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EX-32 - EXHIBIT 32 - BakerCorp International, Inc.bakercorp-01312018xex32.htm
EX-31.2 - EXHIBIT 31.2 - BakerCorp International, Inc.bakercorp-01312018xex312.htm
EX-31.1 - EXHIBIT 31.1 - BakerCorp International, Inc.bakercorp-01312018xex311.htm
EX-21.1 - EXHIBIT 21.1 - BakerCorp International, Inc.bakercorp-01312018xex211.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
_________________________________________________
FORM 10-K
 ___________________

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended January 31, 2018
OR
o
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
(I.R.S. Employer
incorporation or organization)
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)
 
Securities registered pursuant to Section 12(b) of the Act: None

Title of each class
N/A
 
Name of each exchange on which registered
N/A
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o      No x  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes x      No o   

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 o      No x  *

* 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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x      No o  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x   




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
x
  (Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
x
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o      No x  

The registrant is a privately held corporation. As of July 31, 2017, the last business day of the registrant's most recently completed second fiscal quarter, there was no established public trading market for the common stock of the registrant and therefore, an aggregate market value of the registrant's common stock is not determinable.

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 April 13, 2018.
 
_________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE:

Certain exhibits are incorporated in Item 15 of this Annual Report by reference to other reports and registration statements of the registrant which have been filed with the Securities and Exchange Commission.




BAKERCORP INTERNATIONAL, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended January 31, 2018
Table of Contents
 
 
 
Page
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
Item 15





Cautionary Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements. 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. Forward-looking statements should be read in conjunction with the risks and other factors included under “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our forward-looking statements are expressed in good faith. We believe we have a reasonable basis to make these statements based upon our examination of historical operating trends in the industry and data contained in our records and from third parties. However, there can be no assurance that our expectations, beliefs or projections will be achieved.
The forward-looking statements set forth in this annual report on Form 10-K regarding, among other things, future commodities prices and costs, production volumes, industry trends, 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 debt agreements contain restrictions on the manner in which we conduct 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.
A decrease in the price of oil or natural gas or a downturn in the energy exploration or refining industries.
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 industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in the prices that we can charge.
We lease all 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.

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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.
The effect of changes in tax law, such as the effect of the Tax Cuts and Jobs Act that was enacted on December 22, 2017
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 annual report on Form 10-K.
These factors and other risk factors disclosed in this annual report on Form 10-K and elsewhere are not necessarily all 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 annual report on Form 10-K are made only as of the date of this annual report on Form 10-K. 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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PART I

Item 1. BUSINESS
BakerCorp International, Inc. and its consolidated subsidiaries also referred to "we", "our", "us" and "the Company" began operations in 1942 and was reincorporated in Delaware on September 13, 1996. We are a provider of liquid containment, transfer and treatment solutions operating within the specialty sector of the broader industrial services industry. Throughout our operating history of over 75 years, we have developed a reputation for delivering quality containment, transfer and treatment equipment and services to a broad range of customers across a wide variety of end markets. We maintain a large and diverse rental fleet consisting of more than 25,000 serialized units as of January 31, 2018. Our fleet includes steel tanks, polyethylene tanks, modular tanks, roll-off boxes, pumps, pipes, hoses and fittings, filtration, tank trailers, berms, and trench shoring equipment.
We offer liquid containment, transfer and treatment solutions that are comprehensive and often integrated into the regular maintenance and service programs of our clients. We differentiate our business by offering customers a broad range of customized solutions involving multiple products, extensive consultation, technical advice, and transportation services. We believe our advanced product and service capabilities allow us to become more closely integrated with our customers’ businesses and ensure that we remain an essential partner for the long-term.
We operate in the United States through a national network with the capability to serve customers in all 50 states and Puerto Rico. In addition, we operate international locations in Europe and Canada. In Europe, we have the capability to service Western Europe. We provide a broad range of products in the liquid containment, transfer and treatment market. This scale allows us to optimize our fleet utilization and adjust to variations in regional supply and demand by rebalancing our equipment portfolio to target the most attractive opportunities by industry or geography. We have a proven track record of leveraging our branch network to serve customers requiring nationwide service.
We provide our containment solutions to a diverse set of over 4,800 customers. We work with our customers to deliver a mix of our products and services for a wide variety of applications, such as:
maintenance and cleaning of industrial process equipment;
temporary groundwater storage and treatment;
storage and disposal of solids in environmental remediation;
filtration of hydrocarbons from liquid and vapor effluent;
mixing and moving viscous materials in cleaning oil storage tanks;
filtration of sediment from storm water runoff;
liquid storage and transfer for pipeline repair and testing;
bypassing sewer and water lines for rehabilitation and installation;
shoring of trenches and excavations;
separation of liquids from solids in municipal and industrial waste;
fluid movement and temporary storage in response to emergency spills or adverse weather; and
storage and movement of water for the extraction of oil and gas.

Our fleet characteristics include (i) long useful lives, (ii) low maintenance requirements, (iii) favorable unit economics and (iv) the ability to generate rental rates that do not vary substantially based on product age. These asset characteristics provide us with flexibility to manage capital expenditures and the potential to generate free cash flow throughout economic cycles.


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Business Strategy
We have the opportunity to capitalize on a number of growth initiatives to increase the breadth of the services we offer and differentiate our capabilities with respect to our people, products and solutions. Certain key elements of our long-term strategy include:
Commit to safety. We focus on ensuring a safe and healthy working environment for our employees, customers and communities where we live and work. We execute this through a program called BakerZero™. Through this program, we develop and implement policies and procedures to govern and promote workplace safety, including regular management safety reviews, daily branch safety training sessions and a disciplinary action program for incidents that result from non-compliance with our safety programs. The result of this program has driven the Company's TRIR to 0.97 for the calendar year ended December 31, 2017.
Increase our Penetration in Key Industries and Evaluate Opportunities for End Market Expansion. Our low customer concentration, diversity of end markets, and long-standing relationships allow us to capitalize on market and macroeconomic trends while providing a hedge against more volatile industries.
Maintain Commercial Excellence Through Comprehensive Equipment Rental Solutions. As the premier global specialty rental company in our market, we have one of the largest branch networks with a broad equipment and service offering. We distinguish ourselves from our competitors and build customer loyalty by leveraging our extensive network to provide integrated and differentiated rental solutions.
Achieve Operational Excellence by Continuously Developing our Systems and Processes. We are focused on company-wide process improvements such as cost leverage initiatives, equipment rent ready optimization for the branch network ("RROC"), fleet optimization through our newly developed Asset Management System ("AMS") and advanced Quality Management System ("QMS").
Deliver a more solutions oriented approach to containment, transfer and treatment. We are focused on using our unique capabilities to design, deliver and implement turn-key solutions to assist our customers in dealing with their liquid and semi-liquid movement through remediation needs.
Retain the Most Talented Employees in the Industry. Through our best in class training programs and new annual goal-setting and performance management process, we ensure that our workforce is aligned to deliver the highest value to our shareholders, customers and employees.
Pursue Selected Acquisitions. Our markets remain fragmented and have historically presented numerous attractive acquisition candidates. We intend to pursue potential acquisitions that offer complementary products and services or expand our geographic footprint.

Increase Penetration in Existing End Markets and Expand into New Industries
We serve over 15 industries, including industrial and environmental remediation, refining, environmental services, construction, chemicals, transportation, power, municipal works, pipeline, and oil and gas. Through our containment, transfer and treatment products and services, we are able to offer a wide array of solutions, allowing for end market diversification, low customer concentration, and value-added services to our existing customer relationships. None of our top ten customers during fiscal year 2018 composed greater than 10% of our revenue.
Our commercial strategy is based on a deep understanding of customers' needs by end-market and developing integrated rental solutions that improve safety, sustainability and profitability for those we serve. We deliver value to local, regional and national customers through a team of commercial, operational and Environmental Health & Safety ("EHS") experts.
We offer centralized management, support and visibility to our Strategic Account customers, paired with local resources to manage the day-to-day needs of each location. Our Strategic Accounts team works directly with key decision makers for each of these accounts to establish service standards and pricing across all branches. Based upon comprehensive customer analysis, our Strategic Accounts managers develop strategic account plans, including key relationship management, product and service options and customer retention programs. These managers also develop key performance metrics with the customer and coordinate the branch and executive resources to execute this strategy. Our Strategic Accounts generated approximately 31.0%, 28.3% and 30% of our consolidated revenue during fiscal years 2018, 2017 and 2016, respectively.

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We believe the demand for liquid containment, transfer and treatment solutions is affected by (i) the non-discretionary and recurring nature of customer maintenance activity, (ii) continued implementation of new and existing environmental regulations, (iii) general economic conditions, (iv) a growing trend towards the outsourcing of liquid containment, transfer and treatment solutions, and (v) an increasing level of vendor consolidation.
The liquid containment, transfer and treatment solutions industry is fragmented. We have one large national competitor, Western Oilfields Supply Company (d/b/a Rain for Rent), which offers a range of tanks, pumps, and related product categories and several smaller multi-region competitors that offer a more limited range of products. There are also smaller regional and local competitors with limited product and service offerings. We distinguish ourselves from competitors and build customer loyalty by delivering integrated rental solutions through highly trained and experienced employees.

We believe the main competitive factors in the containment, transfer and treatment markets are as follows:

deep understanding of customer needs;
capability to develop and deliver customized equipment solutions;
reputation for product quality and service;
focus on job safety;
knowledgeable, experienced service staff;
diversity and depth of product portfolio;
product availability;
technical applications expertise;
customer relationships;
on-time delivery and proactive logistics management;
response time and ability to provide products on short notice;
geographic footprint;
extent and adaptability of ancillary services supporting rental activity; and
price and related terms.

Maintain Commercial Excellence
We define commercial excellence as improving our customer's safety, sustainability and efficiency with unmatched levels of 24/7 service. Consistently delivering on this commitment allows growth opportunities with new and existing customers by (i) offering additional product lines and solutions across our loyal customer base; (ii) extending our current product lines to branches across our geographic network; and (iii) providing visibility and control services that support safety, environmental risk mitigation and operational efficiency for our customers.

We believe our solution orientation, fleet breadth, and ancillary service offerings provide us with a competitive advantage. Through bundled product offerings and superior asset management, we are able to address a wide variety of applications and ensure sufficient inventory levels to serve our customers on a one-stop basis. We utilize systems, data and processes to allocate fleet among branches and target the most attractive opportunities. Additionally, our equipment generally have long depreciable lives and our customers do not differentiate our equipment by age.

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The following table provides the primary applications for each of our product categories.
Key Product Areas
 
Primary Applications
Steel Containment
 
Storage of groundwater, frac water, fresh water, wastewater, volatile organic liquids, sewage, slurries and bio-sludge, oil/water mixtures, virgin and spent chemicals.
Non-Steel Containment
 
Storage of acids, chemicals, caustics, storm water, groundwater and wastewater.
Roll-Off and Specialty Boxes
 
Storage of solid waste, separation of solids and liquids.
Pumps, Pipes, Hoses and Fittings
 
Liquid handling for storm water, tank cleaning, groundwater, sewage bypass, industrial slurries and drainage, and oil and gas fracking and scavenging.
Tank Trailers
 
Storage and transportation of finished/intermediate products, caustics and acids, chemicals, off-spec products and waste streams.
Secondary Containment
 
Secondary spill containment for tank and pump products.
Filtration Units
 
Removal of particulate matter and other chemicals from storm water run-off or groundwater for re-introduction of this water back into a drainage system or stream.
Trench Shoring
 
Support and protective systems for trenches, excavations and building foundations.
We operate a fleet of specialized tractor, flatbed, and straight trucks. These trucks are based throughout our branch network and deliver the majority of our rental products to customers. These trucks are customized to our standards for performance as well as driver safety. For certain projects, we use third party contract distributors to supplement our own fleet to deliver our products.
We enter into rental agreements with our customers based on either our standard set of terms and conditions or specific terms negotiated with a particular customer through purchase orders and Master Service Agreements. For Strategic Accounts customers, pricing and contractual terms are established centrally for all branches. We set our rental prices based on daily, weekly or monthly rates and bill customers for the equipment use, services and any necessary repairs or maintenance resulting from damages or misuse. Through our contracts and our Quality Management System (“QMS”), we emphasize the customer's responsibility for all materials used in conjunction with our equipment. Specifically, we deliver clean and empty equipment to a customer site, and the customer is responsible for emptying and cleaning the equipment before it is returned. We are not obligated to accept a piece of equipment that has not passed an inspection for cleanliness, as set forth in our QMS. This requirement is important, as we believe it serves to limit our exposure to environmental liability.
We use strategic partnerships to optimize capital deployment and address our customers’ demand for specialty products that we would not stock on a regular basis. In these circumstances, we often provide our customers equipment by renting it from third parties and deploying it as part of the overall solution we deliver. Revenue from the re-rental of equipment generally yields a lower profit margin than the rental of our own equipment due to the additional costs associated with third parties, such as rental fees, additional transportation and potential repair costs.

Achieve Operational Excellence
We operate through a network of locations throughout the United States with additional locations in Europe and Canada. Our U.S. locations include various branches, satellite yards, and our global corporate headquarters. We typically locate our branches in areas with inexpensive rents, operating costs and near a major roadway. Our typical branch consists of a three to five acre outdoor storage yard with a small office located on site or nearby. Each branch is responsible for (i) providing sales and service to our current customers, (ii) targeting potential customers in the branch’s service area, (iii) dispatching drivers and other personnel to deliver and pick up equipment, (iv) providing related services, (v) performing general maintenance and repair, (vi) modifying equipment to meet customized requests, (vii) implementing quality and safety programs, and (viii) performing administrative tasks (e.g., order entry, billing and work orders).
Many of our branches maintain a limited subset of our full suite of containment, pump and filtration products. Branches that maintain a more limited selection of these products are typically in geographic areas where we have not yet dedicated resources to develop a full range of product capabilities. Many of our branches have maintenance capabilities, including painting, cutting and welding, to maintain equipment in good rental condition and complete repairs, modifications or upgrades to the rental fleet.

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We have been engaged in a company-wide Lean/Six Sigma process improvement program since 2013. During fiscal year 2018, we continued implementation of RROC, a program designed to streamline field processes from start to finish to significantly reduce our time to return equipment coming off-rent to rent ready condition. Our branches are undergoing a variety of change management processes as part of our RROC program, which includes but is not limited to lean transformation and standardization of all facility processes, inventory management, and a revamp of our QMS process. Seven branches are RROC certified as of January 31, 2018.
Maintaining the quality of our equipment is crucial. We utilize our QMS, which is modeled after the ISO 9000 criteria, to maintain the quality and integrity of our products and assist our compliance with federal, state and local regulations. Our field employees are trained to conduct a rigorous and detailed QMS process, consisting of three levels of inspection designed to detect potential problems and maintain the integrity of our equipment. We believe QMS is important to our customers, as certain users must report even relatively minor incidents to appropriate regulatory agencies. QMS helps to control costs and sustain the life cycle of our equipment.
In order to effectively deploy, operate and maintain our equipment, we also began implementation of Asset Management System ("AMS"), building upon the capabilities of our existing ERP system. With the implementation of AMS, we are able to make more informed decisions to refurbish or retire under-utilized and/or high maintenance cost assets and replace those units with assets that have a higher demand and/or strategic value. Managing the life cycle of our equipment is an integral part of our business and the ability to execute an efficient and effective AMS not only controls costs but optimizes overall fleet utilization.
We centrally manage the purchasing of our rental fleet in order to standardize product quality and specifications and achieve attractive pricing. In North America and Europe, we work closely with our various suppliers to ensure that the equipment we purchase includes certain features and innovations. We have multiple potential suppliers for each of our product categories. For some equipment categories, we have chosen to work with a small group of equipment suppliers for efficiency and cost leverage. In the event any of our suppliers become unavailable, we believe we could secure other qualified suppliers in a relatively short period of time. We do not maintain long-term supply agreements with any of our North American or European suppliers.

Retain the Best Talent
We believe we have the most committed and talented workforce in the industry. We offer a best in class training program that supports the onboarding of new employees, continued development of existing employees, and mitigation of risk. We focus on safety, compliance, technical, sales and management training. Our Learning Management System (LMS) provides our global employees with access to training that prepares each of them to identify potential safety hazards, properly operate and maintain our equipment and service fleet, advise customers on desired technical solutions, devise strategic sales plans, provide quality customer service, develop new products and applications, lead their teams effectively, and manage and support a profitable workplace. Our education programs include a customized classroom training at our central education campus, specialized training conducted in the field on a regional and local level, company specific web-based programs, third party training, and self-directed training.
We employed 944 full-time personnel as of January 31, 2018, including 487 hourly employees and 457 salaried employees. As of January 31, 2018, our employees were composed of 783 field and 161 corporate and senior management employees. As of January 31, 2017, we employed 873 full-time personnel, including 418 hourly employees and 455 salaried employees. Our employees were composed of 724 field and 149 corporate and senior management employees. The increase in the number of employees has been driven by increasing volumes of customer activity. None of our employees are represented by labor unions.

Segments
We have two reportable segments, North America and Europe. Segment financial information is presented in Note 11 to our consolidated financial statements. The North American segment consists of operations located in the United States and Canada. The European segment consists of operations located in France, Germany, the Netherlands, and the United Kingdom.

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Within North America, we incentivize our local managers to maximize return on assets under their control and have well-developed systems to enable equipment and resource sharing. As a result, equipment in North America is readily transferable and shared across branch locations. The process of equipment and resource sharing enables us to maximize the efficiency of our equipment and respond to shifts in customer demand.     

Within each geographical region of our North American segment, our branches have similar economic and operational characteristics including:

BakerZero™ safety program;
similar products and services;
similar operational policies and procedures;
Strategic Accounts customers with pricing and contractual terms established centrally and administered at the local branches;
equipment that is frequently purchased through a centralized corporate procurement function; and
shared employees and other resources.

Similarly, in Europe we have designed our equipment to be compatible with the most stringent laws in the European Union. Our equipment in the United States would not be suitable for use in our European business. We have not, and have no plans to, transfer assets from North America to Europe.

Environmental, Health, and Safety Regulations
Our operations are subject to numerous laws governing environmental protection and occupational health and safety matters. These laws regulate issues such as wastewater, storm water, solid and hazardous wastes and materials and air quality. Our operations generally do not raise significant environmental risks, but we use and store hazardous waste and materials and air quality as part of maintaining our rental equipment fleet and the overall operations of our business, dispose of solid and hazardous waste and wastewater from equipment washing, and store and dispense petroleum products from above-ground storage tanks located at certain of our locations. Under environmental and safety laws, we may be liable for, among other things, (i) the costs of investigating and remediating contamination at our sites as well as sites to which we send hazardous wastes for disposal or treatment, regardless of fault, and (ii) fines and penalties for non-compliance. We incur ongoing expenses associated with the performance of appropriate investigation and remediation activities at certain of our locations.


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Item 1A.
RISK FACTORS

You should carefully consider the risks described below and the other information contained in this report and other filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes. Any of the following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. In addition, the risks described below are not the only risks we face. Our business, financial condition, results of operations or liquidity could also be adversely affected by additional factors that apply to all companies generally, as well as other risks that are not currently known to us or that we currently view to be immaterial. While we attempt to mitigate known risks to the extent we believe to be practicable and reasonable, we can provide no assurance, and we make no representation, that our mitigation efforts will be successful.

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.
Our rental equipment is used in a broad range of industries, including industrial and environmental services, refining, environmental remediation, construction, chemicals, oil and gas, and others, all of which are cyclical in nature. The demand for our rental equipment is directly affected by the level of economic activity in these industries, which means that when these industries experience a decline in activity, there is a corresponding decline in the demand for our products affecting both price and volume. This could materially adversely affect our operating results by causing our revenue, net income, operating margins and EBITDA to decrease. A slowdown in the continuing economic recovery or worsening of economic conditions, in particular with respect to North American industrial activities, construction, and oil and gas industries, could cause further weakness in our end markets and materially adversely affect our revenue and operating results. Furthermore, a disruption in the capital markets in the United States or globally could make it difficult for us to raise the capital necessary to fund our growth and maintain the liquidity necessary for our business operations. Other factors may materially adversely affect one or more of the industries that use our rental equipment and services, either temporarily or long-term, including:
a decrease in the price of oil or natural gas or a downturn in the energy exploration or refining industries;
a decrease in expected levels of infrastructure spending;
a change in laws that affects demand in an industry that we serve;
a lack of availability of credit or an increase in interest rates;
weather conditions and natural disasters, which may temporarily affect a particular region; or
terrorism or hostilities involving the United States, Canada or Europe or that otherwise affect economic activity in a specific industry or generally.

Continued 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.
Demand for our services and products is sensitive to the level of exploration, development and production activity of, and the corresponding capital spending by, oil and natural gas companies, including national oil companies, regional exploration and production providers, and related service providers. The level of exploration, development and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and are likely to continue to be volatile.

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Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other economic factors that are beyond our control. Any prolonged reduction in oil and natural gas prices will depress the immediate levels of exploration, development and production activity, which could have an adverse effect on our business, results of operations and financial condition. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas companies and related service providers can similarly reduce or defer major expenditures by these companies and service providers given the long-term nature of many large-scale development projects. Factors affecting the prices of oil and natural gas include:
the level of supply and demand for oil and natural gas;
governmental regulations, including the policies of governments regarding the exploration for, and production and development of, oil and natural gas reserves;
weather conditions and natural disasters;
worldwide political, military and economic conditions;
the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;
oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
the cost of producing and delivering oil and natural gas; and
potential acceleration of the development of alternative fuels.
We intend to continue to expand our business into new geographic markets, and this expansion may be costly and may not
be successful.
We have made and continue to plan on making substantial investments of both time and money as part of our continued and existing expansion into new markets or markets which are not fully developed, including Europe. This expansion could require financial resources that would not therefore be available for other aspects of our business, and it may also require considerable time and attention from our management, leaving them with less time to focus on our existing businesses. We may also be required to raise additional debt or equity capital for these initiatives. In addition, we may face challenges operating in new business climates with which we are unfamiliar, including facing difficulties in staffing and managing our new operations, fluctuations in currency exchange rates, exposure to additional regulatory requirements, including certain trade barriers, changes in political and economic conditions, and exposure to additional and potentially adverse tax regimes. Our success in any new markets, including Europe, will depend, in part, on our ability to anticipate and effectively manage these and other risks. It is also possible that our increased investment in new markets will coincide with an economic downturn that prevents our ability to expand successfully. Finally, it is possible that we will face increased competition in any new markets as other companies attempt to take advantage of the market opportunities there, and any new competitors could have substantially more resources than we do and may have better relationships and a greater understanding of the region. If we fail to manage the risks inherent in our geographic expansion, we could incur substantial capital and operating costs without any related increase in revenue, which would harm our operating results and our ability to service our debt.

Our growth strategy includes evaluating selected acquisitions, which entails certain risks to our business and
financial performance.
We have historically achieved a portion of our growth through acquisitions and expect to evaluate selected new acquisitions as part of our strategy. Any acquisition of another business entails risks, and it is possible that we will not realize the expected benefits from an acquisition or that an acquisition will adversely affect our existing operations. Acquisitions entail certain risks, including:
difficulty in integrating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards;
loss of key employees or customers of the acquired company;
the failure to achieve anticipated synergies;
unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller; and
management and other personnel having their time and resources diverted to evaluate, negotiate and integrate acquisitions.

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We would expect to pay for any future acquisitions using cash, capital stock, notes and/or the incurrence or assumption of indebtedness. To the extent that our existing sources of cash are not sufficient in any instance, we would expect to need additional debt or equity financing, which involves its own risks, such as an increase in leverage, including debt that may be secured ahead of our existing debt. Furthermore, future acquisitions could be larger than historical acquisitions we have engaged in, which could result in increased 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.
A portion of our growth strategy is to expand into new product lines that we believe are complementary to our existing business. We may be unsuccessful in marketing these new products to our customers and therefore unable to cover the costs of launching these new products. We may be unfamiliar with these products, which could lead to quality control problems, cost overruns or other issues that could harm our reputation, business performance and operating results. Further, launching these new products could require our management to spend time and attention on them as opposed to our existing business.
We also currently market some of our products, particularly filtration, shoring and pump products, in a limited portion of our nationwide network and intend to expand those products to other markets we cover. This may not ultimately be successful. We may face difficulties in scaling these smaller businesses over our larger enterprise. The expertise held by the local managers of these businesses may be difficult or impossible to impart to our enterprise as a whole. It also may be difficult for us to successfully market these businesses to new customers in new regions who might not be interested in these services or who might already be obtaining them from a competitor.

We depend on our suppliers for the equipment we rent to customers.
Nearly all the equipment we rent to customers is manufactured for us by a limited number of suppliers for the vast majority of our capital expenditures, and we depend on them in the operation of our business. If our suppliers were unable or unwilling to provide us with equipment, we would have to find other suppliers, perhaps on short notice, in order to obtain the equipment necessary to operate and grow our business. We do not maintain long-term or exclusive contracts with any of our suppliers. Many of our suppliers manufacture products for other businesses, including businesses that compete with us or for our customers directly and could decide to stop manufacturing products for us. We also purchase equipment from common suppliers that supply equipment to other companies, and accordingly any substantial increase in demand for the type of equipment we rent may make it more difficult for us to obtain this equipment or result in significant price increases. Our suppliers also may be unable to provide us with equipment because of difficulties or disruptions in their own businesses. It is also possible that one or more of our suppliers will provide us with substandard or faulty equipment that we are unable to rent to our customers. Any of these problems could require us to find other manufacturers of the equipment we rent, which could be a lengthy, disruptive and expensive process, resulting in costs that we may not be able to pass on to our customers and that materially adversely affects our results of operations.

As our rental equipment ages, we may face increased costs to maintain, repair and replace that equipment, and new equipment could become more expensive.
As our rental equipment ages, it will become more expensive for us to maintain and repair that equipment, and we may have to increase our purchases of new equipment as we replace an aging fleet. The cost of new equipment for use in our rental fleet could also increase due to any number of factors beyond our control. Furthermore, changes in customer demand or the development of new technologies could cause certain of our existing equipment to become obsolete and require us to purchase new equipment at increased costs. Any of these factors could cause our operating margins to decline.

The short-term nature of our rental contracts exposes us to redeployment risks and means that we could experience rapid fluctuations in revenue in response to market conditions.
Our rental contracts are typically short-term in nature, with prices quoted on a daily, weekly and monthly basis, and either party to the agreement is able to terminate upon notice. As a result, our rental income, both in terms of price and quantity, is not fixed for any substantial period of time and may fluctuate quickly in response to changes in market conditions. This is because adverse changes in general economic conditions or in the business environment affecting our customers can make it difficult for us to find customers to rent our equipment as it comes off of existing rental contracts. This could lead us to lower our price for renting this equipment, reduce our overall number of rentals or both, which in turn could materially adversely affect our revenue and profitability. Further, because our rental contracts are short-term in nature, these changes to our business and profitability could happen very quickly after the corresponding changes in market conditions.


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Our industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in the prices that we can charge.
The equipment rental industry is fragmented and competitive. We have one large national competitor that offers a range of tanks, pumps and related product categories and several national competitors that offer a more limited range of products than we do. There are also several smaller regional competitors and a host of localized independent companies. General equipment rental companies could decide to compete in our markets using their scale and networks. Furthermore, we are entering new markets that are highly competitive. We may in the future encounter increased competition from our existing competitors or from new companies that choose to enter our business or existing markets. From time to time, our competitors may attempt to compete aggressively by lowering rental rates or prices or by increasing their supply of equipment. Competitive pressures could materially adversely affect our revenue and operating results by, among other things, decreasing our rental volumes or leading us to lower the prices that we can charge. In addition, we or a competitor may decide to increase fleet size in order to retain or increase market share. Furthermore, we may be unable to match a competitor’s price reductions, fleet investment or employee compensation. Any of the foregoing could materially adversely impact our operating results through a combination of a decrease in our market share, lower revenue and decreased operating income. Finally, one of our suppliers of equipment could enter the rental business and compete against us.

We lease all 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.
We do not own any real property and instead rent the property we use for our branches and other locations. This requires us to find appropriate locations and negotiate or renegotiate acceptable leases with our landlords on a regular basis. Accordingly, if there is any major change in rental markets for the types of facilities we require, this could impact our costs and could make it more difficult for us to locate our branches in desirable locations. In addition, we rent approximately 32% of our branch locations from a single landlord, who was at one time an investor in our company. If our relationship with this individual were to deteriorate, if he were to sell or otherwise transfer his holdings, or if he for some other reason decided to stop renting to us on current terms or at all, at the conclusion of each rental agreement we could be forced from these locations and, as a result, pay higher costs for our branch leases. This could cause a disruption of our business and could have a material adverse effect on our costs and results of operations.

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.
Our operations are subject to numerous federal, state, local, foreign and provincial laws and regulations governing environmental protection and occupational health and safety matters. These laws regulate such issues as wastewater, storm water, air quality and the management, storage and disposal of, or exposure to, hazardous substances and hazardous and solid wastes.
Certain of our pump products are subject to increasingly stringent non-road diesel engine emissions standards adopted by the EPA that are being phased in over time for different engine sizes and horsepower ratings. We have developed plans to achieve substantial compliance with these requirements, which rely, in part, on the timely development of compliance engines by our suppliers and our participation in correct EPA regulatory programs. If we are unable to successfully execute such plans, our ability to place our products into the market may be inhibited, which could have a material adverse effect on our competitive position and financial results. Additionally, we expect that these regulatory changes will result in the implementation of price increases and we may not be able to pass along all of these increased costs to our customers.
Under certain laws and regulations, such as the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (“CERCLA”) known as the Superfund law, the obligation to investigate and remediate contamination at a facility may be imposed on current and former owners or operators of that facility or on persons who may have sent or arranged to send hazardous waste to that facility for disposal. Liability under these laws and regulations may be imposed jointly and severally without regard to fault or to the legality of the activities giving rise to the contamination. Under these laws, we may be liable for, among other things, (i) fines and penalties for non-compliance and (ii) the costs of investigating and remediating any contamination at a site where we operate, where our equipment is used or disposal sites to which we may have sent, or arranged to send, hazardous waste in the past, regardless of fault. Our customers often use, dispose of, and store and dispense solid and hazardous waste, wastewater, petroleum products and other regulated materials in connection with their use of our equipment. While we have a policy with certain limited exceptions to require customers to return tanks and containers clean of any substances, they may fail to comply with these obligations.

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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 the capability to serve customers in all 50 states in the United States and Puerto Rico. In addition, we operate international locations in Europe and Canada. In Europe, we have the capability to service Western Europe. This exposes us and our customers to a host of different federal, national, state and local regulations. Many of these laws and regulations affect our customers’ need for our equipment. Accordingly, changes in these laws and regulations could materially adversely affect the demand for our rental equipment in the relevant jurisdictions and thereby decrease our revenue and our margins.
These laws and requirements also address multiple aspects of our operations, such as product design, worker safety, consumer rights, privacy, employee benefits, environmental, safety, transportation and other matters. Furthermore, different jurisdictions often have different and sometimes contradictory requirements. Because we operate in several different countries and are capable of operating in all 50 states, we have to adapt to and comply with different regulatory regimes. Changes in these requirements, or in their interpretation and implementation, could lead to significant increases in our costs. Also, any material failure by our branches to comply with any legal or regulatory requirement could harm our reputation, limit our business activities, and cause us to incur fines or penalties, or have other adverse impacts on our business.

We are exposed to a variety of claims relating to our business, and our insurance may not fully cover them.
Any accidents or system failures in excess of insurance limits at locations that we engineer or construct or where our products are installed or where we perform services could result in significant professional liability, product liability, warranty and other claims against us. Further, the construction projects we perform expose us to additional risks, including cost overruns, equipment failures, personal injuries, property damage, shortages of materials and labor, work stoppages, labor disputes, weather problems and unforeseen engineering, architectural, environmental and geological problems. Finally, once our construction is complete, we may face claims with respect to the work performed. If we incur these claims, we could incur substantial losses of revenue.

Changes in our effective income tax rate could materially affect our results of operations.
Our financial results are significantly impacted by our effective tax rates. Our effective tax rates could be adversely impacted by a number of factors, including:
the jurisdictions in which profits are determined to be earned and taxed;
the resolution of issues arising from tax audits;
changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation allowances;
adjustments to income taxes upon finalization of tax returns;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in tax rules and regulations or their interpretation, including changes in the U.S. related to the treatment of accelerated depreciation expense, carry-forwards of net operating losses, and taxation of foreign income and expenses; and
changes in U.S. GAAP
Our cash held outside the United States may be repatriated to the United States but, under current law, may be subject to U.S. state income taxes and foreign withholding taxes. We do not plan to repatriate cash balances from our foreign subsidiaries to fund our operations within the United States. We have not recognized deferred income taxes for state income, local country income and withholding taxes that could be incurred on distributions of certain non-U.S. earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences. 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. Cash was down year over year as the result of increased capital investment, expenses related to exploring strategic alternatives and increased accounts receivable.
The occurrence of such events may result in higher taxes, lower profitability, and increased volatility in our financial results. In addition, the tax provision could also be impacted by changes in U.S. federal and state or international tax laws applicable to corporate multinationals. On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act" or "Tax

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Reform") significantly changed income tax law that affect U.S. corporations. We made significant judgments and assumptions in the interpretation of this new law and in our calculations of the provisional amounts reflected in our financial statements. The U.S. Treasury Department, the Internal Revenue Service ("IRS"), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered, and additional accounting guidance or interpretations may be issued in the future that is different from our current interpretation. As we further analyze the new law, and collect relevant information to complete our computations of the related accounting impact, we may make adjustments to the provisional amounts that could materially affect our provision for income taxes in the period in which the adjustments are made. In addition, other countries are considering fundamental tax law changes. Any changes in taxing jurisdictions' administrative interpretations, decisions, policies and positions could also impact our tax liabilities.

We have operations outside the United States. As a result, we may incur losses from currency fluctuations.
Our operations in Europe and Canada are subject to the risks normally associated with international operations. These include the need to convert currencies, which could result in a gain or loss depending on fluctuations in exchange rates, as well as a mismatch between expenses being incurred in one currency while the corresponding revenue is incurred in another currency.

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.
Our success is dependent, in part, on the experience and skills of our management team, both at the senior level and below. Competition in our industry and the business world for management talent is generally significant. Although we believe we generally have competitive pay packages, we can provide no assurance that our efforts to attract and retain managers will be successful. If we lose the services of any key member of our senior management team and are unable to find a suitable replacement in a timely fashion, we may not be able to effectively manage our business and execute our strategy. We also depend upon the skill and experience of a number of other managers, including many who have been with our Company for a long period of time. Competitors or customers may find their level of experience attractive and may seek to hire these managers; we depend upon these employees for the successful execution of our business, and it would be difficult for us to replace them, particularly if they depart in substantial numbers.

If our employees should unionize, this could impact our costs and ability to administer our business.
Currently, none of our employees are represented by a union. In light of regulatory, judicial and legislative developments, union organizing may increase generally, and although we have no information that we are a target of union organizing activity, it is possible that we may be in the future. If our employees were to certify a union as their bargaining representative at any of our locations, this could have adverse impacts on our business operations, including but not limited to possible increased compensation and benefit costs and increased administrative and management burdens.

We are exposed to a variety of claims relating to our business, and our insurance may not fully cover them.
We are in the ordinary course exposed to a variety of claims relating to our business. These claims include those 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. Currently, we carry a broad range of insurance for the protection of our assets and operations. However, such insurance may not fully cover these claims for a number of reasons. For example, our insurance policies are often subject to deductibles or self-insured retentions. In addition, certain types of claims, such as claims for punitive damages or for damages arising from intentional misconduct, which are often alleged in third party lawsuits, might not be covered by our insurance.
We establish and regularly evaluate our loss reserves to address business operations claims, or portions thereof, not covered by our insurance policies. To the extent that we are found liable for any significant claim or claims that exceed our established levels of reserves, or that are not otherwise covered by insurance, we could have to significantly increase our reserves and our liquidity and operating results could be materially and adversely affected.


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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.
Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruptions in these systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations and adjust to changing market conditions. In addition, the security measures we employ to protect our systems may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, phishing attacks, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by the sites, networks and systems that we otherwise maintain. We may not anticipate or combat all types of attacks until after they have already been launched. If any of these breaches of security occur or are anticipated, we could be required to expend additional capital and other resources, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, because our systems sometimes contain information about individuals and businesses, our failure to appropriately maintain the security of the data we hold, whether as a result of our own error or the malfeasance or errors of others, could harm our reputation or give rise to legal liabilities leading to lower revenue, increased costs and other material adverse effects on our results of operations. Any compromise or breach of our systems could result in adverse publicity, harm our reputation, lead to claims against us and affect our relationships with our customers and employees, any of which could have a material adverse effect on our business.

Fluctuations in fuel costs or reduced supplies of fuel could harm our business.
In connection with our business, to better serve our customers and limit our capital expenditures, we often move our fleet from branch to branch. Accordingly, we could be materially adversely affected by significant increases in fuel prices that result in higher costs to us for transporting equipment. It is unlikely that we would be able to promptly raise our prices to make up for increased fuel costs. A significant or protracted price fluctuation or disruption of fuel supplies could have a material adverse effect on our financial condition and results of operations.

If we are unable to collect on contracts with customers, our operating results could be materially adversely affected.
From time to time, some of our customers have liquidity issues and ultimately are not able to fulfill the terms of their rental agreements with us. Given our company’s profile, if we are unable to manage credit risk issues adequately, or if a large number of customers should have financial difficulties at the same time in a given fiscal quarter, we could experience delays in customer payments, which would adversely affect our working capital and liquidity for such fiscal quarter. In addition, our credit losses could increase above historical levels, which would adversely affect our operating results. These delinquencies and credit losses generally can be expected to increase during economic slowdowns or recessions.

Existing trucking regulations and changes in trucking regulations may increase our costs and negatively impact our results of operations.
We operate trucks and other heavy equipment associated with many of our service offerings. We therefore are subject to regulation as a motor carrier by the United States Department of Transportation and by various state agencies and their foreign equivalents, whose regulations include certain permit requirements of state or provincial highway and safety authorities. These regulatory authorities exercise broad powers over our trucking operations, generally governing such matters as the authorization to engage in motor carrier operations, driver fitness and qualifications, safety, equipment testing and specifications and insurance requirements.
In particular, the FMCSA implemented the Compliance Safety Accountability operational model in 2010, which evaluates driver behavior in six different on-road safety categories. If a company falls into the bottom quartile in any category, the FMCSA will send that company a warning letter. There are no penalties associated with such a warning letter other than increased roadside inspections; however, if a company had received such a letter and did not improve its safety performance, there could be further scrutiny of its operations in the future, including investigations of safety practices and imposition of a cooperative safety plan. In severe instances, the FMCSA could issue notices of violations imposing civil penalties or even order us to cease all motor vehicle operations. As of January 31, 2018, we have not received any warning letters.
The trucking industry is subject to possible regulatory and legislative changes that may impact our operations by requiring changes in fuel emissions limits, the hours of service regulations, limits on vehicle weight and size and other matters, including safety requirements and electronic on board recording devices.

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Additional regulations that affect transportation are proposed from time to time, including energy efficiency standards for vehicles and emissions standards for greenhouse gases, which may impact our capital expenditure costs and operational costs. We cannot predict whether, or in what form, any legislative or regulatory changes applicable to our trucking operations may be enacted and, accordingly, further developments in this area could have a material adverse effect on our results of operations or cash flows.

Climate change, climate change regulations and greenhouse effects may materially adversely impact our operations
and markets.
Climate change and its association with the emission of GHGs is receiving increased attention from the scientific and political communities. The federal government, certain states and regions have adopted or are considering legislation or regulation imposing overall caps or taxes on greenhouse gas emissions from certain sectors or facility categories or mandating the increased use of electricity from renewable energy sources. These actions could increase the costs of operating our businesses, reduce the demand for our products and services and impact the prices we charge our customers, any or all of which could adversely affect our results of operations. In particular, a large portion of our revenue is generated by customers in the refinery and oil and gas exploration industries; accordingly, any regulatory changes that reduce, or increase the cost of, the exploration for or refining of petroleum products could materially adversely affect our revenue.

The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations.
We voluntarily comply with the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and are subject to certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The indenture governing the notes requires that we file annual, quarterly and current reports with the SEC. Sarbanes-Oxley requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. We incur significant costs to comply with these laws, including hiring additional personnel, implementing more complex reporting systems and paying higher fees to our third party consultants and independent registered public accounting firm. Furthermore, the need to establish the corporate infrastructure appropriate for a public company requires our management to engage in complex analysis and decision making, which may divert their attention away from the other aspects of our business. This could prevent us from implementing our growth strategy or may otherwise adversely affect our business, results of operations and financial condition.

We may be exposed to risks relating to evaluations of controls required by Sarbanes-Oxley.
Pursuant to Sarbanes-Oxley, our management is required to report on, and our independent registered public accounting firm may be required to attest to, the effectiveness of our internal control over financial reporting. Although we prepare our financial statements in accordance with accounting principles generally accepted in the United States of America, our internal accounting controls at any given time may not meet all standards applicable to companies with registered securities. If we fail to implement any required improvements to our disclosure controls and procedures, we may be obligated to report control deficiencies and our independent registered public accounting firm may not be able to certify the effectiveness of our internal controls over financial reporting. In either case, we could become subject to regulatory sanction or investigation. Further, these outcomes could damage investor confidence in the accuracy and reliability of our financial statements.

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.
We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws. For so long as we remain an emerging growth company, we will not be required to:
have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley;
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

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submit certain executive compensation matters to shareholders advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and
include detailed compensation discussion and analysis in our filings under the Exchange Act, and instead may provide a reduced level of disclosure concerning executive compensation.
Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot assure you that we will be able to take advantage of all of the benefits from the JOBS Act.

In addition, as an “emerging growth company,” we may elect under the JOBS Act to delay adoption of all new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Therefore, our financial statements may not be comparable to those of companies that comply with standards that are otherwise applicable to public companies.
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 fiscal year ended January 31, 2018, we recorded charges of approximately $1.0 million for the impairment of our indefinite-lived intangible asset (trade name). Future appraisals of our business impacting the 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.

Risks Related to the Notes and Our Indebtedness

We have a substantial amount of debt, which exposes us to various risks.
We have substantial debt and, as a result, significant debt service obligations. On January 31, 2018, our total indebtedness was $638.6 million (including $240.0 million aggregate principal amount of 8.25% senior notes due June 2019 and $398.6 million aggregate principal amount outstanding under our term loan facility). The terms applicable to the Incremental Term Loans are the same as those applicable to the term loans under the Credit Agreement. We also had an additional $40.0 million available for borrowing under our revolving credit facility as of January 31, 2018. The revolver and term loan facility both mature in less than 12 months from the date of these audited financial statements. Our substantial level of debt and debt service obligations could have important consequences including:
making it more difficult for us to satisfy our obligations with respect to our debt, including the notes, which could result in an event of default under the indenture governing the notes and the agreements governing our other debt, including the credit facilities;
limiting our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, investments, debt service requirements and other general corporate requirements;
increasing our vulnerability to general economic downturns and industry conditions, which could place us at a disadvantage compared to our competitors that are less leveraged and can therefore take advantage of opportunities that our leverage prevents us from pursuing;
potentially allowing increases in floating interest rates to negatively impact our cash flows;

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having our financing documents place restrictions on the manner in which we conduct our business, including restrictions on our ability to pay dividends, make investments, incur additional debt and sell assets; and
reducing the amount of our cash flows available to fund working capital requirements, capital expenditures, acquisitions, investments, other debt obligations and other general corporate requirements, because we will be required to use a substantial portion of our cash flows to service debt obligations.
The occurrence of any one of these events could have an adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our obligations under our debt. In addition, the U.S. Tax Cuts and Jobs Act of 2017 imposes significant additional limitations on the deductibility of interest. See "Changes in our effective income tax rate could materially affect our results of operations."

Despite current debt levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur substantial additional debt, including secured debt, in the future. Although our credit facilities and the indenture governing the notes contain restrictions on the incurrence of additional debt, these restrictions are subject to a number of significant qualifications and exceptions, and any debt we incur in compliance with these restrictions could be substantial. If we incur additional debt on top of our current debt levels, this would exacerbate the risks related to our substantial debt levels.

Our debt agreements include covenants that restrict our ability to operate our business, and this may impede our ability to respond to changes in our business or to take certain important actions.
Our credit facilities and the indenture governing the notes contain, and the terms of any of our future debt would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interest. For example, the indenture governing the notes and the credit agreement governing our credit facilities restrict our and our subsidiaries’ ability to:
incur additional debt;
pay dividends on our capital stock and make other restricted payments;
make investments and expand internationally;
engage in transactions with our affiliates;
sell assets;
make acquisitions or merge; and
create liens.
In addition, under certain circumstances, our credit facilities require us to comply with a maximum total leverage ratio, which is tested quarterly if outstanding loans and letters of credit under our revolving credit facility exceeds 25% of the total commitments thereunder. These restrictions could limit our ability to obtain future financings, make needed capital expenditures, respond to and withstand future downturns in our business or the economy in general or otherwise conduct corporate activities that are necessary or desirable. We may also be prevented from taking advantage of business opportunities that arise because of limitations imposed on us by these restrictive covenants. In addition, it may be costly or time consuming for us to obtain any necessary waiver or amendment of these covenants, or we may not be able to obtain a waiver or amendment on any terms.
A breach of any of these covenants could result in a default under our credit facilities or the notes, as the case may be, that would allow lenders or note holders to declare our outstanding debt immediately due and payable. If we are unable to pay those amounts because we do not have sufficient cash on hand or are unable to obtain alternative financing on acceptable terms, the lenders or note holders could initiate a bankruptcy proceeding or, in the case of our credit facilities, proceed against any assets that serve as collateral to secure such debt.

We will require a significant amount of cash to service our debt, and our ability to generate cash depends on many factors beyond our control.
Our ability to pay interest on and principal of the notes and to satisfy our other debt obligations will primarily depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other

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factors, many of which are beyond our control, will affect our ability to make these payments to satisfy our debt obligations, including the notes.
If we do not generate cash flow from operations sufficient to pay our debt service obligations, including payments on the notes, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at that time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments and the indenture governing the notes may restrict us from adopting some of these alternatives, which in turn could exacerbate the effects of any failure to generate sufficient cash flow to satisfy our debt service obligations. In addition, any failure to make payments of interest and principal on our outstanding debt on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional debt on acceptable terms and may adversely affect the price of the notes. Furthermore, there currently is not a well-established secondary market for our assets. The lack of a secondary market may make the sale of our assets challenging, and the sale of assets should not be viewed as a significant source of funding.
Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms or at all, would have an adverse effect on our business, financial condition and results of operations and may restrict our current and future operations, particularly our ability to respond to business changes or to take certain actions, as well as on our ability to satisfy our obligations in respect of the notes.

Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to
increase significantly.
Certain of our borrowings, primarily borrowings under our credit facilities, are at variable rates of interest and expose us to interest rate risk. As such, our net income is sensitive to movements in interest rates. There are many economic factors outside our control that have in the past, and may in the future, impact rates of interest, including publicly announced indices that underlie the interest obligations related to a certain portion of our debt. Factors that impact interest rates include governmental monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Such increases in interest rates could have a material adverse effect on our financial condition and results of operations.

The notes are not secured by our assets, which means the lenders under any of our secured debt, including our credit facilities, will have priority over holders of the notes to the extent of the value of the assets securing that debt.
The notes and the related guarantees are unsecured. This means they are effectively subordinated in right of payment to all of our and our subsidiary guarantors’ secured debt, including our credit facilities, to the extent of the value of the assets securing that debt. Loans under our credit facilities are secured by substantially all of our and the guarantors’ assets (subject to certain exceptions). We have $398.6 million outstanding under the term loan portion and no amount outstanding (and $40.0 million of unused availability) under the revolving portion of our credit facilities as of January 31, 2018. Furthermore, the indenture governing the notes will allow us to incur additional secured debt.

If we become insolvent or are liquidated, or if payment under our credit facilities or any other secured debt is accelerated, the lenders under our credit facilities and holders of other secured debt will be entitled to exercise the remedies available to secured lenders under applicable law (in addition to any remedies that may be available under documents pertaining to our credit facilities or other senior debt). For example, the secured lenders could foreclose upon and sell assets in which they have been granted a security interest to the exclusion of the holders of the notes, even if an event of default exists under the indenture governing the notes at that time. Any funds generated by the sale of those assets would be used first to pay amounts owing under secured debt, and any remaining funds, whether from those assets or any unsecured assets, may be insufficient to pay obligations owing under the notes.

The notes will be structurally subordinated to the debt and other liabilities of our non-guarantor subsidiaries, including our foreign subsidiaries.
None of our existing or future foreign subsidiaries will guarantee the notes, and some of our future domestic subsidiaries may not guarantee the notes. This means the notes are structurally subordinated to the debt and other liabilities of these subsidiaries. As of January 31, 2018, our non-guarantor subsidiaries had $14.4 million of total liabilities, including trade payables and deferred tax liabilities and excluding intercompany liabilities. Our non-guarantor subsidiaries may, in the

19


future, incur substantial additional liabilities, including debt. Furthermore, we may, under certain circumstances described in the indenture governing the notes, designate subsidiaries to be unrestricted subsidiaries, and any subsidiary that is designated as unrestricted will not guarantee the notes. In the event of our non-guarantor subsidiaries’ bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding, the assets of those non-guarantor subsidiaries will not be available to pay obligations on the notes until after all of the liabilities (including trade payables) of those non-guarantor subsidiaries have been paid in full.

We have substantial doubt about our entity's ability to continue as a going concern
We are required to evaluate whether there is substantial doubt about our ability to continue as a going concern in each reporting period, including interim periods.

In evaluating our ability to continue as a going concern, we considered the conditions and events that could raise substantial doubt about our ability to continue as a going concern within twelve months after the financial statements are issued. We considered the current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the conditional and unconditional obligations due before April 20, 2019. As of January 31, 2018, we had $34.4 million of cash and cash equivalents on our consolidated balance sheet and $40.0 million of availability under our Revolving Credit Facility. A substantial amount of our cash from operations is used for debt service obligations. Under our current debt structure, if the maturity date of the senior notes is not extended 90 days beyond its Revolving Credit Facility’s maturity date, the Revolving Credit Facility maturity date accelerates to January 30, 2019 and, if the maturity date of the senior notes is not extended 90 days beyond its term loan maturity date, the term loan maturity date accelerates to March 2, 2019.

Our current cash and cash equivalents and our forecasted cash flows generated from operating activities through April 20, 2019, will not be sufficient to meet our debt maturities, prior to April 20, 2019. As a result, there is substantial doubt about our ability to continue as a going concern.

We have been reviewing a number of potential alternatives regarding our outstanding indebtedness, including refinancing or extending our debt obligations. Our ability to meet obligations as they become due in the ordinary course of business over the next twelve months will depend on our ability to refinance or extend the maturity of our senior notes. There can be no assurance that management’s plan will be successful such that the debt will be refinanced or extended in a timely manner in amounts that are sufficient to meet our obligations as they become due, or on terms acceptable to us, or at all. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Anticipated Cash Requirements.” Our ability to meet our obligations as they become due in the ordinary course of business for the next 12 months will depend on our ability to achieve our forecast and our ability to refinance or extend the maturity of our senior notes. If we are unable to continue to obtain sources of refinancing or extend the maturity of the senior notes, we could face substantial liquidity problems, which could have a material adverse effect on our financial condition and on our ability to meet the Company’s obligations.

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture.
Upon the occurrence of certain change of control events, we will be required to offer to repurchase all of the notes. Our credit facilities provide that certain change of control events (including a change of control as defined in the indenture governing the notes) constitute a default. Any future credit agreement or other debt agreement would likely contain similar provisions. If we experience a change of control that triggers a default under our credit facilities, we could seek a waiver of that default or seek to refinance those facilities. In the event we do not obtain a waiver or complete a refinancing, the default could result in amounts outstanding under those facilities being declared immediately due and payable. In the event we experience a change of control that requires us to repurchase the notes, we may not have sufficient financial resources to satisfy all of our obligations under our credit facilities and the notes. A failure to make a required change of control offer or to pay a change of control purchase price when due would result in a default under the indenture governing the notes.
In addition, the change of control and other covenants in the indenture governing the notes do not cover all corporate reorganizations, mergers or similar transactions and may not provide note holders with protection in a transaction, including one that would substantially increase our leverage.


20


Federal and state statutes may allow courts, under specific circumstances, to void the notes and the guarantees, subordinate claims in respect of the notes and the guarantees and require note holders to return payments they
have received.
Certain of our existing subsidiaries guarantee the notes, and certain of our future subsidiaries may guarantee the notes. Our issuance of the notes, the issuance of the guarantees by the guarantors and the granting of liens by us and the guarantors in favor of the lenders under our credit facilities, may be subject to review under state and federal laws if a bankruptcy, liquidation or reorganization case or a lawsuit, including circumstances in which bankruptcy is not involved, were commenced at some future date by us, by the guarantors or on behalf of our unpaid creditors or the unpaid creditors of a guarantor. Under the federal bankruptcy laws and comparable provisions of state fraudulent transfer and fraudulent conveyance laws, a court may void or otherwise decline to enforce the notes or a guarantor’s guarantee, or a court may subordinate the notes or a guarantee to our or the applicable guarantor’s existing and future debt.

While the relevant laws may vary from state to state, a court might void or otherwise decline to enforce the notes, or guarantees of the notes, if it found that when we issued the notes or when the applicable guarantor entered into its guarantee or, in some states, when payments become due under the notes or a guarantee, we or the applicable guarantor received less than reasonably equivalent value or fair consideration and either:
we were, or the applicable guarantor was, insolvent, or rendered insolvent by reason of such incurrence;
we were, or the applicable guarantor was, engaged in a business or transaction for which our or the applicable guarantor’s remaining assets constituted unreasonably small capital;
we or the applicable guarantor intended to incur, or believed or reasonably should have believed that we or the applicable guarantor would incur, debts beyond our or such guarantor’s ability to pay such debts as they mature; or
we were, or the applicable guarantor was, a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.
The court might also void the notes or a guarantee without regard to the above factors if the court found that we issued the notes or the applicable guarantor entered into its guarantee with actual intent to hinder, delay or defraud our or its creditors.
A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the notes or such guarantee if we or that guarantor did not substantially benefit directly or indirectly from the issuance of the notes or the applicable guarantee. As a general matter, value is given for a note or guarantee if, in exchange for the note or guarantee, property is transferred or an antecedent debt is satisfied.
The measure of insolvency applied by courts will vary depending upon the particular fraudulent transfer law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an entity would be considered insolvent if:
the sum of its debts, including subordinated and contingent liabilities, was greater than the fair saleable value of its assets;
if the present fair saleable value of its assets were less than the amount that would be required to pay the probable liability on its existing debts, including subordinated and contingent liabilities, as they become absolute and mature; or
it cannot pay its debts as they become due.
In the event of a finding that a fraudulent conveyance or transfer has occurred, the court may void, or hold unenforceable, the notes or the guarantees, which could mean that the note holders may not receive any payments on the notes and the court may direct the note holders to repay any amounts that the note holders have already received from us or any guarantor to us, such guarantor or a fund for the benefit of our or such guarantor’s creditors. Furthermore, the note holders of voided notes would cease to have any direct claim against us or the applicable guarantor. Consequently, our or the applicable guarantor’s assets would be applied first to satisfy our or the applicable guarantor’s other liabilities, before any portion of our or such applicable guarantor’s assets could be applied to the payment of the notes. Sufficient funds to repay the notes may not be available from other sources, including the remaining guarantors, if any. Moreover, the voidance of the notes or a guarantee could result in an event of default with respect to our and our guarantors’ other debt that could result in acceleration of such debt (if not otherwise accelerated due to our or our guarantors’ insolvency or other proceeding).

21


Although each guarantee contains a provision intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer law or may reduce the guarantor’s obligation to an amount that effectively makes its guarantee worthless.

We are substantially owned and controlled by funds advised by Permira Advisers, L.L.C. (the "Sponsor"), and the funds’ interests as equity holders may conflict with yours.
We are controlled by funds advised by the Sponsor, who have the ability to control our policies and operations. The interests of the funds may not in all cases be aligned with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with the interests of the note holders. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even when those transactions involve risks to the note holders. Furthermore, funds advised by the Sponsor may in the future own businesses that directly or indirectly compete with us. Funds advised by the Sponsor also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

The notes may trade at a discount from par.
The notes may trade at a discount from par due to a number of potential factors, including not only our financial condition, performance and prospects, but also many that are not directly related to us, such as a lack of liquidity in trading of the notes, prevailing interest rates, the market for similar securities, general economic conditions and prospects for companies in our industry generally. In addition, the liquidity of the trading market in the notes and the market prices quoted for the notes may be adversely affected by changes in the overall market for high-yield securities.

 
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may impair our ability to obtain future borrowings at similar costs and reduce our access to capital.
The notes have a non-investment grade rating. In the future, any rating agency may lower a given rating if a rating agency judges that adverse change or other future circumstances so warrant, and a ratings downgrade would likely adversely affect the price of the notes. A rating agency may also decide to withdraw its rating of the notes entirely, which would impede their liquidity and adversely affect their price.

We are a holding company, and our ability to make any required payment on the notes is dependent on the operations of, and the distribution of funds from, BakerCorp, A Delaware Corporation (our operating company) and its subsidiaries.
We are a holding company, and BakerCorp and its subsidiaries will conduct all of our operations and own all of our operating assets. Therefore, we will depend on dividends and other distributions from BakerCorp and its subsidiaries to generate the funds necessary to meet our obligations, including our required obligations under the notes. Moreover, each of BakerCorp and its subsidiaries is a legally distinct entity and, other than those of our subsidiaries that are guarantors of the notes, have no obligation to pay amounts due pursuant to the notes or to make any of their funds or other assets available for these payments. Although the indenture governing the notes limits the ability of our subsidiaries to enter into consensual restrictions on their ability to pay dividends and make other payments, these limitations have a number of significant qualifications and exceptions, including provisions contained in the indenture governing the notes and the credit facilities that restrict the ability of our subsidiaries to make dividends and distributions or otherwise transfer any of their assets to us.

Item 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

Item 2.
PROPERTIES
Our global headquarters is located in Plano, Texas, and our facility in Seal Beach, California, house certain finance, IT, legal and other administrative functions.
Location
 
Purpose or Use 
 
Square Feet
as of January 31, 2018
 
Status as of January 31, 2018
Plano, Texas
 
Corporate headquarters
 
18,523
 
Leased, expires August 14, 2024
Seal Beach, California
 
Administration
 
18,310
 
Leased, expires March 31, 2019


22


We lease all our locations in the United States, Canada and Europe. Upon expiration of our leases, we believe we will obtain lease agreements under similar terms; however, there can be no assurance that we will receive similar terms or that any offer to renew will be accepted.

See Note 13, “Commitments and Contingencies—Leases” of the Notes to our Consolidated Financial Statements included in Item 8 of this annual report on Form 10-K for additional information regarding our obligations under leases.

Item 3.
LEGAL PROCEEDINGS
Description can be found in Note 13, “Commitments and Contingencies—Litigation” of the Notes to our Consolidated Financial Statements, included in Item 8 of this annual report on Form 10-K for additional information regarding our legal proceedings.

Item 4.
MINE SAFETY DISCLOSURES
Not Applicable.


23


PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
All of our outstanding shares are privately held, and there is no established public market for our shares.

Holders
As of January 31, 2018, there was one holder of record of our common stock, BakerCorp International Holdings, Inc.

Dividend Policy
We have not paid dividends on our common stock since inception. The payment of any future dividends or the authorization of stock repurchases or other recapitalizations will be determined by our board of directors in light of conditions then existing, including earnings, financial condition and capital requirements, financing agreements, business conditions, stock price and other factors. The terms of our outstanding indebtedness contain certain limitations on our ability to move operating cash flows to BakerCorp International Holdings Inc. and/or pay dividends on, or effect repurchases of, our common stock. In addition, under Delaware law, dividends may only be paid out of surplus or current or prior year’s net profits.

Purchases of Equity Securities by the Issuer
There were no purchases of our equity securities made by or on behalf of us during fiscal year 2018.

Equity Compensation Plans
For information regarding equity compensation plans, see Note 10. “Share-Based Compensation” of the “Notes to our Consolidated Financial Statements” included in Item 8 of this annual report on Form 10-K.


24


Item 6.
SELECTED FINANCIAL DATA
The following selected consolidated historical financial data reflects the results of operations and balance sheet data as of and for the years ended January 31, 2014 to 2018 for the stated periods. The data below should be read in conjunction with and is qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto contained elsewhere in this report. The financial information presented may not be indicative of our future performance.

 
 
 
January 31,
(In thousands)
2018
 
2017
 
2016
 
2015
 
2014
Statement of operations data:
 
 
 
 
 
 
 
 
 
Total revenue
$
278,611

 
$
255,420

 
$
303,129

 
$
332,320

 
$
310,611

Total operating expense
275,346

 
369,433

 
468,330

 
302,334

 
291,309

Income (loss) from operations
3,265

 
(114,013
)
 
(165,201
)
 
29,986

 
19,302

Total other expenses, net
40,287

 
42,059

 
43,492

 
43,331

 
45,230

Loss before income tax benefit
(37,022
)
 
(156,072
)
 
(208,693
)
 
(13,345
)
 
(25,928
)
Income tax benefit
(44,507
)
 
(31,937
)
 
(36,473
)
 
(6,702
)
 
(7,684
)
Net income (loss)
$
7,485

 
$
(124,135
)
 
$
(172,220
)
 
$
(6,643
)
 
$
(18,244
)
Balance sheets as of
 
 
 
 
 
 
 
 
 
Cash
$
34,442

 
$
44,563

 
$
44,754

 
$
18,665

 
$
25,536

Accounts receivable, net
68,105

 
52,478

 
62,420

 
70,758

 
65,142

Property and equipment, net
310,676

 
320,707

 
336,635

 
368,299

 
393,142

Total assets
821,101

 
830,540

 
995,094

 
1,217,853

 
1,274,506

Total debt (excluding capital leases)
634,387

 
635,477

 
637,264

 
639,521

 
641,279

Shareholder’s equity
$
69,634

 
$
42,395

 
$
167,448

 
$
342,248

 
$
373,756



25


EBITDA GAAP Reconciliations
The following is a reconciliation of our net income (loss) to EBITDA and Adjusted EBITDA for the following:

 
Fiscal years ended January 31,
(dollar amounts in thousands)
2018
 
2017
 
2016
Net income (loss)
$
7,485

 
$
(124,135
)
 
$
(172,220
)
Interest expense
40,734

 
41,516

 
42,329

Income tax benefit
(44,507
)
 
(31,937
)
 
(36,473
)
Depreciation and amortization expense
59,260

 
59,775

 
63,168

EBITDA
62,972

 
(54,781
)
 
(103,196
)
Foreign currency exchange (gain) loss, net
(427
)
 
565

 
1,163

Financing related costs
3,970

 
138

 
135

Sponsor management fees
585

 
554

 
546

Share-based compensation expense
445

 
315

 
343

Impairment of goodwill and other intangible assets
1,000

 
116,340

 
182,849

Impairment of long-lived assets
1,391

 
4,485

 
3,086

Restructure related costs
585

 
703

 
1,884

Software license and other fees related to impaired asset

 

 
917

Other
3,674

 
610

 
1,784

Adjusted EBITDA
  
$
74,195

 
$
68,929

 
$
89,511

Adjusted EBITDA margin
26.6
%
 
27.0
%
 
29.5
%

EBITDA represents the sum of net income (loss), interest expense, income taxes and depreciation of rental equipment and non-rental depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding certain expenses detailed within the net income (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 alternative to measures of our financial performance as determined in accordance with U.S. GAAP, such as net income (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.



26


Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with "Selected Financial Data," our consolidated financial statements and the related notes included in the Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risk and uncertainty. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors including the risks we discus in Item 1A, "Risk Factors," and elsewhere in this Annual Report on Form 10-K, that could cause actual results to differ materially from those anticipated by us. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect actual outcomes. The discussion is divided into the following sections:

Overview
Critical Accounting Policies, Estimates and Judgments
Results of Operations
Liquidity and Capital Resources

Overview
Business
We are a provider of liquid containment, transfer and treatment 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 number of international locations in Europe and Canada. We maintain one of the largest and most diverse liquid containment, transfer and treatment solutions rental fleets in the industry consisting of more than 25,000 serialized 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 industrial and environmental remediation, refining, environmental services, construction, chemicals, transportation, power, municipal works, pipeline, and oil and gas. During fiscal years 2018, 2017 and 2016, no single customer represented more than 10% of our total revenue, and our top ten customers accounted for approximately 19.3% of our total revenue.

The demand for our services in the upstream segment of the oil and gas industry, which comprised approximately 8.9% of our total revenue for the fiscal year ended January 31, 2018, 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 and 2016, 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 fiscal year ended January 31, 2018, we recorded charges totaling $1.0 million associated with the impairment of a portion of our indefinite-lived other intangible assets (trade name) within our North American segment as a result of the sustained decline in oil prices, together with the projected market expectations of a slow recovery of such prices, making it more likely than not that the fair value had decreased below its respective carrying value. 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 of our intangible assets and property and equipment associated with our North American operations.

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Our key business objectives are to continue to fund our highest growth opportunities, optimize our fleet, increase revenue through a multi-tiered commercial strategy, and achieve operational excellence by increasing efficiencies and maintaining an expense base that supports our existing revenue streams and allows for scalability. We can achieve this through a variety of company-wide process improvements such as:
We continued the implementation of the Asset Management System, which enables us to thoroughly evaluate our equipment, assess cost of ownership and rate of return, and prioritize how we manage each piece of equipment, allowing for improved planning, cost management, and resource allocation.
We developed more sophisticated systems to actively monitor the life cycle of our equipment. With this investment, we can make more informed decisions to refurbish or retire under-utilized and/or high maintenance cost assets and replace those units with assets that have a higher demand and/or strategic value.
We continued to implement the "Rent Ready Optimization Concept" (RROC), which includes lean transformation and standardization of all facilities, inventory management, and a revamp of our Quality Management System process. RROC is designed to streamline field processes from start to finish to significantly reduce our time to return equipment coming off-rent to rent ready condition, thereby improving our ability to respond to customer demand as well as accurately manage assets throughout their life cycle. We currently have 7 RROC certified branches and anticipate 15 RROC certified branches by the end of the fiscal year 2019.
We continued to evaluate additional product lines and service offerings that complement and enhance our current capabilities.
We have been engaged in a company-wide Lean/Six Sigma process improvement program. These strategic efforts have been focused on implementing company-wide process improvements as well as tactical activities at the local branches.
We focused on improving our strategic sourcing, vendor consolidation, national purchasing programs, and cost leverage initiatives across the business.
We continue to evaluate the branch and product line structures for profitability by determining whether customers at certain locations can benefit from other solutions we have available.
We implemented Salesforce.com, a tool that improves the management of our sales cycle, previews upcoming demand for products and services, and provides better insight to market demand and customer opportunities, thereby improving the accuracy of our forecasts.
We successfully integrated a comprehensive market segment strategy, which included improved mapping of sales territories with higher demand, customer evaluations, and pricing improvements.
We developed a data warehouse that supports both the sales and operations team by delivering current information to our branch management team with key performance indicators around pricing, utilization, and customer characteristics. This enables fast and effective decision making aligned with our short and long-term business objectives.


28


Geographic Operations
Our branches and employees by reportable segment were as follows:
 
January 31,
 
 
 
2018
 
2017
 
Change
Branches:
 
 
 
 
 
Number of branches-North American Segment    
46

 
46

 

Number of branches-European Segment    
11

 
11

 

Total branches    
57

 
57

 

Employees:
 
 
 
 
 
Number of employees-North American Segment    
789

 
741

 
48

Number of employees-European Segment    
155

 
132

 
23

Total employees    
944

 
873

 
71


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 U.S. and Canada comprise our North American segment. Our equipment generally has the capability to be utilized for multiple applications within North America. We incentivize our local managers to maximize return on assets under their control and we have well-developed systems to enable equipment and resource sharing. As a result, equipment in the U.S. and Canada is readily transferable and shared by the local branch managers. The process of equipment and resource sharing within our reportable segments enables us to maximize our efficiency and respond to shifts in customer demand.
We serve customers in our European segment from branches located in the Netherlands, Germany, France, and the United Kingdom. Our European operations are headquartered in the Netherlands. Our equipment may be transferred between European locations to serve customers if demand dictates.

Rental Revenue Metrics
We evaluate rental revenue, the largest portion of our revenue, utilizing the following metrics:
Rental Activity – The change in rental activity is measured by the impact of several items, including the utilization of rental equipment that we individually track which reflects the demand for our products in relation to the level of equipment, volume of rental revenue on bulk items not individually tracked (which includes pipes, hoses, fittings, and shoring), and the volume of re-rent revenue, resulting from the rental of equipment we do not own.
Pricing – The impact of changes in pricing is measured by the increase or decline in the average daily, weekly or monthly rental rates on rental equipment that we specifically track.
Available Rental Fleet – The available rental fleet, as we define it, is the average number of equipment units 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, moving, or treating liquids, the impact of weather may hinder the ability of our customers to fully utilize our equipment. This is particularly the case for customers with project locations in regions that are subject to freezing temperatures during winter.

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Critical Accounting Policies, Estimates, and Judgments
The preparation and presentation of financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to establish policies and make estimates and assumptions that affect (i) the amounts of assets and liabilities as of the dates presented on the accompanying consolidated balance sheets and (ii) the amounts of revenue and expenses for each year presented in the accompanying consolidated statements of operations.

Our management believes its estimates and assumptions are supportable, reasonable, and consistently applied. Nonetheless, estimates are inherently uncertain. As a result, our financial position and operating results could materially differ from the amounts reported within the accompanying consolidated financial statements if management's estimates require prospective adjustment.
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we may choose to rely on certain exemptions.

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies. An “emerging growth company” can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an “emerging growth company” or (ii) affirmatively and irrevocably opts out of the extended transition period provided in Securities Act Section 7(a)(2)(B). We have elected to take advantage of the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies and, as a result, our financial statements may not be comparable to other public companies.

Our critical accounting policies and estimates arise in conjunction with the following accounts:

Revenue recognition
Share-based compensation
Allowance for doubtful accounts
Goodwill and trade name
Long-lived assets and customer relationships
Customer relationships amortization policy
Depreciation policy
Medical insurance reserve
Contingencies
Income taxes
Inventory
Business combinations

Revenue Recognition

We enter into contracts with our customers to rent equipment based on a daily, weekly or monthly rental rates. The rental agreement may be terminated by us or our customers at any time. We have the right to substitute any equipment on rent with similar equipment at our discretion. We recognize rental revenue upon the passage of each rental day when: (i) there is contractual evidence of the arrangement; (ii) the price is fixed and determinable; and (iii) there is no evidence to indicate that collectability is not reasonably assured.
We recognize revenue on the sale of products or services when: (i) there is contractual evidence of the transaction; (ii) the products or services are delivered; (iii) the price is fixed and determinable; and (iv) there is no evidence to indicate that collectability is not reasonably assured.

We accrue for volume rebates and discounts during the same period as the related revenues are recorded based on our current expectations, after considering historical experience. Changes in such accruals may be required if future rebates differ from our estimates. Rebates and discounts are recognized as a reduction of revenues. The rebates and discounts accrual balance as of January 31, 2018 and 2017 was $0.7 million and $0.8 million, respectively.

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We record a provision for estimated sales returns and allowances. The provision recorded for estimated sales returns and allowances is deducted from revenues to arrive at net revenues in the period the related revenue is recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual or expected future returns and claims are significantly greater or lower than the reserves that we have established, we will record a reduction or increase to net revenues in the period in which we make such a determination. The allowance for sales returns balance as of January 31, 2018 and 2017 was $0.6 million in both fiscal years.

Multiple Element Arrangements
We enter into agreements to rent our equipment, sell our products and perform services, and, while the majority of our agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element. We recognize revenue for delivered elements as separate units of accounting only when the delivered elements have standalone value, uncertainties regarding customer acceptance are resolved and there is no customer-negotiated refund or return rights for the delivered elements. For elements that do not have standalone value, we recognize revenue consistent with the pattern of the associated deliverables. If the arrangement includes a customer-negotiated refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. Changes in the allocation of the sales price between elements may impact the timing of revenue recognition but will not change the total revenue recognized on the contract. Generally, the deliverables under our multiple element arrangements are delivered over a period of less than three months.
We establish the selling prices used for each deliverable based on the vendor-specific objective evidence (“VSOE”), if available, third party evidence, if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. We establish the VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. Third party evidence of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. The best estimate of selling price (“ESP”) is established considering internal factors such as margin objectives, pricing practices and controls, and customer segment pricing strategies. Consideration is also given to market conditions such as competitor pricing strategies and industry conditions. When determining ESP, we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions. We may modify or develop new go-to-market practices in the future. As these go-to-market strategies evolve, we may modify our pricing practices in the future, which may result in changes in selling prices, impacting both VSOE and ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal year, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue.

Share-based Compensation
Share-based compensation relates to options to purchase shares of BCI Holdings, our sole shareholder and parent company. Stock options to purchase shares of our parent company have been granted to certain employees of the Company. The fair value of share-based compensation awards are expensed to the “Employee related expenses” line within the statement of operations. The Black-Scholes valuation calculation requires us to make highly subjective assumptions, including the following:

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. Under the income approach, we calculate the fair value based on the present value of estimated future cash flows. The estimated marketability factor is a discount taken to adjust for the cost and a time lag associated with locating interested and capable buyers of a privately held company, because there is no established market of readily available buyers and sellers.
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.

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Expected dividends—We historically have not paid cash dividends and do not currently intend to pay cash dividends; therefore, we have assumed a 0% dividend rate.
Expected term—For options granted “at-the-money” in fiscal years 2018 and 2017, 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” in fiscal years 2018 and 2017, we used an adjusted simplified method that considers the probability of the stock options becoming “in-the-money.”
Risk-free rate—The risk-free interest rate was based on the U.S. Treasury yield with a maturity date closest to the expiration date of that stock option grant.

     The valuation dates and the resulting value of BCI Holdings common stock during fiscal years 2016 and 2017 were the following:  
 
March
2015
 
July
2015
 
October
2015
 
January
2016
 
March
2016
Stock value per share (1)
$
102.00

 
$
90.00

 
$
85.00

 
$
63.61

 
$
63.61

Number of option grants (in shares)
5,000

 

 

 
650,301

 
2,625

Total equity value (in millions) (1)
$
386.5

 
$
341.2

 
$
322.9

 
$
241.8

 
$
241.8

 
 
 
 
 
 
 
 
 
 
 
May
2016
 
July
2016
 
August
2016
 
September
2016
 
 
Stock value per share (1)
$
21.26

 
$
18.30

 
$
18.30

 
$
18.30

 
 
Number of option grants (in shares)(2)
37,500

 
14,000

 
1,250

 
1,500

 
 
Total equity value (in millions) (1)
$
80.8


$
69.6

 
$
69.6

 
$
69.6

 


(1)
These values have been discounted for a marketability factor as the shares are not tradable on any market or exchange and contain transfer restrictions.
(2)
Pursuant to the Option Exchange Offer, we granted modified stock options to eligible options holders (including the CEO) to purchase 568,427 shares of common stock in exchange for the cancellation of the tendered options to purchase 732,033 shares of common stock (see discussion below). We granted an additional 81,874 options on January 29, 2016. In the year ended January 31, 2017 we granted options to purchase 56,875 shares. There were no options granted for the fiscal year ended January 31, 2018. Refer to Note 10 in the "Notes to Consolidated Financial Statements" included in Item 8 of this annual report on Form 10-K, for further information.
There were no new grants of stock options during the fiscal year ended January 31, 2018.

Stock Option Exchange Program
In November 2015, we commenced the Option Exchange Offer to allow certain employees and non-employee members of our board of directors the opportunity to exchange, on a grant-by-grant basis, their eligible options, with varying exercise prices per share ranging from $70 to $300, for new stock options that the Company granted under its 2011 Plan. Generally, most of the employees and non-employee board members with outstanding options were eligible to participate in the Option Exchange Offer, which expired on December 29, 2015. Each new stock option has an exercise price equal to $85, the stock value per share estimated as of the quarter end date preceding modification. Each new stock option has a maximum term that is equal to the remaining term of the original 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 (“IPO”) of our common stock 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. There are three employees and one non-employee consultant who are not participating in the Option Exchange Offer.
The exchange of stock options was treated as a modification in accordance with Accounting Standards Codification (“ASC”) 718, “Compensation - Stock Compensation.” We determined that the modified stock options granted under the program contain a service and performance condition. In addition, we determined that there was no market condition associated with the modified stock options as the exercise price of $85 was determined using the stock value per share estimated as of the quarter end date preceding modification.
We did not recognize any incremental expense resulting from the modification. Since the modified stock options contain a liquidity event based performance condition (i.e., Change in Control or IPO), we determined recognition of any incremental compensation cost should be deferred until the occurrence of the liquidity event. Total future additional share-

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based compensation expense resulting from the modification of stock options, excluding CEO options, and including options previously classified as liability awards, totaled $5.2 and $6.2 million as of January 31, 2018 and 2017, respectively.
For option holders that did not participate in the Option Exchange Offer, their stock options continue to be granted in three tranches. The first tranche is comprised of 50% of the total options granted, while the second and third tranches are each comprised of 25% of the total options granted. The exercise price for the first tranche is the fair value of BCI Holdings common stock on the grant date. The exercise price for the second tranche is $200 and the exercise price for the third tranche is $300.    
We have concluded that there is only a service condition and no market condition for the first tranche given that the fair value of the common stock on the grant date does not vary significantly from the exercise price; therefore, the first tranche stock options do not constitute deeply out-of-the-money options. However, for the second and third tranches, we have concluded that a service and market condition exists, as the difference between the exercise price and the fair value of the BCI Holdings common stock on the grant date is significant.

 
For stock options subject solely to service conditions (where cash settlement is not probable), we recognize the grant date fair value of the stock options within expense using the straight-line method. For stock options subject to service and market conditions (where cash settlement is not probable), we recognize compensation cost from the service inception date to the vesting date for each vesting tranche (i.e., on a tranche by tranche basis) using the accelerated attribution method.
CEO Stock Options
We determined that all the stock option tranches granted to our CEO contain a service and performance condition. In addition, we performed an analysis of all stock options that were granted at a strike price significantly greater than the fair value of our stock at the time of grant and determined that these options had characteristics of “deep-out-of-the-money” stock options. Based on this analysis, we concluded these tranches were granted “deep-out-of-the-money” as the exercise prices were significantly greater than our grant date stock price of $125 (See “Current Common Stock Value” above for grant date price analysis). Options granted deep-out-of-the-money are deemed to contain a market condition.
Included in the Option Exchange Offer discussed above, we granted modified stock options to the CEO to purchase 225,000 shares of common stock in exchange for the tendered options to purchase 450,000 shares of common stock under the 2011 Plan. Each new stock option has an exercise price equal to $85, the stock value per share estimated as of the quarter end date preceding modification. Each new stock option has a maximum term that is equal to the remaining term of the original corresponding eligible option. Each new stock option becomes fully vested and exercisable only upon the consummation of a Change in Control or an IPO and only if the employee remains employed at that time. The modified stock options contain a liquidity event based performance condition. As a result, we determined compensation cost recognition should continue to be deferred until the occurrence of the Change in Control or IPO. As of January 31, 2018, and 2017, the total unrecognized share-based compensation expense for the CEO's options was $8.1 million. During fiscal years 2018, 2017 and 2016, we did not recognize any share-based compensation expense related to the CEO’s options.
New Grants
There were no new grants of stock options during the fiscal year ended January 31, 2018.
Share-based Compensation
The assumptions used to calculate the fair value of our share-based payment awards represent our best estimates, but these estimates involve inherent uncertainties. As a result, if different assumptions had been used, our share-based compensation expense may have been materially different. In addition, if factors change and we use different assumptions, our share-based compensation expense may be materially different in the future.
Please refer to Note 10, “Share-Based Compensation” of the “Notes to Consolidated Financial Statements” included in Item 8 of the annual report on Form 10-K, for more information.

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Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We establish and maintain the allowance for estimated losses based upon historical loss experience, evaluation of past due accounts receivable, current economic trends and our experience with respect to the paying history of certain customers. Management reviews the level of the allowance for doubtful accounts on a regular basis and adjusts the level of the allowance as needed. Our historical reserves have been sufficient to cover losses from uncollectible accounts. However, we cannot predict future changes in the financial stability of our customers, and actual losses from uncollectible accounts may differ from our estimates and have a material effect on our consolidated financial position, results of operations and cash flows.
Goodwill and Trade Names
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are evaluated for impairment annually as of November 1, or whenever events or changes in circumstances indicate that the asset might be impaired. We evaluate the possible impairment (i) if/when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable; or (ii) in the case of goodwill and indefinite-lived intangible assets, our annual impairment assessment date of November 1. These evaluations require significant judgment by our management in forecasting net cash flows to be derived by these intangible assets through our on-going operations. The discounted value of such cash flows (or our market capitalization in the case of goodwill) are compared to each asset's carrying value to assess whether there is an indication of impairment and resulting charges to record.
Some factors we consider important that could trigger an impairment review include the following:
significant under-performance relative to historical, expected or projected operating results;
significant changes in the manner of our use of the acquired assets or our strategy;
significant negative industry or general economic trends;
a decline in the Company’s valuation for a sustained period of time;
a significant adverse change in legal factors or in business climate; and
an adverse action or assessment by a regulator.

When performing the impairment review, we determine the carrying amount of each reporting unit by assigning assets and liabilities, including the existing goodwill, to those reporting units. A reporting unit is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. We determined we have two reporting units consisting of North America and Europe, which are also operating and reportable segments.

Prior to January 1, 2017, we reviewed goodwill for impairment utilizing a two-step process. To evaluate whether goodwill is impaired, the first step is to 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. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of enterprise value to EBITDA for comparable companies. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured.
Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue and expense growth rates, capital expenditures and the depreciation and amortization related to these capital expenditures, changes in working capital, discount rates, selection of appropriate control premiums, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Due to the inherent uncertainty involved in making these estimates, actual future results related to assumed variables could differ from these estimates. Changes in assumptions regarding future results or other underlying assumptions would have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge, if any.

Goodwill Impairment testing during fiscal year ended January 31, 2018
The North America goodwill was written down to zero as of January 31, 2017, and there were no indicators of impairment to our European reporting unit as of January 31, 2018.

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Goodwill Impairment testing during fiscal year ended January 31, 2017
During the three months ended April 30, 2016, we encountered a reduction in our operating results in comparison to our forecast, primarily due to greater weakness in upstream oil and gas than anticipated, slower rebound in our construction business, and the delay of capital projects by refinery and power plants which can be seen through our lower volume of work with industrial service customers. As a result of the decline in demand for our products and services, we re-assessed our revenue and EBITDA forecast beginning with fiscal year 2017 using a bottoms-up approach, having conversations with our key customers, and performing an analysis on current market conditions and industry spending behavior. Based on our assessment, we noted that despite the recent stabilization of oil prices during the first quarter of fiscal year 2017, there was continued uncertainty in the energy market resulting in a slow-down in capital spend. As a result, during the first quarter of fiscal year 2017, we updated our projections to reflect the decline in activity for the remainder of the year, adjusted our forecast for the outer years to maintain similar growth rates as our previous forecast, and performed the first step of the goodwill impairment test.
Under the first step of the impairment test, we determined the carrying value of the North American reporting unit exceeded fair value. We then performed the second step of the impairment test for the North American reporting unit and calculated the implied fair value of goodwill, which was less than its carrying value. Based on our analysis, we recorded a non-cash goodwill impairment charge of $65.7 million.
In connection with our annual goodwill impairment test that was conducted as of November 1, 2016, we bypassed the qualitative assessment for each reporting unit and proceeded directly to the first step of the goodwill impairment test. We were required to proceed to Step 2 as the fair value of the North American unit exceeded its carrying value by $119.7 million, or 19.2%. Based on the results of step two, we determined that the carrying value of the goodwill allocated to the North American operating segment was not impaired as of November 1, 2016. The reason we passed the step two impairment test was due to the fair value of our Customer Relationship intangible asset being much lower than the carrying value.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment" (ASU No. 2017-04). ASU No. 2017-04 simplifies the accounting for goodwill impairment. The standard removes Step 2 of the goodwill impairment test, which determined goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard is effective for non-public entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We elected to early adopt ASU No. 2017-04 as of January 1, 2017 and proceeded to perform the goodwill impairment test as of January 31, 2017 based upon impairment indicators identified during our annual impairment test as of November 1, 2016, where we failed Step 1 of the impairment test. The results of the impairment test determined the carrying value of the North American reporting unit exceeded its fair value by approximately $80.8 million, or 13.2%. Based on our analysis, we recorded a non-cash goodwill impairment charge of $32.3 million, the remaining carrying value, of our North American goodwill during the year ended January 31, 2017.

During the year ended January 31, 2017, the fair value of the European reporting unit exceeded its carrying value, suggesting no indicators of potential impairment.

Trade name impairment test during fiscal year ending January 31, 2018
To evaluate whether trade names are impaired, we compare the fair value to its 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 our trade names asset is less than its carrying value. Determining the fair value of trade names is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions. If actual results are not consistent with our estimates and assumptions, we may be exposed to material impairment charges.

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During the three months ended July 31, 2017, an indicator of impairment to our indefinite-lived intangible asset (trade name) was identified in our North American reporting unit due to a reduction in our forecast due to a slower than expected recovery in our maintenance and oil and gas customers. Based on our analysis, we concluded that the carrying value of our trade name indefinite-lived intangible asset exceeded its fair value and we recorded an impairment charge of $1.0 million. No further indicators of impairment existed to our North American trade name throughout the remainder of the fiscal year ended January 31, 2018. As of January 31, 2018, the net Customer Relationship definite-lived intangible asset was $295.7 million of which $281.0 million, or 95%, related to the North American reporting unit.
Trade name impairment test during fiscal year ending January 31, 2017
Due to certain indicators of impairment identified during our April 30, 2016 interim impairment test of goodwill, we assessed our indefinite and definite-lived intangible assets for impairment. Based on our analysis, we concluded that the carrying value of our indefinite-lived intangible asset (trade name) exceeded its fair value and recorded an impairment charge of $18.3 million in our North American reporting unit during the fiscal year ended January 31, 2017. As of January 31, 2017, the net Customer Relationship definite-lived intangible asset was $309.7 million of which $296.3 million, or 96%, related to the North American reporting unit.
There were no impairment charges recorded in Europe during the fiscal years ended January 31, 2018 and 2017.
These aforementioned impairment charges, which are included under the caption "Impairment of goodwill and other intangible assets" in our consolidated statement of operations, does not impact our operations, compliance with our debt covenants or our cash flows.

Long-lived Assets and Customer Relationships
We assess long-lived and definite-lived intangible assets for impairment on an individual basis whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors considered important which may trigger an impairment review if significant include the following:
underperformance relative to historical or projected future operating results;
changes in the manner of use of the assets;
changes in the strategy of our overall business; and
negative industry or economic trends.
If the carrying value of the asset is larger than its undiscounted cash flows, the asset is impaired. Impairment is measured as the difference between the net book value of the asset and the asset’s estimated fair value. We use the income valuation approach to determine the fair value of our long-lived assets and customer relationships. Fair value is estimated primarily utilizing the asset’s projected discounted cash flows. In assessing fair value, we must make assumptions regarding estimated future cash flows, the discount rate and other factors. If actual results are not consistent with our estimates and assumptions, we may be exposed to material impairment charges.
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years ended January 31, 2018, 2017 and 2016. We do not currently anticipate that there will be a material change in the estimates or assumptions we use to calculate the impairment of long-lived assets and customer relationships.
Impairment charges for our long-lived assets were $1.4 million, $4.5 million and $3.1 million during the fiscal years ended January 31, 2018, 2017 and 2016, respectively.

Customer Relationships Amortization Policy
In conjunction with the Transaction purchase price allocation, we assessed the appropriate amortization period for customer relationships by reviewing our customer retention over a look-back period. Customer relationships were ascribed a 25-year life, as the data supported a modest attrition amount, but did not support an indefinite life. The expected revenue growth from existing customer relationships exceeds the expected customer attrition rate, and since a reliably determinable pattern of use could not be established, we believe the straight-line method of amortization is appropriate.


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Depreciation Policy
We begin to depreciate our property and equipment when they are placed in service utilizing the straight-line method over each asset’s estimated useful life. We continue to depreciate assets held for rent even when they are not on rent. Significant management judgment is required in connection with determining the useful lives of property and equipment. Property and equipment are assigned a useful life based on our accounting policy for the asset class. We routinely track the age of our equipment that is retired and compare our estimate of useful lives to this data. We also evaluate current business practices and uses of our equipment to evaluate whether this may impact the economic life of the equipment. Based on this analysis, we reassess the appropriate useful lives for property and equipment at the asset class level whenever there are significant discrepancies between the expected retirement age of our equipment and our estimated useful lives. However, from time to time we may determine that certain individual groups of assets within an asset class that have become significant are not tracking with the estimated useful life of the overall asset class; therefore, the useful lives associated with the group are adjusted accordingly. Additionally, in the event that we acquire new rental products, we evaluate their useful lives based upon industry and past ownership practice until we have sufficient independent history and evidence to make our assessment.

In computing depreciation expense, we have made the assumption that there will be no salvage value at the end of the equipment’s useful life. If we were to change our depreciation policy from no salvage value to include a salvage value or were to change our depreciation methods due to shorter or longer useful lives, such changes could have an effect on our earnings, with the actual effect being determined by the change.

Medical Insurance Reserve
In fiscal year 2016, we switched to a self-insured plan and made an estimate for participant claims that had been incurred but not reported to the insurer of $0.8 million as of January 31, 2016. In fiscal year 2018 and 2017, we retained a third party to provide the incurred but not reported estimates. The estimates were developed in compliance with applicable standards as promulgated by the Actuarial Standards of Practice. Incurred but not reported claims as of January 31, 2018 and 2017 were estimated at $0.9 million and $0.8 million, respectively.

We purchased insurance coverage that provided reimbursement for any individual claim in excess of $175,000. Due to medical privacy regulations, we had limited visibility and little history with respect to the benefits from this policy. Therefore, we recorded these benefits as they were received.

Contingencies
We are subject to various claims and litigation in the normal course of business. Our current estimated range of liability related to various claims and pending litigation is based on claims for which management can determine that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Because of the uncertainties related to both the probability and possible range of loss on pending claims and litigation, considerable judgment is required in making a reasonable determination of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation. We do not anticipate that the ultimate disposition of these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Income Taxes
In preparing our consolidated financial statements, we recognize income taxes in each of the jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount of taxes currently payable or receivable as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each jurisdiction.

We must assess the likelihood that each of our deferred tax assets will be realized. To the extent we believe that realization of any of our deferred tax assets is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding tax expense in our consolidated statement of operations. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally reduces our overall income tax expense. The

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majority of our deferred tax asset relates to U.S. net operating loss carry forwards that have future expiration dates. Management believes that the Company will fully utilize all of its deferred tax assets, including federal, state and foreign net operating loss carryforwards, except $0.2 million of certain foreign tax credits and state net operating loss carryforwards as we believe it is more likely than not that those deferred tax assets will not be realized.

We have recorded provisional estimates associated with the December 22, 2017 enactment of the U.S. Tax Cuts and Jobs Act of 2017. The SEC has provided accounting and reporting guidance that allows us to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. We consider both the recognition of the transition tax and the remeasurement of deferred income taxes incomplete. New guidance from regulators, interpretation of the law, and refinement of our estimates from ongoing analysis of data and tax positions may change the provisional amounts.

The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax benefit for the fiscal year ended January 31, 2018. See Note 9 "Income Taxes" of the Notes to the Consolidated Financial Statements included in Item 8 of this annual report for further detail.

Inventory
Our inventory is composed of finished goods that we purchase and hold for resale, components that we utilize in our assembly of electrocoagulation equipment, pumps and filtration equipment and repair parts used to replace components in our rental fleet equipment. Inventory is valued at the lower of cost or market value. We write down our inventory for the estimated difference between the inventory’s cost and its estimated market value based upon our best estimates of market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which may have a material impact on our consolidated financial statements. Such circumstances may include, but are not limited to, the development of new competing technology that impedes the marketability of our products or the occurrence of significant price decreases.

We carry inventory in amounts necessary to satisfy our customers’ demand. We continually monitor our inventory status to control inventory levels and write down any excess or obsolete inventories on hand.

Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. We engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer contracts and customer lists, risk adjusted discount rates, brand awareness and market position, as well as assumptions about the period of time the brand will continue to be used in our product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable; as a result, actual results may differ from estimates.



38


Results of Operations
The table below presents results as follows:
 
Fiscal Years Ended January 31,
 
2018
 
 
2017
 
 
2016
(dollar amounts in thousands)
Amount
 
% of 
Revenues
 
 
Amount
 
% of 
Revenue
 
 
Amount
 
% of 
Revenue
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental revenue    
$
225,741

 
81.0
 %
 
 
$
207,985

 
81.5
 %
 
 
$
243,409

 
80.3
 %
Sales revenue    
18,893

 
6.8
 %
 
 
16,966

 
6.6
 %
 
 
17,271

 
5.7
 %
Service revenue    
33,977

 
12.2
 %
 
 
30,469

 
11.9
 %
 
 
42,449

 
14.0
 %
Total revenue    
278,611

 
100.0
 %
 
 
255,420

 
100.0
 %
 
 
303,129

 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee related expenses    
104,119

 
37.4
 %
 
 
94,148

 
36.9
 %
 
 
108,037

 
35.6
 %
Rental expense    
37,414

 
13.4
 %
 
 
31,718

 
12.4
 %
 
 
41,788

 
13.8
 %
Repair and maintenance    
13,467

 
4.8
 %
 
 
10,882

 
4.3
 %
 
 
11,740

 
3.9
 %
Cost of goods sold    
11,395

 
4.1
 %
 
 
10,408

 
4.1
 %
 
 
10,691

 
3.5
 %
Facility expense    
27,484

 
9.9
 %
 
 
26,863

 
10.5
 %
 
 
28,818

 
9.5
 %
Professional fees    
7,638

 
2.7
 %
 
 
3,835

 
1.5
 %
 
 
3,820

 
1.3
 %
Other operating expenses    
15,581

 
5.6
 %
 
 
14,568

 
5.7
 %
 
 
16,632

 
5.5
 %
Depreciation and amortization    
59,260

 
21.3
 %
 
 
59,775

 
23.4
 %
 
 
63,168

 
20.8
 %
Gain on sale of equipment
(3,403
)
 
(1.2
)%
 
 
(3,589
)
 
(1.4
)%
 
 
(2,299
)
 
(0.8
)%
Impairment of goodwill and other intangible assets
1,000

 
0.4
 %
 
 
116,340

 
45.5
 %
 
 
182,849

 
60.3
 %
Impairment of long-lived assets
1,391

 
0.5
 %
 
 
4,485

 
1.8
 %
 
 
3,086

 
1.0
 %
Total operating expenses    
275,346

 
98.8
 %
 
 
369,433

 
144.7
 %
 
 
468,330

 
154.4
 %
Income (loss) from operations    
3,265

 
1.2
 %
 
 
(114,013
)
 
(44.7
)%
 
 
(165,201
)
 
(54.4
)%
Other expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net    
40,734

 
14.6
 %
 
 
41,516

 
16.3
 %
 
 
42,329

 
14.0
 %
Foreign currency exchange (gain) loss, net    
(427
)
 
(0.3
)%
 
 
565

 
0.1
 %
 
 
1,163

 
0.3
 %
Other income, net
(20
)
 
 %
 
 
(22
)
 
 %
 
 

 
 %
Total other expenses, net    
40,287

 
14.5
 %
 
 
42,059

 
16.4
 %
 
 
43,492

 
14.3
 %
Loss before income taxes    
(37,022
)
 
(13.3
)%
 
 
(156,072
)
 
(61.1
)%
 
 
(208,693
)
 
(68.8
)%
Income tax benefit
(44,507
)
 
(16.0
)%
 
 
(31,937
)
 
(12.5
)%
 
 
(36,473
)
 
(12.0
)%
Net income (loss)
$
7,485

 
2.7
 %
 
 
$
(124,135
)
 
(48.6
)%
 
 
$
(172,220
)
 
(56.8
)%

 

39


Results of Operations - Fiscal Year 2018 compared to Fiscal Year 2017
 
Fiscal Years Ended January 31,
 
 
 
 
($ in thousands, except Operating Data)
2018
 
2017
 
$ Change
 
% Change
North America
 
 
 
 
 
 
 
Rental revenue    
$
187,740

 
$
174,897

 
$
12,843

 
7.3
 %
Sales revenue    
18,276

 
16,824

 
1,452

 
8.6
 %
Service revenue    
30,927

 
27,740

 
3,187

 
11.5
 %
Total revenue    
236,943

 
219,461

 
17,482

 
8.0
 %
Total operating expenses(3)   
246,803

 
345,008

 
(98,205
)
 
(28.5
)%
Loss from operations
(9,860
)
 
(125,547
)
 
115,687

 
(92.1
)%
Europe
 
 
 
 
 
 
 
Rental revenue    
38,001

 
33,088

 
4,913

 
14.8
 %
Sales revenue    
617

 
142

 
475

 
334.5
 %
Service revenue    
3,050

 
2,729

 
321

 
11.8
 %
Total European revenue    
41,668

 
35,959

 
5,709

 
15.9
 %
Total operating expenses(3)   
28,543

 
24,425

 
4,118

 
16.9
 %
Income from operations
13,125

 
11,534

 
1,591

 
13.8
 %
Consolidated
 
 
 
 
 
 
 
Total revenue
278,611

 
255,420

 
23,191

 
9.1
 %
Total operating expenses
275,346

 
369,433

 
(94,087
)
 
(25.5
)%
Total income (loss) from operations
$
3,265

 
$
(114,013
)
 
$
117,278

 
(102.9
)%
Operating Data:
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
Average utilization (1)
50.3
%
 
43.9
%
 
640
bps
 
 
Average daily rental rate (2)    
$
28.73

 
$
29.65

 
$
(0.92
)
 
(3.1
)%
Average number of rental units    
22,727

 
23,420

 
(693)

 
(3.0
)%
Europe
 
 
 
 
 
 
 
Average utilization (1)
41.3
%
 
44.8
%
 
(350
)bps
 
 
Average daily rental rate (2)    
$
84.41

 
$
86.62

 
$
(2.21
)
 
(2.6
)%
Average number of rental units    
2,110

 
1,648

 
462

 
28.0
 %
Consolidated
 
 
 
 
 
 
 
Average utilization (1)
49.5
%
 
44.0
%
 
550
bps
 
 
Average daily rental rate (2)    
$
32.67

 
$
33.46

 
$
(0.79
)
 
(2.4
)%
Average number of rental units    
24,837

 
25,068

 
(231)

 
(0.9
)%
(1)
The average utilization of rental fleet is a measure of efficiency used by management; it represents the percentage of time a unit of equipment is on-rent during a given period. It is not a U.S. GAAP financial measure.
(2)
The average daily rental rate is used by management to gauge the daily rate of rental equipment that we specifically track during a given period. It is not a U.S. GAAP financial measure.
(3)
Total operating expenses by reporting segment excludes inter-segment allocations from North America to Europe of $4.4 million and $5.1 million in fiscal years ended 2018 and 2017, respectively.


40


Revenue
North America
Our North American segment, saw overall growth in revenues in several of its key industries. Our largest industry growth was seen within our maintenance end market, consisting of industrial service, refinery and midstream customers, of $7.3 million, or 6.4%. This was driven by an increase in plant maintenance activities with new and existing customers. Our construction and oil and gas industries increased $3.2 million, or 6.8% and $2.6 million, or 12.4%, respectively. We started to see growth in oil and gas revenue beginning in the second quarter of fiscal 2018, which continued through the remainder of fiscal year 2018 with increased customer commitments as a result of the increase in the price per barrel for oil which ranged from a low of $43.01 to $66.14 as of January 31, 2018. The construction industry increased due to the overall economic growth primarily occurring in the western United States. Additional increases of $2.2 million, or 18.4% were spread across our diversified customer base, specifically in the food market industry which grew $1.6 million, representing triple digit growth. Lastly, our environmental industry grew $1.7 million, or 6.4%. Our average utilization rate increased 640 bps. Our average daily rental rate declined due to continued competitive pricing pressures in the marketplace. The rental revenue increase in these industries also positively impacted our sales and service revenue which grew 8.6% and 11.5%, respectively.

Europe
Our European segment revenue increased primarily due to an increase in revenues within our refinery customers of $3.7 million, or 83.0%, our chemical customers of $1.7 million, or 23.9% and our manufacturing customers of $0.9 million, or 49.9%. These increases were partially offset by a decrease in revenue within our environmental customers of $1.8 million, or 21.9%. The increases are primarily due to the introduction of our pumps and filtration line of business partially offset by a large environmental project in the prior year that did not recur in the current year. Average utilization decreased 350 bps primarily due to the 28.0% growth in the number of rental units as our expansion into the pump and filtration business continues to grow. The slight decrease in our average daily rental rate is due to pricing pressures from new competition entering the market.

Operating Expenses
North America    
Total operating expenses decreased $98.2 million which is primarily due to a $115.3 million reduction in impairment of goodwill and other intangibles. The impairment charges during the prior year were due to a reduction in our operating results in comparison to our forecast, primarily due to a greater weakness in upstream oil and gas than anticipated, slower recovery in our construction business, and the delay of capital projects by refinery and power plants which can be seen through the lower volume of work with industrial services customers. During the current year we have seen improvement across all of our industries. Excluding the change in impairment of goodwill and other intangibles, total operating expenses increased $17.1 million primarily due to the following:

$3.8 million increase in professional fees incurred in connection with a detailed review of strategic options, and various corporate finance considerations, consisting of potential refinancing options.
$8.6 million increase in employee related expenses due to an increase in bonus of $4.2 million due to improved company results and a $2.9 increase in payroll and payroll related expenses due to the addition of 48 employees to support the growth in the business. To a lesser degree medical insurance increased $0.9 million and temporary labor increased $0.7 million.
$5.1 million increase in rental expenses is primarily due to rebill and re-rent expenses as a result of higher rental revenue as well as increased outside hauling and truck expense to support the delivery of our equipment to our customers.
$0.9 million increase in other operating expenses is due to higher personnel recruiting, employee training and travel expenses.
$0.6 million increase in cost of goods sold is attributable to the $1.5 million, or 8.6% increase in sales revenue. The sales revenue growth is primarily due to the $12.8 million, or 7.3% increase in rental revenue.
$2.3 million increase in repair and maintenance expense is primarily due to servicing our tank, pump and other rental equipment as part of our initiative to get the majority of our rental equipment rent ready for our customers through our RROC program.


41


The above increases were partially offset by the following decreases:

$1.5 million decrease in depreciation and amortization expense due to more assets becoming fully depreciated before the start of fiscal year 2018 than the depreciation on newly acquired assets as well as the impairment of certain identified assets during the year ended January 31, 2017.
$3.1 million decrease in the impairment of long-lived assets

Europe
The increase in total operating expenses of $4.1 million was due to the following:
$1.4 million increase in employee related expenses primarily in wages for operations. Employee related expenses increased primarily due to an increase in headcount of 23 employees, or 18.3%, from 132 employees as of January 31, 2017 to 155 employees as of January 31, 2018, to support the growth in our business and roll-out of pumps and filtration products.
$1.0 million increase in depreciation and amortization expense as a result of the increase in fixed assets specifically related to the introduction of the pump and filtration business line.
$0.6 million increase in rental expense is primarily due to rebill and re-rent expenses as a result of higher rental revenue as well as increased outside hauling and truck expense to support the delivery of our equipment to our customers.
$0.5 million increase in facility expenses, primarily for office expenses, data processing and yard and shop expenses.
$0.2 million increase in repairs and maintenance expense and other expenses due to the increase in our rental fleet.

 
Income Tax Benefit
Income tax benefit during fiscal year 2018 increased by $12.6 million, to a benefit of $44.5 million from $31.9 million during fiscal year 2017. The increase is primarily due to the benefit from the Tax Cuts and Jobs Act of $29.4 million, partially offset by a non-cash transition tax expense of $1.0 million recorded in fiscal year 2018 and $24.0 million of expense recorded in fiscal year ended 2017 for non-deductible goodwill, in addition to the mix of jurisdictional income and loss.


42


Results of Operations
Revenue
 
Fiscal Years Ended January 31,
 
 
 
 
($ in thousands, except Operating Data)
2017
 
2016
 
$ Change
 
% Change
North America
 
 
 
 
 
 
 
Rental revenue    
$
174,897

 
$
215,463

 
$
(40,566
)
 
(18.8
)%
Sales revenue    
16,824

 
17,262

 
(438
)
 
(2.5
)%
Service revenue    
27,740

 
39,928

 
(12,188
)
 
(30.5
)%
Total revenue    
219,461

 
272,653

 
(53,192
)
 
(19.5
)%
Total operating expenses(3)   
345,008

 
446,038

 
(101,030
)
 
(22.7
)%
(Loss) income from operations
(125,547
)
 
(173,385
)
 
47,838

 
(27.6
)%
Europe
 
 
 
 
 
 
 
Rental revenue    
33,088

 
27,946

 
5,142

 
18.4
 %
Sales revenue    
142

 
9

 
133

 
1,477.8
 %
Service revenue    
2,729

 
2,521

 
208

 
8.3
 %
Total European revenue    
35,959

 
30,476

 
5,483

 
18.0
 %
Total operating expenses(3)   
24,425

 
22,292

 
2,133

 
9.6
 %
Income from operations
11,534

 
8,184

 
3,350

 
40.9
 %
Consolidated

 

 

 

Total revenue
255,420

 
303,129

 
(47,709
)
 
(15.7
)%
Total operating expenses
369,433

 
468,330

 
(98,897
)
 
(21.1
)%
Total (loss) income from operations
$
(114,013
)
 
$
(165,201
)
 
$
51,188

 
(31.0
)%
North America
 
 
 
 
 
 
 
Average utilization (1)
43.9
%
 
53.1
%
 
(920
)bps
 
 
Average daily rental rate (2)
$
29.65

 
$
31.40

 
$
(1.75
)
 
(5.6
)%
Average number of rental units
23,420
 
23,879
 
(459)

 
(1.9
)%
Europe
 
 
 
 
 
 
 
Average utilization (1)
44.8
%
 
42.8
%
 
200
 bps
 
 
Average daily rental rate (2)
$
86.62

 
$
90.55

 
$
(3.93
)
 
(4.3
)%
Average number of rental units
1,648
 
1,415
 
233
 
16.5
 %
Consolidated
 
 
 
 
 
 
 
Average utilization (1)
44.0
%
 
52.5
%
 
(850
)bps
 
 
Average daily rental rate (2)
$
33.46

 
$
34.05

 
$
(0.59
)
 
(1.7
)%
Average number of rental units
25,068
 
25,293
 
(225)
 
(0.9
)%
(1)
The average utilization of rental fleet is a measure of efficiency used by management; it represents the percentage of time a unit of equipment is on-rent during a given period. It is not a U.S. GAAP financial measure.
(2)
The average daily rental rate is used by management to gauge the daily rate of rental equipment that we specifically track during a given period. It is not a U.S. GAAP financial measure.
(3)
Operating expenses by reporting segment excludes inter-segment allocations from North America to Europe of $4.6 million and $5.1 million in fiscal years ended 2017 and 2016, respectively.


43


Revenue
North America
Our North American segment revenue decreased primarily due to a decrease in revenues from oil and gas customers of $24.3 million, or 53.7%, industrial service customers of $7.7 million, or 20.0% and environmental customers of $6.0 million or 19.7%. The decrease in these industries is primarily due to continued pressure in the upstream and downstream oil and gas markets as well as reduced downstream and pipeline opportunities. Based on these declines our average utilization decreased 920 basis points and our average daily rental rate declined due to competitive pricing pressures in the marketplace. The rental revenue impact of these industry decreases also impacted our sales and services revenue.

Europe
Our European segment revenue increased primarily due to an increase in revenues from environmental customers of $2.9 million or 54.8%, chemical customers of $2.0 million or 38.0%, industrial service customers of $1.0 million or 13.2%, and manufacturing customers of $0.7 million or 64.4%. The growth in Europe is primarily due to the introduction of pump and filtration products during the year and the capability of selling full service solutions to its customers. Average utilization increased 200 basis points despite a 16.5% increase in the average number of rental units, due to the increase in revenue. The average daily rental rate decreased due to new competition entering the market. The increase in revenue was negatively impacted by a $0.8 million foreign currency exchange as a result of the dollar strengthening against the British pound.

Operating Expenses
North America
The decrease in total operating expenses is due to the following:
$66.5 million decrease in goodwill and other intangible asset impairments;
$15.1 million decrease in total employee related expenses as a result of headcount reductions to align our expenses with lower revenues;
$10.2 million decrease in rental expenses such as fuel costs and re-rent expenses as a result of lower revenues.
$1.9 million decrease in facility expenses due to lower data processing fees related to a contract termination in the prior year of $0.9 million. Additionally, office expense and uniform costs decreased as a result of cost containment initiatives implemented in the current year;
$2.2 million decrease in other operating expenses. Travel and entertainment decreased $0.9 million as a result of travel cuts and bad debt expense decreased $0.6 million due to improved collections and a significant customer write-off in the prior year. Relocation, recruiting and other operating expenses decreased due to less new hires from external recruiters and less relocations; and
$3.9 million decrease in depreciation expense is due to more assets becoming fully depreciated than the depreciation on new assets as well as the impairment of certain identified assets during the years ended January 31, 2017 and 2016.

Europe
The increase in total operating expenses of $2.1 million is due to the following:
$1.2 million increase in employee related expenses as a result of increased headcount to support revenue growth;
$0.3 million increase in legal and other professional fees;
$0.5 million increase in depreciation expense due to the capital additions of rental equipment to support revenue growth; and
$0.3 million increase in foreign currency translation as a result of the dollar strengthening against the British pound.


44


Income Tax Benefit
Income tax benefit during fiscal year 2017 decreased by $4.6 million, to a benefit of $31.9 million from $36.5 million during fiscal year 2016. The decrease is primarily due to a decrease in consolidated pre-tax book loss, partially offset by a reduction in non-deductible goodwill in the amounts of $69.9 million and $113.9 million during fiscal years 2017 and 2016, respectively.

45


Liquidity and Capital Resources
Liquidity Summary
We have a history of generating higher cash flow from operations than net income (loss) recorded during the same period. The cash flow to fund our business has historically been generated from operations. We utilize this cash flow to invest in property and equipment that are core to our business and to reduce debt. We invest in assets that have relatively long useful lives. The Internal Revenue Code allows us to accelerate the depreciation of these assets for tax purposes over a much shorter period allowing us to defer the payment of income taxes.

Cash and cash equivalents by geographic region were the following:
 
January 31,
($ in thousands)
2018
 
2017
 
$ Change
 
% Change
United States
$
27,276

 
$
30,608

 
$
(3,332
)
 
(10.9
)%
Europe
6,241

 
13,438

 
(7,197
)
 
(53.6
)%
Canada
925

 
517

 
408

 
78.9
 %
Total cash and cash equivalents
$
34,442

 
$
44,563

 
$
(10,121
)
 
(22.7
)%

Our cash held outside the United States may be repatriated to the United States but, under current law, may be subject to U.S. state income taxes and foreign withholding taxes. We do not plan to repatriate cash balances from our foreign subsidiaries to fund our operations within the United States. We have not recognized deferred income taxes for state income, local country income and withholding taxes that could be incurred on distributions of certain non-U.S. earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences. 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. Cash was down year over year as the result of increased capital investment, expenses related to exploring strategic alternatives and increased accounts receivable.

Our business requires ongoing investment in equipment to maintain the size of our rental fleet. Most of our assets, if properly maintained, may generate a level of revenue similar to new assets of the same type over the assets’ useful lives. There is not a well-defined secondary or resale market for the majority of our assets; therefore, we rent our assets for as long as they may safely be employed to meet our customers’ needs. We invest capital in additional equipment with the expectation of generating revenue on that investment within a relatively short period of time.

We invest in new equipment for several reasons, including:
to expand our fleet of current product lines within markets where we already operate;
to enter new geographic regions;
to add additional product offerings in response to customer or market demands; and
to replace equipment that has been retired because it is no longer functional.

We have not made long-term commitments to purchase equipment. Additionally, the period of time between when we place an order for equipment and when we begin to receive it is typically two to four months. This ordering process enables us to quickly reduce our capital spending during periods of economic slowdown. During periods of expansion, we fund our investments in equipment utilizing our cash flow from operations or borrowings.

We may use funds to repurchase our outstanding indebtedness from time to time, including outstanding indebtedness under our credit facility and notes. Repurchases may be made in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, at prices and on terms we deem appropriate and subject to our cash requirements for other purposes, compliance with the covenants under our debt agreements, and other factors management deems relevant.


46


Debt
On June 1, 2011, we (i) entered into a $435.0 million senior secured credit facility (the “Credit Facility”), consisting of a $390.0 million term loan facility (the “Senior Term Loan”) and a $45.0 million revolving credit facility (the “Revolving Credit Facility”) and (ii) issued $240.0 million in aggregate principal amount of 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 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 3.05%, 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 Notes maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Notes are not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to the Company’s ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.

On November 13, 2013, we entered into a second amendment to the Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term 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.

On November 3, 2016, we entered into a third amendment to our Credit Facility (the “Third Amendment”) to amend the Revolving Credit Facility. The amendment (i) extends our maturity date from February 7, 2018 to November 7, 2019 (provided that such maturity date will be accelerated to January 30, 2019 unless the Company’s Notes are repaid in full or extended or refinanced on or prior to January 30, 2019) and (ii) reduces the revolver commitment from $45.0 million to $40.0 million in addition to certain other amendments to the original terms.

The Third Amendment is accounted for as debt modification. Costs incurred in connection with the Third Amendment were deferred and amortized over the term of the new Revolving Credit Facility. In addition, any unamortized deferred costs related to the old arrangement were written off in proportion to the decrease in borrowing capacity. As of January 31, 2017, we recorded $0.5 million to deferred costs related to the Third Amendment.

Under the Credit Facility, we may be required to satisfy and maintain a total leverage ratio not in excess of the leverage ratio of 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.

As of January 31, 2018, we did not have an outstanding balance on the Revolving Credit Facility as a result, we were not subject to a leverage test. Additionally, we were in compliance with all of our requirements and covenant tests under the Credit Facility.


47


The Credit Facility, as amended during February 2013, November 2013 and November 2016, contains certain restrictive covenants (in each case, subject to exclusions) that limit, among other things, our ability and the ability of our restricted subsidiaries to: (1) create, incur, assume, or permit to exist, any liens; (2) create, incur, assume, or permit to exist, directly or indirectly, any additional indebtedness; (3) consolidate, merge, amalgamate, liquidate, wind up, or dissolve themselves; (4) convey, sell, lease, license, assign, transfer, or otherwise dispose of assets; (5) make certain restricted payments; (6) make certain investments; (7) make any optional prepayment, repayment, or redemption with respect to, or amend or otherwise alter the terms of documents related to, certain subordinated indebtedness; (8) enter into sale leaseback transactions; (9) enter into transactions with affiliates; (10) change our fiscal year end date or the method of determining fiscal quarters; (11) enter into contracts that limit our ability to incur any lien to secure our obligations under the Credit Facility; (12) create any encumbrance or restriction on the ability of any restricted subsidiary to make certain distributions; and (13) engage in certain lines of business. The Credit Facility also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds.

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 $3.1 million, $2.9 million and $2.8 million of deferred financing costs during the fiscal years ended January 31, 2018, 2017 and 2016, 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.
Under the Company’s current debt structure if the Notes’ maturity is not extended beyond its Amended Term Loan maturity, the Amended Term Loan springs ahead to be due 90 days prior to maturity of the Notes on March 2, 2019. Additionally, the Revolving Credit Facility becomes due 30 days prior to the new term loan maturity date on January 30, 2019. Based on the Company’s cash flow forecast, it will not be possible to cover upcoming debt maturities with cash generated from operating activities. The Company plans to refinance or extend its debt obligations. However, at this time, the Company has not completed either an amendment or a refinancing to extend the maturities outside twelve months of the issuance of these financial statements. Therefore, there is substantial doubt about the Company's ability to continue as a going concern.
Management is optimistic that we will be able to refinance or extend our debt maturities, in part because of our improving financial results and decreasing net leverage. There is no assurance that the debt will be refinanced or extended in a timely manner, in amounts that are sufficient to meet the Company's obligations as they become due, or on terms acceptable to the Company, or at all. See Risk Factors included in Item 1A of this annual report on Form 10-K. The Company’s ability to meet its obligations as they become due in the ordinary course of business over the next twelve months will depend on its ability to refinance or extend the maturity of its Notes. This assumes, among other things, that the Company will continue to be successful in implementing its business strategy and that there will be no material adverse developments in its business, liquidity or capital requirements.
The Company has been reviewing a number of potential alternatives regarding its outstanding indebtedness. These alternatives include refinancing and/or other transactions. The Company has considered and will continue to evaluate potential transactions to improve its capital structure and address its liquidity constraints.


48


Interest and Fees
Interest and fees related to our Credit Facility and Notes were as follows:
 
Fiscal Years Ended January 31,
(in thousands)
2018
 
2017
 
2016
Credit Facility interest and fees (weighted average interest rate of 4.30%, 4.25% and 4.25%, respectively) (1)
$
19,327

 
$
19,387

 
$
19,380

Notes interest and fees (2)
21,231

 
21,110

 
20,999

Total interest and fees
$
40,558

 
$
40,497

 
$
40,379

(1)    Interest on the Amended Term Loan is payable quarterly based upon an interest rate of 4.30%.
(2)    Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.

Principal Payments on Debt
As of January 31, 2018, the minimum required principal payments relating to the Credit Facility and the Notes for each of the fiscal years ending January 31, are due according to the following table:
(In thousands)
 
2019
$
4,163

2020
634,414

Total
$
638,577


 Sources and Uses of Cash
Cash Provided by Operating Activities
Cash provided by operating activities was $17.1 million as compared to $33.9 million for the fiscal year ended January 31, 2017. Net income of $7.5 million was adjusted by the following non-cash items, such as depreciation of $59.3 million, deferred income taxes $45.4 million, gain on sale of equipment of $3.4 million, amortization of deferred financing costs $3.1 million, impairment of long-lived assets of $1.4 million and impairment of goodwill and other intangible assets of $1.0 million. Additionally, our cash flows from operations include a $14.5 million use of cash related to an increase in accounts receivable as a result of higher revenues. Accounts payable and other liabilities was a source of cash of $7.7 million due to the timing of purchases and payments to our suppliers.

 
Cash Used in Investing Activities
Cash used in investing activities was $23.6 million for the fiscal year ended January 31, 2018, as compared to $29.2 million for the fiscal year ended January 31, 2017. Cash used for the purchase of equipment was $28.2 million for the fiscal year ended January 31, 2018, compared to $34.5 million for the fiscal year ended January 31, 2017. We received $4.7 million in cash proceeds from the sale of equipment for the fiscal year ended January 31, 2018, compared to $5.3 million for the fiscal year ended January 31, 2017.

Cash Used in Financing Activities
Cash used in financing activities was $4.2 million for the fiscal year ended January 31, 2018 compared to $4.7 million for the fiscal year ended January 31, 2017.

Effect of Exchange Rate Changes on Cash
The effect of foreign currency translation on cash resulted in an increase of $0.6 million and a decrease of $0.2 million to cash and cash equivalents for the fiscal years ended January 31, 2018 and 2017, respectively.


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Contractual Obligations
We are obligated to make future payments under various contracts such as debt agreements, lease agreements, and purchase obligations. The following table represents our contractual obligations as of January 31, 2018.
 
Payments Due by Period
(in thousands) 
Total
 
1 year
 
2 - 3 
years
 
4 - 5
years
 
After
5 years
Contractual obligations:
 
 
 
 
 
 
 
 
 
Commitment fee on credit facility(2)   
$
4

 
$
4

 
$

 
$

 
$

Operating lease obligations(3)   
45,514

 
10,375

 
13,240

 
8,756

 
13,143

Capital lease obligations(5)   
2,784

 
1,127

 
1,086

 
571

 

Senior term loan (4)
398,577

 
4,163

 
394,414

 

 

Scheduled interest payment obligations under senior term loan (1)
18,504

 
17,107

 
1,397

 

 

Senior unsecured notes(4)   
240,000

 

 
240,000

 

 

Scheduled interest payment obligations under senior unsecured notes(1)   
26,400

 
19,800

 
6,600

 

 

Total contractual obligations
$
731,783

 
$
52,576

 
$
656,737

 
$
9,327

 
$
13,143

 
(1)
Estimated interest payments have been calculated based on the principal amount of debt and the applicable interest rates as of January 31, 2018.     
(2)
This represents the estimated payments due for maintaining the credit facility.
(3)
This represents the minimum lease payments due in such period under non-cancelable operating leases.
(4)
This represents the scheduled principal and interest payments due in such period.
(5)
This represents the scheduled principal and interest payments due in such period.

Off-Balance Sheet Arrangements
As of January 31, 2018, 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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Item 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk related to our debt. We have substantial debt and, as a result, significant debt service obligations. As of January 31, 2018, our total indebtedness was $638.6 million (including $240.0 million aggregate principal amount of 8.25% senior notes due 2019 and $398.6 million aggregate principal amount outstanding of LIBOR term loans (subject to a 1.25% floor) under our term loan facility).

A 100 basis point increase in interest rates for our debt would have had an approximately $4.0 million impact on reported net income for the fiscal year ended January 31, 2018. We cannot make any assurances that we will not need to borrow additional amounts in the future or that funds will be extended to us under comparable terms or at all. If funding is not available to us at a time when we need to borrow, we would have to use our cash reserves, which may have a material adverse effect on our operating results, financial position and cash flows.

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, the most significant of which is the Euro. Below is a list of the countries in which our foreign subsidiaries are located, along with the local currencies in which their transactions are denominated.
Country
 
Local Currency
Canada
 
Canadian dollar
France
 
Euro
Germany
 
Euro
The Netherlands
 
Euro
The United Kingdom
 
British pound sterling
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 level of our international operations during fiscal year 2018 relative to the Company as a whole, we estimate a 10% change in the exchange rates would cause our annual after-tax earnings to change by approximately $0.6 million.



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Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors of BakerCorp International, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BakerCorp International, Inc. and Subsidiaries (the Company) as of January 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows for the three years ended January 31, 2018, 2017 and 2016 and the related notes and schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2018 and 2017, and the results of its operations and its cash flows for the three years ended January 31, 2018 in conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2017-04
As discussed in Note 1 to the consolidated financial statements, BakerCorp International, Inc. and Subsidiaries changed its method for testing goodwill for impairment as a result of the early adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment,” on January 1, 2017.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has significant debt obligations coming due and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/Ernst & Young LLP
We have served as the Company's auditor since 2005.
Irvine, California
April 20, 2018


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BakerCorp International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
 
January 31,
 
2018
 
2017
Assets
 
 
 
Current assets: