||||||||||||||
North America | ||||||||||||||
Average utilization (1) | 54.1 | % | 58.3 | % | (420 | ) bps | ||||||||
Average daily rental rate (2) | $ | 31.73 | $ | 32.55 | $ | (0.82 | ) | (2.5 | )% | |||||
Average number of rental units | 23,370 | 24,347 | (977) | (4.0 | )% | |||||||||
Europe | ||||||||||||||
Average utilization (1) | 41.9 | % | 48.2 | % | (630 | ) bps | ||||||||
Average daily rental rate (2) | $ | 93.86 | $ | 103.39 | $ | (9.53 | ) | (9.2 | )% | |||||
Average number of rental units | 1,374 | 1,267 | 107 | 8.4 | % | |||||||||
Consolidated | ||||||||||||||
Average utilization (1) | 53.4 | % | 57.8 | % | (440 | ) bps | ||||||||
Average daily rental rate (2) | $ | 34.42 | $ | 35.51 | $ | (1.09 | ) | (3.1 | )% | |||||
Average number of rental units | 24,743 | 25,614 | (871) | (3.4 | )% |
(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. |
Revenue
Consolidated Revenue
Total revenue decreased $10.4 million, or 11.7% from $88.8 million during the three months ended October 31, 2014 to $78.5 million during the three months ended October 31, 2015. Revenue from oil and gas customers decreased by $7.3 million, or 40.4%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Consolidated revenue, excluding oil and gas customers, decreased by $3.1 million, or 4.4%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014 due to decreases in revenue related to our maintenance and construction customers, partially offset by an increase in revenue related to our environmental customers.
Since late 2014, oil and gas prices have declined significantly to their lowest levels since 2009. As a result of the reduced price of oil and gas and the subsequent downturn in the oil and gas industry, we have experienced a decline in demand and pricing for our services. The decrease in demand for our services continued through the three months ended October 31, 2015.
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Revenue by reportable segment for three months ended October 31, 2015 is discussed in detail below.
North America
Our North American segment revenue decreased $9.4 million, or 11.7%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Revenue from oil and gas customers decreased by $6.8 million, or 39.8%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014.
Revenue, excluding oil and gas customers, decreased by $2.6 million, or 4.1%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014 due to decreases in revenue related to our maintenance and construction customers, partially offset by an increase in revenue related to our environmental customers.
Rental Revenue
Rental revenue decreased $7.0 million, or 11.1%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. The decrease in rental revenue was primarily driven by a 2.5% decrease in average daily rental rate, a 4.0% decrease in the average number of rental units, a 420 basis point decrease in average utilization, and a $0.3 million decrease in re-rent revenue. The decrease in the average daily rate was negatively impacted in part from a higher portion of our rental revenue being driven by equipment with lower rental rates. The average number of rental units decreased by 977 units, or 4.0%, to 23,370 units during the three months ended October 31, 2015 from 24,347 units during the three months ended October 31, 2014 primarily due to a decrease in our capital expenditures. During the twelve months ended October 31, 2015, we made $24.7 million of capital expenditures in our North American Segment, compared to $42.9 million in the prior fiscal period.
Sales Revenue
Sales revenue decreased by $2.1 million, or 32.8%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014 as a result of decreased sales of pumps and filtration media.
Service Revenue
Service revenue decreased by $0.3 million, or 2.8%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. The decrease in service revenue was primarily driven by a decrease in hauling services performed in conjunction with steel tank-related projects.
Europe
Total revenue from our European segment decreased by $1.0 million, or 11.5%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Excluding a $1.1 million unfavorable impact on revenue as a result of the dollar strengthening against the Euro and the British Pound Sterling, revenue from our European segment increased by $0.1 million, or 1.1%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014.
Rental Revenue
Rental revenue decreased by $1.1 million, or 13.4%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Excluding a $1.0 million unfavorable impact on revenue as a result of the dollar strengthening against the Euro and the British Pound Sterling, rental revenue from our European segment decreased by $0.1 million, or 0.9%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Excluding the impact of the change in foreign currency translation rates, the decrease in rental revenue was primarily due to a 630 basis point decrease in average utilization, partially offset by the impact from a 8.4% increase in the average number of rental units and a 4.8% increase in the average daily rate. The decrease in average utilization was driven by the increase in the number of rental units. The available number of rental units increased by 107 units to 1,374 units during the three months ended October 31, 2015 from 1,267 units during the three months ended October 31, 2014, as we continue to invest capital to improve market penetration. The increase in the average daily rate was primarily due to product mix.
Sales Revenue
Sales revenue for Europe was not significant in either period.
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Service Revenue
Service revenue for Europe increased $0.1 million, or 10.6%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. The increase in service revenue was primarily due to an increase in hauling services performed in conjunction with steel tank-related projects.
Operating Expenses
Consolidated Operating Expenses
Total operating expenses during the three months ended October 31, 2015 increased by $67.0 million, or 85.0%, compared to the three months ended October 31, 2014. Excluding the impact of goodwill and other intangible asset impairment charges, total operating expenses during the three months ended October 31, 2015 decreased by $7.3 million, or 9.2%, compared to the three months ended October 31, 2014. Excluding the impact of goodwill and other intangible asset impairment charges, the decrease was primarily attributable to decreased operating expenses of $6.8 million, or 9.3%, in North America. Operating expenses in the European segment decreased by $0.5 million, or 9.0%, compared to the three months ended October 31, 2014. 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 October 31, 2015 were $140.3 million, an increase of $67.5 million, or 92.8%, compared to the three months ended October 31, 2014. The increase was primarily attributable to the following:
• | $74.2 million of goodwill and other intangible asset impairment charges recorded during the three months ended October 31, 2015 in connection with our October 1, 2015 interim impairment test. See Note 6, “Goodwill and Other Intangible Assets, Net” of the notes to the consolidated condensed financial statements for further information. |
• | $0.6 million increase as a result of impairment of long-lived assets. During the three months ended October 31, 2014, we determined that the decline in the estimated fair value of our stock was a potential indicator of impairment of our long-lived assets. As a result, we assessed our long-lived assets for impairment and wrote down certain assets by $2.1 million to their estimated fair value. During the three months ended October 31, 2015, we determined that limited sales volume for certain aged property and equipment was a potential indicator of impairment of the assets. As a result, we assessed the assets for impairment and wrote down certain assets by $2.7 million to their estimated fair value. See Note 5, “Property and Equipment, Net” of the notes to the consolidated condensed financial statements for further information. |
The increases in operating expenses detailed above were partially offset by the following:
• | $3.4 million decrease in employee related expenses primarily due to a $1.9 million decrease in payroll and payroll-related costs, a $1.8 million decrease in share-based compensation expense and a $0.2 million decrease in temporary labor costs, partially offset by a $0.4 million increase in bonus expense. The decrease in payroll and payroll-related costs was primarily driven by a 5.6% decrease in headcount from 931 as of October 31, 2014 to 879 as of October 31, 2015 and corporate cost reduction programs impacting certain employee benefits and overtime pay. The decrease in share-based compensation expense was primarily due to a $1.3 million decrease in expense related to the remeasurement of our stock options accounted for as liability awards and a $0.5 million decrease in expense due to the impact of forfeitures and cancellations of stock options from employee terminations. The decrease in temporary labor costs was primarily due to decreases in project staffing requirements. The increase in bonus expense was the result of our operating results, which were closer to plan. |
• | $1.2 million decrease within rental expense due to a $0.8 million decrease in fuel expense and a $0.3 million decrease in re-rent expense driven by lower re-rent revenue. |
• | $1.0 million decrease in cost of goods sold driven by the decrease in sales revenue. |
• | $0.5 million decrease in other operating expenses primarily due to reductions in travel, relocation and various other expenses of $0.3 million, $0.2 million and $0.9 million, respectively, partially offset by an increase in bad debt expense of $0.9 million. The decrease in travel expense was due to the impact of cost reduction programs during the three months ended October 31, 2015. Relocation expenses decreased due to the move of our corporate office from California to Texas in the prior fiscal period. Bad debt expense increased primarily due to an increase in the reserve for receivables during the three months ended October 31, 2015. The impact from the specific reserve was partially offset by the overall improved collection of receivables during the three months ended October 31, 2015, compared to the prior fiscal period. |
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• | $1.2 million decrease in depreciation and amortization as we decreased our investment in new rental fleet during the prior twelve months as part of management’s initiative to increase utilization of existing fleet. |
Europe
Operating expenses for the European segment during the three months ended October 31, 2015 were $5.5 million, a decrease of $0.5 million, or 9.0%, compared to the three months ended October 31, 2014. Excluding a $0.9 million favorable impact on operating expenses as a result of the dollar strengthening against the Euro and the British Pound Sterling, operating expenses from our European segment increased by $0.4 million, or 6.3%, during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. Excluding the impact of the change in foreign currency translation rates, the increase in operating expenses was primarily due to an increase of $0.4 million in employee related expenses. Employee related expenses increased primarily due to higher payroll and payroll-related costs driven by an increase in headcount of 13 employees, or 12.7%, from 102 employees on October 31, 2014 to 115 employees on October 31, 2015.
Other Expenses, Net
Consolidated
Other expenses, net decreased slightly during the three months ended October 31, 2015 compared to the three months ended October 31, 2014. As a result, other expenses, net did not contribute significantly to the change in our consolidated net loss.
Income Tax Benefit
Income tax benefit during the three months ended October 31, 2015 increased by $10.6 million to $11.2 million from $0.6 million during the three months ended October 31, 2014. The tax benefit increase was primarily due to an increase in book losses, partially offset by an impairment of non-deductible goodwill recorded during the three months ended October 31, 2015.
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Results of Operations
Nine Months Ended - October 31, 2015 compared to October 31, 2014
Nine Months Ended | ||||||||||||||
(In thousands, except Operating Data) | October 31, 2015 | October 31, 2014 | $ Change | % Change | ||||||||||
North America | ||||||||||||||
Rental revenue | $ | 165,567 | $ | 176,656 | $ | (11,089 | ) | (6.3 | )% | |||||
Sales revenue | 13,706 | 18,143 | (4,437 | ) | (24.5 | )% | ||||||||
Service revenue | 32,560 | 31,012 | 1,548 | 5.0 | % | |||||||||
Total North America revenue | 211,833 | 225,811 | (13,978 | ) | (6.2 | )% | ||||||||
Europe | ||||||||||||||
Rental revenue | 21,565 | 23,280 | (1,715 | ) | (7.4 | )% | ||||||||
Sales revenue | 7 | 3 | 4 | 133.3 | % | |||||||||
Service revenue | 2,051 | 2,058 | (7 | ) | (0.3 | )% | ||||||||
Total European revenue | 23,623 | 25,341 | (1,718 | ) | (6.8 | )% | ||||||||
Total Consolidated Revenue | $ | 235,456 | $ | 251,152 | $ | (15,696 | ) | (6.2 | )% | |||||
Operating Data: | ||||||||||||||
North America | ||||||||||||||
Average utilization (1) | 54.1 | % | 56.0 | % | (190 | ) bps | ||||||||
Average daily rental rate (2) | $ | 31.78 | $ | 33.50 | $ | (1.72 | ) | (5.1 | )% | |||||
Average number of rental units | 23,938 | 23,984 | (46) | (0.2 | )% | |||||||||
Europe | ||||||||||||||
Average utilization (1) | 43.7 | % | 45.9 | % | (220 | ) bps | ||||||||
Average daily rental rate (2) | $ | 91.58 | $ | 113.04 | $ | (21.46 | ) | (19.0 | )% | |||||
Average number of rental units | 1,341 | 1,245 | 96 | 7.7 | % | |||||||||
Consolidated | ||||||||||||||
Average utilization (1) | 53.5 | % | 55.5 | % | (200 | ) bps | ||||||||
Average daily rental rate (2) | $ | 34.43 | $ | 36.78 | $ | (2.35 | ) | (6.4 | )% | |||||
Average number of rental units | 25,279 | 25,228 | 51 | 0.2 | % |
(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. |
Revenue
Consolidated Revenue
Total revenue decreased $15.7 million, or 6.2% from $251.2 million during the nine months ended October 31, 2014 to $235.5 million during the nine months ended October 31, 2015. Revenue from oil and gas customers decreased by $12.5 million, or 24.9%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Consolidated revenue, excluding oil and gas customers, decreased by $3.2 million, or 1.6%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. The net decrease in consolidated revenue, excluding oil and gas customers, was due to decreases in revenue related to our maintenance and construction customers, partially offset by an increase in revenue related to our environmental customers.
Revenue by reportable segment for nine months ended October 31, 2015 is discussed in detail below.
45
North America
Our North American segment revenue decreased $14.0 million, or 6.2%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Revenue from oil and gas customers decreased by $11.8 million, or 24.7%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Revenue, excluding oil and gas customers, decreased by $2.2 million, or 1.2%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014 due to a decrease in revenue related to our maintenance and construction customers, partially offset an increase in revenue related to our environmental customers.
Rental Revenue
Rental revenue decreased $11.1 million, or 6.3%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. The decrease in rental revenue was primarily driven by a 5.1% decrease in average daily rental rate, a 0.2% decrease in the average number of rental units, and a 190 basis point decrease in average utilization, partially offset by a $2.0 million increase in re-rent revenue. The decrease in the average daily rate was negatively impacted in part from a higher portion of our rental revenue being driven by equipment with lower rental rates. The average number of rental units decreased 46 units, or 0.2%, to 23,938 units during the nine months ended October 31, 2015 from 23,984 units during the nine months ended October 31, 2014 primarily due to a decrease in our capital expenditures. During the twelve months ended October 31, 2015, we made $24.7 million of capital expenditures in our North American Segment, compared to $42.9 million in the prior fiscal period.
Sales Revenue
Sales revenue decreased by $4.4 million, or 24.5%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014 as a result of decreases in pumps and filtration media sales.
Service Revenue
Service revenue increased by $1.5 million, or 5.0%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. The increase in service revenue was primarily driven by an increase in labor and other services performed in conjunction with pump-related projects, partially offset by a decrease in hauling services performed in conjunction with steel tank-related projects.
Europe
Total revenue from our European segment decreased by $1.7 million, or 6.8%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Excluding a $4.6 million unfavorable impact on revenue as a result of the dollar strengthening against the Euro and the British Pound Sterling, revenue from our European segment increased by $2.9 million, or 11.4%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014.
Rental Revenue
Rental revenue decreased by $1.7 million, or 7.4%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Excluding a $4.2 million unfavorable impact on revenue as a result of the dollar strengthening against the Euro and the British Pound Sterling, rental revenue from our European segment increased by $2.5 million, or 10.7%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Excluding the impact of the change in foreign currency translation rates, the increase in rental revenue was primarily due to a 7.7% increase in the average number of rental units, partially offset by a 1.9% decrease in the average daily rate and a 220 basis point decrease in average utilization. The average number of rental units increased by 96 units to 1,341 units during the nine months ended October 31, 2015 from 1,245 units during the nine months ended October 31, 2014, as we continue to invest capital to improve market penetration. We made $3.8 million of capital expenditures in our European Segment during the twelve months ended October 31, 2015. The decrease in the average daily rate was primarily due to product mix as well as rate pressure from smaller, regional competitors. The decrease in average utilization was driven by the increase in the number of rental units.
Sales Revenue
Sales revenue for Europe increased slightly during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. 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 decreased slightly during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. 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 nine months ended October 31, 2015 increased by $63.6 million, or 27.9%, compared to the nine months ended October 31, 2014. Excluding the impact of goodwill and other intangible asset impairment charges, total operating expenses during the nine months ended October 31, 2015 decreased by $10.7 million, or 4.7%, compared to the nine months ended October 31, 2014. Excluding the impact of goodwill and other intangible asset impairment charges, the decrease was primarily attributable to decreased operating expenses of $9.5 million, or 4.5%, in North America. Operating expenses in the European segment decreased by $1.2 million, or 6.6%, compared to the nine months ended October 31, 2014. The North American and European segments do not include an allocation of all inter-segment expenses.
North America
Total operating expenses during the nine months ended October 31, 2015 were $275.2 million, an increase of $64.7 million, or 30.7%, compared to the nine months ended October 31, 2014. The increase was primarily attributable to the following:
• | $74.2 million of goodwill and other intangible asset impairment charges recorded during the nine months ended October 31, 2015 in connection with our October 1, 2015 interim impairment test. See Note 6, “Goodwill and Other Intangible Assets, Net” of the notes to the consolidated condensed financial statements for further information. |
• | $1.1 million increase in facility expenses primarily due to increases in data processing and rent of $0.7 million and $0.5 million, respectively. The increase in data processing expense was primarily due to contract settlement costs related to a maintenance and license agreement for an internally developed software that we discontinued using during the current fiscal period. See Note 5, “Property and Equipment, Net” of the notes to the consolidated condensed financial statements for further information. The increase in rent expense was primarily attributable to increased rental rates for various branches. |
• | $0.7 million decrease in gain on sale of equipment due to higher sales of equipment in the prior fiscal period. |
The increases in operating expenses detailed above were partially offset by the following:
• | $0.8 million decrease in employee related expenses primarily due to a $1.9 million decrease in share-based compensation expense and a $0.5 million decrease in payroll and payroll-related costs, partially offset by a $1.1 million increase in bonus expense and a $0.6 million increase in insurance expense. The decrease in share-based compensation expense was primarily due to a $1.3 million decrease in expense related to the remeasurement of our stock options accounted for as liability awards and a $0.6 million decrease in expense due to the impact of forfeitures and cancellations of stock options from employee terminations during the nine months ended October 31, 2015. The decrease in payroll and payroll-related costs was driven primarily by the impact of corporate cost reduction programs which affected certain employee benefits and overtime pay, partially offset by an increase in average headcount of 18 additional employees, or 2.0%, from 902 employees during the nine months ended October 31, 2014 to 920 employees during the nine months ended October 31, 2015. The increase in bonus expense was the result of our operating results, which were closer to plan. The increase in insurance expense was driven by higher costs due to a change from self-insured to fully-insured health plans on July 1, 2014 and the associated premium increase. We reverted to a self-insured employee medical program effective July 1, 2015. |
• | $1.5 million decrease within rental expense due to a $2.1 million decrease in fuel expense, partially offset by a $0.7 million increase in the rental of equipment used in the field. |
• | $1.7 million decrease in repair and maintenance expenses primarily due to the reduction of refurbishment efforts for certain aged equipment during the nine months ended October 31, 2015. |
• | $2.8 million decrease in cost of goods sold driven by the decrease in sales revenue. |
• | $1.3 million decrease in professional and legal fees as a result of the resolution of several legal matters during fiscal year 2015 and lower consulting costs. |
47
• | $1.7 million decrease in other operating expenses primarily due to decreases of $0.7 million in advertising expense, $0.7 million in travel expense, $0.3 million in recruitment expenses, $0.2 million in relocation expenses, and various other expenses of $1.1 million, partially offset by a $1.3 million increase in bad debt expense. The decrease in advertising expense was driven by reduced advertising and trade show costs. The decrease in travel expense was due to the impact of cost reduction programs during the nine months ended October 31, 2015. The decrease in recruitment expenses was due to higher search fees incurred to fill certain key management positions during the prior fiscal period. Relocation expenses decreased due to the move of our corporate office from California to Texas in the prior fiscal period. Bad debt expense increased primarily due to an increase in the reserve for receivables during the nine months ended October 31, 2015. |
• | $1.3 million decrease in depreciation and amortization as we decreased our investment in new rental fleet during the prior twelve months as part of management’s initiative to increase utilization of existing fleet. |
Europe
Operating expenses for the European segment during the nine months ended October 31, 2015 were $16.4 million, a decrease of $1.2 million, or 6.6%, compared to the nine months ended October 31, 2014. Excluding a $3.4 million favorable impact on operating expenses as a result of the dollar strengthening against the Euro and the British Pound Sterling, operating expenses from our European segment increased by $2.2 million, or 12.6%, during the nine months ended October 31, 2015 compared to the nine months ended October 31, 2014. Excluding the impact of the change in foreign currency translation rates, the increase in operating expenses was primarily due to increases of $1.7 million and $0.6 million in employee related expenses and rental expenses, respectively. Employee related expenses increased primarily due to a $1.5 million increase in payroll and payroll-related costs and a $0.3 million increase in bonus expense. The increase in payroll and payroll-related costs was driven by an increase in average headcount of 22 employees, or 24.4%, from 90 employees during the nine months October 31, 2014 to 112 employees during the nine months ended October 31, 2015. The increase in bonus expense was due to our operating results, which were closer to plan. Rental expenses increased due to an increase in rental activity.
Other Expenses, Net
Consolidated
Other expenses, net decreased slightly during the nine months ended October 31, 2015. As a result, other expenses, net did not contribute significant to the change in our consolidated net loss.
Income Tax Benefit
Income tax benefit during the nine months ended October 31, 2015 increased by $9.7 million to $14.9 million from $5.2 million during the nine months ended October 31, 2014. The tax benefit increase was primarily due to an increase in book losses and discrete items primarily related to a tax benefit for bad debt impairment recorded during the nine months ended October 31, 2014 and impairment of non-deductible goodwill recorded during the nine months ended October 31, 2015.
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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 October 31, 2015 and January 31, 2015, our cash and cash equivalents by geography were the following:
(In thousands) | October 31, 2015 | January 31, 2015 | $ Change | % Change | ||||||||||
United States | $ | 30,537 | $ | 14,407 | $ | 16,130 | 112.0 | % | ||||||
Europe | 9,397 | 3,482 | 5,915 | 169.9 | % | |||||||||
Canada | 1,152 | 776 | 376 | 48.5 | % | |||||||||
Total cash and cash equivalents | $ | 41,086 | $ | 18,665 | $ | 22,421 | 120.1 | % |
Our cash held outside the United States may be repatriated to the United States but, under current law, may be subject to United States federal income taxes, less applicable foreign tax credits. We do not plan to repatriate cash balances from our foreign subsidiaries to fund our operations within the United States. We have not provided for the United States federal tax liability on these amounts as this cash is considered permanently reinvested outside of the United States. We utilize a variety of 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 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 our 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
On June 1, 2011, we (i) entered into a $435.0 million senior secured credit facility (the “Credit Facility”), consisting of a $390.0 million term loan facility (the “Senior Term Loan”) and a $45.0 million revolving credit facility (the “Revolving Credit Facility”) ($45.0 million available on October 31, 2015) and (ii) issued $240.0 million in aggregate principal amount of senior unsecured notes due 2019 (the “Notes”). (Refer to Note 9, “Debt” of the notes to the consolidated condensed financial statements for further details.)
Credit Facility
On February 7, 2013, we entered into a first amendment to our Credit Facility (the “First Amendment”), to refinance our Credit Facility. Pursuant to the First Amendment, we borrowed $384.2 million of term loans (the “Amended Senior Term Loan”) to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Amended Senior Term Loan is not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to the Company’s ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to the Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term 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 term loans under the Credit Facility.
The Credit Facility, as 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.
Under the Credit Facility, we may be required to satisfy and maintain a total leverage ratio not in excess of the leverage ratio 6.00:1.00. if there is an outstanding balance on the Revolving Credit Facility of 25% or more of the committed amount on any quarter end.
The total leverage ratio is calculated as our net debt (total debt less cash and cash equivalents) divided by our trailing twelve months’ adjusted EBITDA.
On October 31, 2015, we did not have an outstanding balance on the Revolving Credit Facility; therefore, on October 31, 2015, we were not subject to a leverage test. Additionally, on October 31, 2015, we were in compliance with all of our requirements and covenant tests under the Credit Facility.
The Credit Facility, as 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 Credit Facility also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds.
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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 $0.6 million and $0.7 million of deferred financing costs during three months ended October 31, 2015 and October 31, 2014, respectively, and $2.0 million and $1.9 million during the nine months ended October 31, 2015 and October 31, 2014, respectively.
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 | Nine Months Ended | |||||||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | October 31, 2015 | October 31, 2014 | ||||||||||||
Credit Facility interest and fees(1) | $ | 4,845 | $ | 4,928 | $ | 14,496 | $ | 13,131 | ||||||||
Notes interest and fees (2) | 5,253 | 5,227 | 15,739 | 17,180 | ||||||||||||
Total interest and fees | $ | 10,098 | $ | 10,155 | $ | 30,235 | $ | 30,311 |
(1) | Interest on the Amended 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%. |
Principal Payments on Debt
On October 31, 2015, the schedule of minimum required principal payments relating to the Credit Facility 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, 2016 | $ | 1,040 | |
2017 | 4,163 | ||
2018 | 4,163 | ||
2019 | 4,163 | ||
2020 | 634,414 | ||
Total | $ | 647,943 |
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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:
Nine Months Ended October 31, 2015 | |||||||||||
(In thousands) | October 31, 2015 | October 31, 2014 | $ Change | ||||||||
Net loss | $ | (73,064 | ) | $ | (3,525 | ) | $ | (69,539 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Provision for doubtful accounts | 2,071 | 686 | 1,385 | ||||||||
Provision for excess and obsolete inventory, net | 15 | (16 | ) | 31 | |||||||
Share-based compensation expense | 298 | 2,218 | (1,920 | ) | |||||||
Loss on sale of subsidiary | — | 99 | (99 | ) | |||||||
Gain on sale of equipment | (1,792 | ) | (2,187 | ) | 395 | ||||||
Depreciation and amortization | 47,919 | 49,826 | (1,907 | ) | |||||||
Amortization of deferred financing costs | 2,048 | 1,942 | 106 | ||||||||
Deferred income taxes | (13,692 | ) | (4,464 | ) | (9,228 | ) | |||||
Amortization of above-market lease | (286 | ) | (522 | ) | 236 | ||||||
Impairment of goodwill and other intangible assets | 74,248 | — | 74,248 | ||||||||
Impairment of long-lived assets | 3,048 | 3,364 | (316 | ) | |||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable | 881 | (11,768 | ) | 12,649 | |||||||
Inventories | (1,023 | ) | (1,927 | ) | 904 | ||||||
Prepaid expenses and other assets | 454 | 557 | (103 | ) | |||||||
Accounts payable and other liabilities | 260 | (7,967 | ) | 8,227 | |||||||
Cash provided by operating activities | 41,385 | 26,316 | 15,069 | ||||||||
Cash used in investing activities | (15,548 | ) | (26,606 | ) | 11,058 | ||||||
Cash used in financing activities | (3,248 | ) | (4,839 | ) | 1,591 | ||||||
Effect of foreign currency translation on cash | (168 | ) | (606 | ) | 438 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 22,421 | $ | (5,735 | ) | $ | 28,156 |
Cash Provided by Operating Activities
Cash flow from operations during the nine months ended October 31, 2015 totaled $41.4 million, an increase of $15.1 million compared to the nine months ended October 31, 2014. This increase was primarily related to the following:
• | The change in accounts receivable resulted in a $12.6 million increase to cash provided by operating activities primarily due to an increase in accounts receivable due to higher sales during the prior fiscal period and slower collections. Our days-sales outstanding during the three months ended October 31, 2015 and October 31, 2014, were 79.2 and 77.9, respectively. |
• | The change in accounts payable and other liabilities resulted in a $8.2 million increase to cash provided by operating activities primarily due to reduced capital expenditures compared to the prior fiscal period. |
• | The change in inventories resulted in a $0.9 million increase to cash provided by operating activities as total inventories increased 33.8% during the nine months ended October 31, 2014, primarily as a result of the ramp-up in production activity following the acquisition of Kaselco during the fourth quarter of fiscal year 2014. |
• | The impairment of goodwill and other intangible assets resulted in a $74.2 million increase. See Note 6, “Goodwill and Other Intangible Assets, Net” of the notes to the consolidated condensed financial statements for further information. |
• | The change in the provision for doubtful accounts resulted in a $1.4 million primarily due to an increase in reserve for receivables during the three months ended October 31, 2015. |
• | The change in gain on sale of equipment resulted in a $0.4 million increase due to higher sales of equipment in the prior fiscal period. |
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The increases above were partially offset by the following:
• | Net loss increased $69.5 million from a net loss of $3.5 million during the nine months ended October 31, 2014 to a net loss of $73.1 million during the nine months ended October 31, 2015. |
• | The change in share-based compensation expense resulted in a $1.9 million decrease, primarily due to to a $1.3 million decrease in expense related to the remeasurement of our stock options accounted for as liability awards and a $0.6 million decrease in expense due to the impact of forfeitures and cancellations of stock options from employee terminations during the nine months ended October 31, 2015. |
• | The change in depreciation and amortization resulted in a $1.9 million decrease, primarily due to a decrease in our investment in rental fleet during the prior twelve months. |
• | The change in deferred income taxes resulted in a $9.2 million decrease to cash provided by operating activities. |
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 $18.4 million and $29.8 million during the nine months ended October 31, 2015 and October 31, 2014, respectively. Proceeds from equipment sales totaled $2.9 million and $3.1 million during the nine months ended October 31, 2015 and October 31, 2014, respectively. The decrease in capital expenditures was due to management’s initiative to increase utilization of existing fleet. 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 nine months ended October 31, 2015 increased $1.6 million compared to the nine months ended October 31, 2014 primarily due to fewer stock option exercises. We returned $1.7 million of capital to BakerCorp International Holdings, Inc. for stock options exercised during the nine months ended October 31, 2014 compared to $0.1 million during the nine months ended October 31, 2015.
Effect of Exchange Rate Changes on Cash
The effect of foreign currency translation on cash resulted in decreases of $0.2 million and $0.6 million to cash and cash equivalents during the nine months ended October 31, 2015 and the nine months ended October 31, 2014, respectively. The Euro/USD, the British Pound Sterling/USD and Canadian dollar/USD spot rates decreased from 1.252, 1.599, and 0.887, respectively, on October 31, 2014 to 1.102, 1.534, and 0.759, respectively, on October 31, 2015.
Hedging Activities
We use interest rate swap agreements to effectively convert a portion of our debt with variable interest rates into a fixed interest rate obligation. Under our interest rate swap agreements, we typically agree to pay the counterparty a fixed interest rate in exchange for receiving interest payments based on an interest rate that will vary similarly to the rate on the debt that we are attempting to hedge. We have historically conducted our swaps with large well-capitalized counterparties whom we determined to be creditworthy.
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.
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On October 31, 2015, there were seven swap agreements with a total notional amount of $214.0 million outstanding, six with a five-year term and a notional value totaling $150.0 million with a fixed rate of 2.35%, and one with a three-year term and a notional amount totaling $64.0 million with a fixed rate of 1.64%. On October 31, 2015 and January 31, 2015, the liability recorded related to interest rate swaps was $1.4 million and $2.7 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 2015 Annual Report.
Off-Balance Sheet Arrangements
On October 31, 2015, 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.
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, judgments and assumptions, including those related to revenue recognition, allowances for doubtful accounts, warranties, inventory valuation, customer rebates, sales allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, income taxes, share-based compensation (expense and liability), and derivatives. We believe our estimates, judgments and assumptions are reasonable; however, actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the nine months ended October 31, 2015 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, 2015.
Recent Accounting Pronouncements
Refer to Note 2, “Accounting Pronouncements” of the notes to the consolidated condensed financial statements for a discussion of new accounting guidance.
Forward-Looking Statements
This quarterly report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our expectations, beliefs, and projections are expressed in good faith, and we believe we have a reasonable basis to make these statements through our management’s examination of historical operating trends, data contained in our records, and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs, or projections will be achieved.
The discussions of our financial condition and results of operations may include various forward-looking statements about future costs and prices of commodities, production volumes, industry trends, demand for our products and services, and projected results of operations and our projected capital resources and liquidity. Statements that are not historical in nature are considered to be forward-looking statements. They include statements regarding our expectations, hopes, beliefs, estimates, intentions, or strategies regarding the future. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to,” and similar expressions are intended to identify forward-looking statements.
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The forward-looking statements set forth in this quarterly report regarding, among other things, achievement of revenue, profitability and net income in future quarters, future prices and demand for our products and services, estimated fair value for purposes of write-down of goodwill, and estimated cash flows and sufficiency of cash flows to fund capital expenditures, reflect only our expectations regarding these matters. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following.
• | Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations. |
• | Our debt agreements contain restrictions that limit our flexibility in operating our business. |
• | Our business is subject to the general health of the economy, and accordingly any slowdown in the current economy or decrease in general economic activity could materially adversely affect our revenue and operating results. |
• | Continuing or sustained decline in oil prices and/or natural gas prices at or below current levels could have a negative impact on our operating results. |
• | Ongoing government review of hydraulic fracturing and its environmental impact could lead to changes to this activity or its substantial curtailment, which could materially adversely affect our revenue and results of operations. |
• | We intend to expand our business into new geographic markets, and this expansion may be costly and may not be successful. |
• | Our growth strategy includes evaluating selective acquisitions, which entails certain risks to our business and financial performance. |
• | We intend to expand into new product lines, which may be costly and may not ultimately be successful. |
• | We depend on our suppliers for the equipment we rent to customers. |
• | As our rental equipment ages, we may face increased costs to maintain, repair, and replace that equipment and new equipment could become more expensive. |
• | The short term nature of our rental arrangements exposes us to redeployment risks and means that we could experience rapid fluctuations in revenue in response to market conditions. |
• | Our customers may decide to begin providing their own liquid and solid containment solutions rather than sourcing those products from us. |
• | Our industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in the prices that we may charge. |
• | We lease all of our branch locations, and accordingly are subject to the risk of substantial changes to the real estate rental markets and our relationships with our landlords. |
• | Our business is subject to numerous environmental and safety regulations. If we are required to incur significant compliance or remediation costs, our liquidity and operating results could be materially adversely affected. |
• | Changes in the many laws and regulations to which we are subject in the United States, Europe and Canada, or our failure to comply with them, could materially adversely affect our business. |
• | We have operations outside the United States. As a result, we may incur losses from currency fluctuations. |
• | Turnover of our management and our ability to attract and retain other key personnel may affect our ability to efficiently manage our business and execute our strategy. |
• | If our employees should unionize, this could impact our costs and ability to administer our business. |
• | We are exposed to a variety of claims relating to our business, and our insurance may not fully cover them. |
• | Disruptions in our information technology systems could materially adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and provide effective services to our customers. |
• | Fluctuations in fuel costs or reduced supplies of fuel could harm our business. |
• | If we are unable to collect on contracts with customers, our operating results would be materially adversely affected. |
• | Climate change, climate change regulations, and greenhouse effects may materially adversely impact our operations and markets. |
• | Existing trucking regulations and changes in trucking regulations may increase our costs and negatively impact our results of operations. |
• | We may be required to recognize additional impairment charges in the future which could have an adverse effect on our financial condition and results of operations. |
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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, and operations in the United Kingdom are denominated in the British Pound Sterling. Likewise, we pay our expenses in the local currencies, described above, in the areas in which we operate. We are exposed to foreign exchange rate fluctuations as the financial results of our non-United States operations are translated into U.S. dollars. Based upon the financial results of our international operations during the period relative to the Company as a whole, a 10% change in the exchange rates would not have a material impact on our after-tax earnings.
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 October 31, 2015. There have been no changes in our internal control over financial reporting during the three months ended October 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth above under Note 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, 2015. 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. Except as described below, there have been no material changes from our risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
We may be required to recognize additional impairment charges in the future which could have an adverse effect on our financial condition and results of operations.
We assess our goodwill, other intangible assets and our long-lived assets on an annual basis and whenever events or changes in circumstances indicate the carrying value of our assets may not be recoverable, and as and when required by accounting principles generally accepted in the United States to determine whether they are impaired. During the three months ended October 31, 2015, we recorded charges of approximately $74.2 million for the impairment of our goodwill and indefinite-lived intangible asset (trade name). Future appraisal of our business impacting fair value of our assets or changes in estimates of our future cash flows could affect our impairment analysis in future periods and cause us to record either an additional expense for impairment of assets previously determined to be partially impaired or record an expense for impairment of other assets. Depending on future circumstances, we may never realize the full value of intangible assets. Any future determination or impairment of a significant portion of our goodwill and other intangibles could have an adverse effect on our financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BAKERCORP INTERNATIONAL, INC. | |||
Date: | December 11, 2015 | By: | /s/ Robert Craycraft |
Robert Craycraft | |||
President and Chief Executive Officer | |||
By: | /s/ Raymond Aronoff | ||
Raymond Aronoff | |||
Chief Operating Officer and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit Number | Description | |
10.1 | Employment Agreement, dated September 17, 2015, by and between BakerCorp and Les Fry | |
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 |
60