BakerCorp International, Inc. - FORM 10-Q - June 14, 2018

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EX-32 - EXHIBIT 32 - BakerCorp International, Inc.bakercorpexhibit3204302018.htm
EX-31.2 - EXHIBIT 31.2 - BakerCorp International, Inc.bakercorpexhibit3120430201.htm
EX-31.1 - EXHIBIT 31.1 - BakerCorp International, Inc.bakercorpexhibit3110430201.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
 FORM 10-Q
___________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2018
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     
Commission File Number: 333-181780
 ___________________________________________________
BAKERCORP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________
Delaware
 
13-4315148
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
7800 N. Dallas Parkway, Suite 500, Plano, Texas
 
75024
(Address of principal executive offices)
 
(Zip Code)

(888) 882-4895
(Registrant’s telephone number, including area code)
 ___________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ý*

* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months, had it been subject to such filing requirements.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Emerging growth company
 
x
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

There is no public market for the registrant’s common stock. There were 100 shares of the registrant’s common stock, par value $0.01 per share, outstanding on June 11, 2018.
 


TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)

 
April 30,
2018
 
January 31,
2018
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
27,454

 
$
34,442

Accounts receivable, net of allowance for doubtful accounts of $5,531 and $5,446, respectively
71,330

 
68,105

Inventories, net
5,187

 
4,981

Prepaid expenses and other assets
5,056

 
3,443

Total current assets
109,027

 
110,971

Property and equipment, net
306,860

 
310,676

Goodwill
56,588

 
57,832

Other intangible assets, net
335,948

 
340,529

Other assets
1,394

 
1,093

Total assets
$
809,817

 
$
821,101

Liabilities and shareholder’s equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
22,759

 
$
20,514

Accrued expenses
29,003

 
28,533

Current portion of long-term debt (net of deferred financing costs of $3,263 and $3,258, respectively)
1,089

 
905

Total current liabilities
52,851

 
49,952

Long-term debt, net of current portion (net of deferred financing costs of $140 and $932, respectively)
633,045

 
633,482

Deferred tax liabilities, net
65,713

 
65,705

Other long-term liabilities
2,177

 
2,328

Total liabilities
753,786

 
751,467

Commitments and contingencies


 


Shareholder’s equity:
 
 
 
Common stock, $0.01 par value; 100,000 shares authorized; 100 shares issued and outstanding as of April 30, 2018 and January 31, 2018
—

 
—

Additional paid-in capital
393,605

 
393,532

Accumulated other comprehensive loss
(25,250
)
 
(22,221
)
Accumulated deficit
(312,324
)
 
(301,677
)
Total shareholder’s equity
56,031

 
69,634

Total liabilities and shareholder’s equity
$
809,817

 
$
821,101


See Accompanying Notes


1

BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited)
(In thousands)

 
Three Months Ended April 30,
 
2018
 
2017
Revenue:
 
 
 
Rental revenue
$
62,362

 
$
50,813

Sales revenue
5,225

 
4,698

Service revenue
8,223

 
7,628

Total revenue
75,810

 
63,139

Operating expenses:
 
 
 
Employee related expenses
27,994

 
24,940

Rental expenses
12,181

 
8,757

Repair and maintenance
3,457

 
3,168

Cost of goods sold
2,941

 
3,143

Facility expenses
7,469

 
6,832

Professional fees
1,506

 
1,359

Other operating expenses
4,351

 
4,020

Depreciation and amortization
14,901

 
14,721

Gain on sale of equipment
(733
)
 
(1,120
)
Impairment of long-lived assets
196

 
200

Total operating expenses
74,263

 
66,020

Income (loss) from operations
1,547

 
(2,881
)
Other expenses:
 
 
 
Interest expense, net
10,530

 
9,982

Foreign currency exchange gain, net
566

 
160

Total other expenses, net
11,096

 
10,142

Loss before income tax expense (benefit)
(9,549
)
 
(13,023
)
Income tax expense (benefit)
1,098

 
(4,812
)
Net loss
$
(10,647
)
 
$
(8,211
)

See Accompanying Notes



2

BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (loss) (unaudited)
(In thousands)

 
Three Months Ended April 30,
 
2018
 
2017
Net loss
$
(10,647
)
 
$
(8,211
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(3,029
)
 
2,090

Total comprehensive loss
$
(13,676
)
 
$
(6,121
)

See Accompanying Notes



3

BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholder’s Equity
(In thousands)

 
Common Stock
 
Additional
Paid-in
Capital 
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Equity 
 
Shares
 
Amount 
 
Balance as of January 31, 2018
100

 
$
—

 
$
393,532

 
$
(22,221
)
 
$
(301,677
)
 
$
69,634

Additional investment from BakerCorp International Holdings, Inc., net
—

 
—

 
73

 
—

 
—

 
73

Other comprehensive income
—

 
—

 
—

 
(3,029
)
 
—

 
(3,029
)
Net income
—

 
—

 
—

 
—

 
(10,647
)
 
(10,647
)
Balance as of April 30, 2018
100

 
$
—

 
$
393,605

 
$
(25,250
)
 
$
(312,324
)
 
$
56,031


See accompanying notes


4

BakerCorp International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)

 
Three Months Ended April 30,
 
2018
 
2017
Operating activities
 
 
 
Net loss
$
(10,647
)
 
$
(8,211
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Provision for doubtful accounts
346

 
600

Provision for excess and obsolete inventory, net
—

 
55

Share-based compensation
81

 
138

Gain on sale of equipment
(733
)
 
(1,120
)
Depreciation and amortization
14,901

 
14,721

Amortization of deferred financing costs
787

 
744

Deferred income taxes
180

 
(5,049
)
Amortization of above-market lease
(29
)
 
(38
)
Impairment of long-lived assets
196

 
200

Changes in assets and liabilities:
 
 
 
Accounts receivable
(3,908
)
 
(6,787
)
Inventories
(210
)
 
(675
)
Prepaid expenses and other assets
(1,525
)
 
565

Accounts payable and other liabilities
2,770

 
(1,554
)
Net cash provided by (used in) operating activities
2,209

 
(6,411
)
Investing activities
 
 
 
Purchases of property and equipment
(9,362
)
 
(9,836
)
Proceeds from sale of equipment
879

 
470

Net cash used in investing activities
(8,483
)
 
(9,366
)
Financing activities
 
 
 
Repayment of long-term debt
(1,041
)
 
(1,041
)
Net cash used in financing activities
(1,041
)
 
(1,041
)
Effect of foreign currency translation on cash
327

 
(442
)
Net decrease in cash and cash equivalents
(6,988
)
 
(17,260
)
Cash and cash equivalents, beginning of period
34,442

 
44,563

Cash and cash equivalents, end of period
$
27,454

 
$
27,303

 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
4,803

 
$
4,198

Income taxes
$
1,007

 
$
1,178


See Accompanying Notes


5

BakerCorp International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization, Description of Business, and Basis of Presentation
We are a provider of liquid containment, transfer and treatment solutions, operating within a specialty sector of the broader industrial services industry. Our revenue is generated by providing customized solutions, rental equipment, customized solutions, and service to our customers. We provide a wide variety of steel and polyethylene temporary storage tanks, roll-off containers, pumps, filtration, pipes, hoses and fittings, shoring, and related products to a broad range of customers for a number of applications. Tank and roll-off container applications include the storage of water, chemicals, waste streams, and solid waste. Pump applications include the pumping of groundwater, municipal waste and other fluids. Filtration applications include the separation of various solids from liquids. We serve a variety of industries, including industrial and environmental remediation, refining, environmental services, construction, chemicals, transportation, power, municipal works, and oil and gas. We have branches in 23 states in the United States as well as branches in Canada, France, Germany, the Netherlands, and the United Kingdom. As used herein, the terms “Company,” “we,” “us,” and “our” refer to BakerCorp and its subsidiaries, unless the context indicates to the contrary.

Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended January 31, 2018, included in our 2018 Annual Report on Form 10-K filed with the SEC on April 23, 2018.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary for a fair statement of our results of operations and financial position for the interim periods. The results of operations for the three months ended April 30, 2018 are not necessarily indicative of the results to be expected for future quarters or the full year.

Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions with our subsidiaries have been eliminated.

Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, inventory valuation, customer rebates, sales returns and allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets and goodwill, depreciation and amortization, contingencies, income taxes and share-based compensation (expense and liability). Our estimates, judgments, and assumptions are based on historical experience, future expectations, and other factors which we believe to be reasonable. Actual results could materially differ from those estimates.



6

Note 2. Going Concern
During the second quarter of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern”. This update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. The Company adopted this standard for the year ended January 31, 2017. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern in each reporting period, including interim periods.

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the filing of the Company’s Form 10-Q. Management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before June 15, 2019. As of April 30, 2018, the Company had $27.5 million of cash and cash equivalents on its condensed consolidated balance sheet and $40.0 million of availability under its revolving credit facility. A substantial amount of the Company's cash from operations is used for debt service obligations. Under the Company’s 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.

The Company’s current cash and cash equivalents and its forecasted cash flows generated from operating activities through June 15, 2019, will not be sufficient to meet the Company’s debt maturities, prior to June 15, 2019. As a result, there is substantial doubt about the Company’s ability to continue as a going concern.

The Company has been reviewing a number of potential alternatives regarding its outstanding indebtedness, including refinancing or extending its debt obligations. 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 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 the Company's obligations as they become due, or on terms acceptable to the Company, or at all.

The accompanying condensed consolidated financial statements are prepared on a going concern basis and do not include any adjustments that might result from uncertainty about the Company’s ability to continue as a going concern.

Note 3. Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2018, the FASB issued ASU 2018-05 associated with the accounting and disclosures around the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which the Company has adopted. See Note 10 for the disclosures related to this amended guidance.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718)”. The guidance clarifies how an entity should account for effects of a modification of a share-based payment. Under the updated guidance, a modification is defined as a change in the terms or conditions of a share-based payment award, and an entity should account for the effects of a modification unless all of the following are met:

1.
The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation techniques that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.
2.
The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.
3.
The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

Adoption of this guidance did not have an impact on our financial statements.


7

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”). ASU No. 2016-09 simplifies several aspects of the accounting for share-based payments transactions, including income tax consequences, classification of awards as either liability or equity, and classification on the statement of cash flows. We prospectively adopted the amendments in this guidance that relate to the classification of excess tax benefits from share-based payment arrangements on the statement of cash flows. The excess tax benefits from share-based payment arrangements result from stock-based compensation windfall deductions in excess of the amounts reported for financial reporting purposes. We did not have any windfall deductions as of the adoption date so there was no impact to our financial statements upon adoption.

Other significant components of the adopted guidance include:

•
The guidance requires that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. We have historically classified such payments as financing activities, so no retrospective change was required to our historic statements of cash flows.
•
Certain aspects of the guidance require a cumulative change to retained earnings upon adoption. Upon adopting this guidance, we elected to continue to estimate forfeitures of share-based payments so there was no cumulative change to retained earnings upon adoption and, therefore, no impact to our financial statements.

Recently Issued Accounting Pronouncements
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company has elected to treat any potential GILTI inclusions as a period cost.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 23), Restricted Cash". The guidance will require restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. We expect to adopt this guidance when effective, and do not expect the guidance to have a significant impact on our condensed consolidated financial statements based upon our current procedures for tracking restricted cash and cash equivalents.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets other than Inventory". The guidance will require companies to recognize the income tax effects of intra-entity sales and transfers of assets other than inventory in the period in which the transfer occurs. The new guidance will be effective for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. The guidance requires modified retrospective adoption. We expect to adopt this guidance when effective, and do not expect the guidance to have a significant impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The standard is effective for non-public entities for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2016-15 will have on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). This amendment requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases” and increases the disclosure requirements surrounding these leases. For non-public business entities, ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements.
During May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). ASU No. 2014-09 will require companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance

8

obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU No. 2014-09 allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. A decision about which method to use will affect a company’s implementation plans. The standard and multiple clarifying standard updates are effective for non-public entities for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact the adoption of ASU No. 2014-09 will have on our condensed consolidated financial statements.

Note 4. Changes in Accumulated Other Comprehensive Loss
The following table includes the change in foreign currency translation adjustments to the components of accumulated other comprehensive loss:
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Balance, beginning of period
$
(22,221
)
 
$
(41,537
)
Other comprehensive (loss) income before reclassifications
(3,029
)
 
2,090

Balance, end of period
$
(25,250
)
 
$
(39,447
)


Note 5. Inventories
Inventories, net consists of the following:
(In thousands)
April 30,
2018
 
January 31,
2018
Components
$
4,424

 
$
4,176

Work-in-process
753

 
490

Finished goods
841

 
1,146

Less: inventory reserve
(831
)
 
(831
)
Inventories, net
$
5,187

 
$
4,981



9

Note 6. Property and Equipment, Net
Property and equipment, net consisted of the following as of April 30, 2018:
(In thousands)
Cost
 
Accumulated
Depreciation
 
Net
Carrying Amount
Assets held for rent:
 
 
 
 
 
Secondary containment
$
3,599

 
$
(2,435
)
 
$
1,164

Boxes
33,630

 
(16,830
)
 
16,800

Filtration
19,789

 
(10,758
)
 
9,031

Generators and light towers
667

 
(294
)
 
373

Pipes, hoses and fittings
9,399

 
(6,299
)
 
3,100

Non-steel containment
12,522

 
(5,702
)
 
6,820

Pumps
65,086

 
(43,782
)
 
21,304

Shoring
6,253

 
(4,558
)
 
1,695

Steel containment
328,155

 
(103,453
)
 
224,702

Tank trailers
1,888

 
(1,770
)
 
118

Construction in progress
2,629

 
—

 
2,629

Total assets held for rent
483,617

 
(195,881
)
 
287,736

Assets held for use:
 
 
 
 
 
Leasehold improvements
4,589

 
(2,958
)
 
1,631

Machinery and equipment
45,722

 
(34,114
)
 
11,608

Office furniture and equipment
6,794

 
(5,056
)
 
1,738

Software
15,524

 
(11,603
)
 
3,921

Construction in progress
226

 
—

 
226

Total assets held for use
72,855

 
(53,731
)
 
19,124

Total
$
556,472

 
$
(249,612
)
 
$
306,860



10

Property and equipment, net consisted of the following as of January 31, 2018:
(In thousands)
Cost
 
Accumulated
Depreciation
 
Net
Carrying Amount
Assets held for rent:
 
 
 
 
 
Secondary containment
$
3,631

 
$
(2,538
)
 
$
1,093

Boxes
31,705

 
(16,320
)
 
15,385

Filtration
18,995

 
(10,115
)
 
8,880

Generators and light towers
642

 
(276
)
 
366

Pipes, hoses and fittings
9,510

 
(6,448
)
 
3,062

Non-steel containment
12,101

 
(5,595
)
 
6,506

Pumps
64,693

 
(42,108
)
 
22,585

Shoring
5,943

 
(4,325
)
 
1,618

Steel containment
329,795

 
(100,683
)
 
229,112

Tank trailers
1,888

 
(1,768
)
 
120

Construction in progress
2,315

 
—

 
2,315

Total assets held for rent
481,218

 
(190,176
)
 
291,042

Assets held for use:
 
 
 
 
 
Leasehold improvements
4,590

 
(2,910
)
 
1,680

Machinery and equipment
44,664

 
(33,102
)
 
11,562

Office furniture and equipment
6,557

 
(4,871
)
 
1,686

Software
15,403

 
(10,923
)
 
4,480

Construction in progress
226

 
—

 
226

Total assets held for use
71,440

 
(51,806
)
 
19,634

Total
$
552,658

 
$
(241,982
)
 
$
310,676

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) are less than the carrying value, a write-down would be recorded to reduce the related carrying value of the asset to its estimated fair value.
During the three months ended April 30, 2018 and 2017, certain assets that were on long-term rentals were returned in conditions beyond repair. We determined that the net book value of these assets exceeded the assets’ estimated fair value. As a result, during each of the three months ended April 30, 2018 and 2017, respectively, we recorded an impairment charge of $0.2 million in our North American segment.
Included in machinery and equipment are assets under capital leases with a cost of $5.7 million and $5.3 million as of April 30, 2018 and January 31, 2018, respectively, and accumulated depreciation of $2.3 million and $2.1 million as of April 30, 2018 and January 31, 2018, respectively.
Depreciation and amortization expense related to property and equipment including amortization expense for assets recorded as capital leases for the three months ended April 30, 2018 and 2017 was $10.8 million and $10.7 million, respectively.

11

Note 7. Goodwill and Other Intangible Assets, Net
Goodwill
Changes in the carrying amount of the European reporting unit goodwill was as follows:
(In thousands)
Total
Balance as of January 31, 2018
$
57,832

Foreign currency translation
(1,244
)
Balance as of April 30, 2018
$
56,588


We evaluate the carrying value of goodwill annually as Novemeber 1 of each fiscal year and more frequently if we believe indicators of impairment exist.

We perform our annual, or interim goodwill impairment test in accordance with ASU No. 2017-04 by comparing the estimated fair value of a reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount. We will record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. We estimate the fair value of our reporting units based on income and market approaches.

Our remaining goodwill is related to our European reporting unit. There were no indicators of impairment as of April 30, 2018 to our European reporting unit.
Other Intangible Assets, Net
The components of other intangible assets, net was the following as of:
 
April 30, 2018
 
January 31, 2018
(In thousands)
Gross (1)
 
Impairment
 
Accumulated
Amortization
 
Net
 
Gross (1)
 
Impairment
 
Accumulated
Amortization
 
Net
Carrying amount:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships (25 years)
$
402,761

 
$
—

 
$
(111,430
)
 
$
291,331

 
$
403,192

 
$
—

 
$
(107,518
)
 
$
295,674

Customer backlog (2 years)
200

 
—

 
(200
)
 
—

 
200

 
—

 
(200
)
 
—

Developed technology (11 years)
1,665

 
—

 
(666
)
 
999

 
1,671

 
—

 
(630
)
 
1,041

Trade name (Indefinite)(1)
86,756

 
(43,138
)
 
—

 
43,618

 
86,952

 
(43,138
)
 
—

 
43,814

Total carrying amount
$
491,382

 
$
(43,138
)
 
$
(112,296
)
 
$
335,948

 
$
492,015

 
$
(43,138
)
 
$
(108,348
)
 
$
340,529

(1)
Amounts are stated at gross, net of impairment charges to trade name of $1.0 million for the fiscal year ended January 31, 2018.
We evaluate the carrying value of our indefinite-lived intangible asset (trade name) annually during the fourth quarter of each fiscal year and more frequently if we believe indicators of impairment exist. To test our indefinite-lived intangible asset for impairment, we compare the fair value of our indefinite-lived intangible asset to its carrying value. We estimate the fair value using an income approach and using the asset’s projected discounted cash flows. We recognize an impairment loss when the estimated fair value of the indefinite-lived intangible asset is less than the carrying value.
We assess the impairment of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The asset is impaired if its carrying value exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset. In assessing recoverability, we must make assumptions regarding estimated future cash flows and other factors. The impairment loss is the amount by which the carrying value of the asset exceeds its fair value. We estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model. When calculating fair value, we must make assumptions regarding estimated future cash flows, discount rates and other factors.
As of April 30, 2018 there were no indicators of impairment to our definite-lived intangible assets.

12

Amortization expense related to intangible assets for the three months ended April 30, 2018 and 2017 was $4.1 million and $4.0 million, respectively. Estimated amortization expense for the fiscal periods ending January 31 is as follows:
(In thousands)
 
Remainder of the fiscal year ending January 31, 2019
$
16,261

2020
16,261

2021
16,261

2022
16,261

2023
16,261

Thereafter
211,025

Total
$
292,330



Note 8. Accrued Expenses
Accrued expenses consist of the following as of:
(In thousands)
April 30,
2018
 
January 31,
2018
Accrued compensation
$
10,094

 
$
15,911

Accrued insurance
933

 
870

Accrued interest
8,208

 
3,258

Accrued professional fees
273

 
179

Accrued taxes
5,875

 
4,727

Capital lease - current
965

 
683

Customer deposits
342

 
410

Other accrued expenses
2,313

 
2,495

Total accrued expenses
$
29,003

 
$
28,533


Note 9. Debt
Debt consists of the following:
(In thousands)
April 30,
2018
 
January 31,
2018
Senior term loan (LIBOR margin of 3.0%, and interest rate of 4.77% and 4.30%, respectively)
$
397,537

 
$
398,577

Senior unsecured notes
240,000

 
240,000

Total debt
637,537

 
638,577

Less: deferred financing costs
(3,403
)
 
(4,190
)
Total debt less deferred financing costs
634,134

 
634,387

Less: current portion (net of current portion of deferred financing costs of $3,263 and $3,258, respectively)
(1,089
)
 
(905
)
Long-term debt, net of current portion (net of long-term portion of deferred financing costs of $140 and $932, respectively)
$
633,045

 
$
633,482

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”).

13

Credit Facility
On February 7, 2013, we entered into a first amendment to refinance our Credit Facility (the “First Amendment”), to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Notes are not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to our ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to our Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term Loan”), which may be used for general corporate purposes, including to finance permitted acquisitions. The terms applicable to the Incremental Term Loans are the same as those applicable to the term loans under the Credit Facility.

On November 3, 2016, we entered into a third amendment to our Credit Facility (the “Third Amendment”) to amend the Revolving Credit Facility. The amendment (i) extends 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. Under the amended Credit Facility, we may be required to satisfy and maintain a total leverage ratio if there is an outstanding balance on the revolving loan of 25% or more of the committed amount on and quarter end.

The Credit Facility, as amended, in February 2013, November 2013 and November 2016, places certain limitations on our (and all of our U.S. subsidiaries’) ability to incur additional indebtedness, pay dividends or make other distributions, repurchase capital stock, make certain investments, enter into certain types of transactions with affiliates, utilize assets as security in other transactions, and sell certain assets or merge with or into other companies.

The Third Amendment was accounted for as a debt modification. Costs incurred in connection with the Third Amendment are being 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 April 30, 2018, we did not have an outstanding balance on the revolving loan; and therefore, we were not subject to a leverage test. Additionally, as of April 30, 2018, we were in compliance with all of our requirements and covenant tests under the Credit Facility, as amended.

Senior Unsecured Notes Due 2019
On June 1, 2011, we issued $240.0 million of fixed rate 8.25% Notes due, June 1, 2019. We may redeem all or any portion of the Notes at the redemption prices set forth in the applicable indenture, plus accrued and unpaid interest. Upon a change of control, we are required to make an offer to redeem all of the Notes from the holders at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of the repurchase. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by our direct and indirect existing and future wholly-owned domestic restricted subsidiaries.


14

Interest and Fees
Costs related to debt financing are deferred and amortized to interest expense over the term of the underlying debt instruments utilizing the straight-line method for our revolving credit facility and the effective interest method for our senior term and revolving loan facilities. As of April 30, 2018 and January 31, 2018, deferred financing costs of $3.4 million and $4.2 million, respectively, are reflected as a reduction of the underlying debt. We amortized $0.8 million and $0.7 million of deferred financing costs during the three months ended April 30, 2018 and 2017, respectively.
Interest and fees related to our Credit Facility and the Notes are as follows:
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Credit Facility interest and fees
$
5,161

 
$
4,859

Notes interest and fees (1)
5,328

 
5,296

Total interest and fees
$
10,489

 
$
10,155

 
 
 
 
Credit Facility interest rate
4.77
%
 
4.30
%
(1)    Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.

Principal Payments on Debt
As of April 30, 2018, the schedule of minimum required principal payments on our debt for each of the fiscal years ending January 31 are due according to the table below:
(In thousands)
 
Remainder of the fiscal year ending January 31, 2019
$
3,122

2020
244,163

2021
390,252

Total
$
637,537


Note 10. Income Taxes
U.S. Tax Reform
On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. The Tax Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. In March 2018, the FASB issued ASU 2018-05 associated with the accounting and disclosures around the enactment of the Tax Act and the Securities and Exchange Commission’s SAB 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of April 30, 2018, we have not changed the provisional estimates recognized for the fiscal year ended January 31, 2018.
All amounts recognized associated with the Tax Act as of April 30, 2018 are provisional. Given the complexity of the Tax Act, we are still evaluating the tax impact and obtaining the information required to complete the accounting. The date we expect to complete the accounting is not currently determinable while we continue to obtain the information required to complete the accounting. Given the provisional amounts recognized for the fiscal year ended January 31, 2018, and the fact that we have not changed our provisional estimates, the impact of measurement period adjustments was not material during the three months ended April 30, 2018.
The income tax expense and the benefit for the three months ended April 30, 2018 and 2017, respectively, is based on the estimated effective tax rate for the entire fiscal year. The estimated effective tax rate is subject to adjustment in subsequent quarterly periods as our estimates of pre-tax income and loss for the year fluctuate, including changes in the geographic mix of pre-tax income and loss.


15

The effective income tax rates for the three months ended April 30, 2018 was (11.5)%, compared to 36.9% for the three months ended April 30, 2017. The effective tax rate differs from the U.S. federal statutory rate primarily due to income taxed in foreign jurisdictions, state taxes, non-deductible meals and entertainment expenses, GILTI, valuation allowances and discrete items. The difference in effective income tax rates for the three months ended April 30, 2018 and 2017 primarily relates to a change in the estimated forecast of pre-tax book income and loss for each respective jurisdiction, change in federal tax rate from 35% to 21% as a result of the Tax Act, GILTI, valuation allowance recorded on disallowed interest expense, and discrete items related primarily to excess shortfalls associated with the cancellation and expiration of stock options recorded during the three months ended April 30, 2018.

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A valuation allowance is recorded for deferred income tax assets when management determines it is more likely than not that such assets will not be realized. Our deferred tax assets primarily relate to federal net operating loss and disallowed interest carry-forwards. The Tax Act limits the deduction for net business interest expense in excess of 30% percent of adjusted taxable income effective for taxable years beginning after December 31, 2017. The disallowed interest expense is carried forward indefinitely, subject to future limitations.

Based upon management’s assessment, a valuation allowance was recorded on our deferred tax asset in the amount of $2.1 million primarily for deferred tax assets related to disallowed interest expense carryforward, for the period ended April 30, 2018. Based on the weight of available evidence and the uncertainty of the reversal of this portion of the deferred tax asset, it cannot be determined that it is more likely than not (likelihood of more than 50%) that it will be realized. Management believes we will realize the benefit of the remaining deferred tax assets based on the scheduled reversal of U.S. deferred tax liabilities, related to depreciation and amortization expenses not deductible for tax purposes, which is ordinary income and therefore of the same character as the temporary differences giving rise to the deferred tax assets. This reversal will occur in substantially similar time periods and in the same jurisdictions as the deferred tax assets. As such, the deferred tax liabilities are considered a source of income sufficient to support all remaining deferred tax assets as of April 30, 2018.

We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Tax benefits recognized from such a position are measured based on whether the benefit has a greater than 50% likelihood of being realized upon ultimate resolution. It is reasonably possible that an additional $0.1 million of uncertain tax positions will decrease within the next 12 months due to the expiration of the net operating loss carryforwards associated with such positions.

We believe our income tax contingencies are adequate for all outstanding issues in all jurisdictions and all open years. However, due to the risk that audit outcomes and the timing of audit settlements are subject to significant uncertainty and as we continue to evaluate such uncertainties in light of current facts and circumstances, our current estimate of the total amounts of unrecognized tax benefits could increase or decrease for all open tax years.

Note 11. Shareholder’s Equity
Share-Based Compensation
Subsequent to the adoption of the 2011 Plan, on September 12, 2013, the BCI Holdings’ Board of Directors amended the 2011 Plan by resolution to increase the number of shares of BCI Holdings common stock authorized for issuance under the 2011 Plan to 1,001,339 shares. As of April 30, 2018, there were 300,937 shares available for grant. The amended 2011 Plan permits the granting of BCI Holdings stock options, nonqualified stock options and restricted stock to eligible employees and non-employee directors and consultants.


16

The following table summarizes stock option activity during the three months ended April 30, 2018:
 
Number of
Options
 
Weighted
Average
Exercise 
Price
 
Aggregate
Intrinsic 
Value
(in thousands)(1)
 
Weighted
Average 
Term
Remaining
(in years)
 
Weighted
Average 
Grant
Date Fair 
Value
Outstanding, January 31, 2017
700,270

 
$
83.87

 
$
—

 
5.4
 
 
Granted
—

 
$
—

 
 
 
 
 
$
—

Exercised
—

 
$
—

 
$
—

 
 
 
 
Forfeited/canceled/expired
(9,295
)
 
$
80.94

 
 
 
 
 
 
Outstanding, April 30, 2018
690,975

 
$
83.91

 
$
—

 
5.2
 
 
Vested and expected to vest, April 30, 2018
75,816

 
$
75.06

 
$
—

 
2.1
 
 
Exercisable, April 30, 2018
75,816

 
$
75.06

 
$
—

 
2.1
 
 
 
(1)
Aggregate intrinsic value in the table above represents the total pre-tax value that option holders would have received had all stock option holders exercised their options as of April 30, 2018. The aggregate intrinsic value is the difference between the estimated fair market value of the BCI Holdings common stock at the end of the period and the stock option exercise price, multiplied by the number of in-the-money options. This amount will change based on the fair market value of the BCI Holdings common stock.

As of April 30, 2018, there was $15.6 million of unrecognized pre-tax share-based compensation expense related to non-vested stock options of which $0.2 million we expect to recognize over a weighted average period of 0.9 years. We expect to recognize the remaining $15.4 million, which includes $8.1 million of unrecognized share-based compensation expense for the CEO’s options, upon a Change in Control or initial public offering (“IPO”) as defined in the 2011 Plan. During the three months ended April 30, 2018, we did not recognize any share-based compensation expense related to the CEO’s options. No options were exercised during the three months ended April 30, 2018 and 2017, respectively. There were no options that vested during the three months ended April 30, 2018 and 2017, respectively.

The share-based compensation expense included within employee related expenses in our condensed consolidated statement of operations was the following:
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Non-cash share-based compensation expense
$
81

 
$
138


The fair value of BCI Holdings stock options issued and classified as equity awards was determined using the Black-Scholes options pricing model utilizing the following weighted-average assumptions for each respective period:
 
Three Months Ended April 30,
 
2017
Expected volatility
56
%
Expected dividends
—
%
Expected term
7.2 years

Risk-free interest rate
1.5
%

There were no option grants during the three months ended April 30, 2018.

Note 12. Segment Reporting
We conduct our operations through entities located in the United States, Canada, France, Germany, the United Kingdom, and the Netherlands. We transact business using the local currency within each country where we perform the service or provide the rental equipment.

17

Our operating and reportable segments are North America and Europe. Within each operating segment, there are common customers, common pricing structures, the ability and history of sharing equipment and resources, operational compatibility, commonality among regulatory environments, and relative geographic proximity. Our operating segments consist of the following:

•
the North American segment consisting of branches located in the United States and Canada that provide solutions suitable across both of these North American countries.
•
the European segment consisting of branches located in France, Germany, the Netherlands, and the United Kingdom, that provide solutions to customers in a number of European countries.

Selected statement of operations information for our reportable segments are the following:
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Revenue
 
 
 
North America
$
63,760

 
$
54,178

Europe
12,050

 
8,961

Total revenue
$
75,810

 
$
63,139

Depreciation and amortization
 
 
 
North America
$
13,279

 
$
13,390

Europe
1,622

 
1,331

Total depreciation and amortization
$
14,901

 
$
14,721

Interest expense, net
 
 
 
North America
$
10,542

 
$
9,993

Europe
(12
)
 
(11
)
Total interest expense, net
$
10,530

 
$
9,982

Income tax expense (benefit)
 
 
 
North America
$
223

 
$
(5,246
)
Europe
875

 
434

Total income tax expense (benefit)
$
1,098

 
$
(4,812
)
Net (loss) income
 
 
 
North America (1)
$
(12,554
)
 
$
(10,301
)
Europe (1)
1,907

 
2,090

Total net loss
$
(10,647
)
 
$
(8,211
)
 
(1)
During the three months ended April 30, 2018 and 2017, we included $1.0 million and $1.1 million, respectively, of intersegment expense allocations from North America to Europe.

Total asset and long-lived asset information by reportable segment consists of the following:
(In thousands)
April 30,
2018
 
January 31,
2018
Total assets
 
 
 
North America
$
671,785

 
$
683,107

Europe
138,032

 
137,994

Total assets
$
809,817

 
$
821,101

Long-lived assets
 
 
 
North America
$
257,435

 
$
259,718

Europe
49,425

 
50,958

Total long-lived assets
$
306,860

 
$
310,676



18

Note 13. Related Party Transactions
From time to time, we enter into transactions in the normal course of business with related parties. The accounting policies that we apply to our transactions with related parties are consistent with those applied in transactions with independent third parties.

Pursuant to a professional services agreement between us and Permira Advisers L.L.C. (the “Sponsor”), we agreed to pay the Sponsor an annual management fee of $0.5 million, payable quarterly, plus reasonable out-of-pocket expenses, in connection with the planning, strategy, and oversight support provided to management. We recorded $0.1 million for each of three months ended April 30, 2018 and 2017, in aggregate management fees and expenses to the Sponsor. Management fees payable to the Sponsor totaled $0.04 million as of April 30, 2018 and January 31, 2018, respectively. Management fees are included in professional fees in the condensed consolidated statement of operations.

Note 14. Commitments and Contingencies
Litigation
We are involved in various legal actions arising in the ordinary course of conducting our business. These include claims relating to (i) personal injury or property damage involving equipment rented or sold by us, (ii) motor vehicle accidents involving our vehicles and our employees, (iii) employment-related matters, and (iv) environmental matters. We do not believe that the ultimate disposition of these matters will have a material adverse effect on our condensed consolidated financial position, results of operations or cash flow. We expense legal fees during the period in which they are incurred.

Note 15. Condensed Consolidating Financial Information
Our Notes are guaranteed by all of our U.S. subsidiaries (the “guarantor subsidiaries”). This indebtedness is not guaranteed by BCI Holdings or our foreign subsidiaries (together, the “non-guarantor subsidiaries”). The guarantor subsidiaries are all one hundred percent owned, and the guarantees are made on a joint and several basis and are full and unconditional (subject to subordination provisions and subject to customary release provisions and a standard limitation, which provides that the maximum amount guaranteed by each guarantor will not exceed the maximum amount that can be guaranteed without making the guarantee void under fraudulent conveyance laws). The following condensed consolidating financial information presents the financial position, results of operations, and cash flows of the parent, guarantors, and non-guarantor subsidiaries of the Company and the eliminations necessary to arrive at the information on a consolidated basis for the periods indicated. The parent referenced in the condensed consolidating financial statements is BakerCorp International, Inc., the issuer.
We conduct substantially all of our business through our subsidiaries. To make the required payments on our Notes and other indebtedness, and to satisfy other liquidity requirements, we will rely, in large part, on cash flows from these subsidiaries, mainly in the form of dividends, royalties, and advances, or payments of intercompany loan arrangements. The ability of these subsidiaries to make dividend payments to us will be affected by, among other factors, the obligations of these entities to their creditors, requirements of corporate and other law, and restrictions contained in agreements entered into by or relating to these entities.
The parent and the guarantor subsidiaries have each reflected investment in their respective subsidiaries under the equity method of accounting. There are no restrictions limiting the transfer of cash from guarantor subsidiaries and non-guarantor subsidiaries to the parent.



19


Condensed Consolidating Balance Sheet
April 30, 2018 (unaudited)
(In thousands)

 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
18,814

 
$
8,640

 
$
—

 
$
27,454

Accounts receivable, net
—

 
56,758

 
14,572

 
—

 
71,330

Inventories, net
—

 
5,099

 
88

 
—

 
5,187

Prepaid expenses and other assets
86

 
3,598

 
1,372

 
—

 
5,056

Total current assets
86

 
84,269

 
24,672

 
—

 
109,027

Property and equipment, net
—

 
245,088

 
61,772

 
—

 
306,860

Goodwill
—

 
—

 
56,588

 
—

 
56,588

Other intangible assets, net
—

 
312,714

 
23,234

 
—

 
335,948

Other assets
—

 
925

 
469

 
—

 
1,394

Investment in subsidiaries
342,588

 
131,824

 
—

 
(474,412
)
 
—

Total assets
$
342,674

 
$
774,820

 
$
166,735

 
$
(474,412
)
 
$
809,817

Liabilities and shareholder’s equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
77

 
$
20,273

 
$
2,409

 
$
—

 
$
22,759

Accrued expenses
8,207

 
15,341

 
5,455

 
—

 
29,003

Current portion of long-term debt (net of deferred financing costs of $3,263)
1,089

 
—

 
—

 
—

 
1,089

Intercompany balances
(323,253
)
 
303,543

 
19,710

 
—

 
—

Total current liabilities
(313,880
)
 
339,157

 
27,574

 
—

 
52,851

Long-term debt, net of current portion (net of deferred financing costs of $140)
633,045

 
—

 
—

 
—

 
633,045

Deferred tax liabilities, net
(32,522
)
 
90,980

 
7,255

 
—

 
65,713

Other long-term liabilities
—

 
2,095

 
82

 
—

 
2,177

Total liabilities
286,643

 
432,232

 
34,911

 
—

 
753,786

Total shareholder’s equity
56,031

 
342,588

 
131,824

 
(474,412
)
 
56,031

Total liabilities and shareholder’s equity
$
342,674

 
$
774,820

 
$
166,735

 
$
(474,412
)
 
$
809,817


20


Condensed Consolidating Balance Sheet
January 31, 2018
(In thousands)
 
 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
27,276

 
$
7,166

 
$
—

 
$
34,442

Accounts receivable, net
—

 
54,419

 
13,686

 
—

 
68,105

Inventories, net
—

 
4,854

 
127

 
—

 
4,981

Prepaid expenses and other current assets
23

 
2,777

 
643

 
—

 
3,443

Total current assets
23

 
89,326

 
21,622

 
—

 
110,971

Property and equipment, net
—

 
246,932

 
63,744

 
—

 
310,676

Goodwill
—

 
—

 
57,832

 
—

 
57,832

Other intangible assets, net
—

 
316,578

 
23,951

 
—

 
340,529

Other long-term assets
—

 
735

 
358

 
—

 
1,093

Investment in subsidiaries
352,401

 
133,110

 
—

 
(485,511
)
 
—

Total assets
$
352,424

 
$
786,681

 
$
167,507

 
$
(485,511
)
 
$
821,101

Liabilities and shareholder’s equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
58

 
$
18,718

 
$
1,738

 
$
—

 
$
20,514

Accrued expenses
3,258

 
20,243

 
5,032

 
—

 
28,533

Current portion of long-term debt (net of deferred financing costs of $3,258)
905

 
—

 
—

 
—

 
905

Intercompany balances
(323,257
)
 
303,212

 
20,045

 
—

 
—

Total current liabilities
(319,036
)
 
342,173

 
26,815

 
—

 
49,952

Long-term debt, net of current portion (net of deferred financing costs of $932)
633,482

 
—

 
—

 
—

 
633,482

Deferred tax liabilities, net
(31,656
)
 
89,870

 
7,491

 
—

 
65,705

Other long-term liabilities
—

 
2,237

 
91

 
—

 
2,328

Total liabilities
282,790

 
434,280

 
34,397

 
—

 
751,467

Total shareholder’s equity
69,634

 
352,401

 
133,110

 
(485,511
)
 
69,634

Total liabilities and shareholder’s equity
$
352,424

 
$
786,681

 
$
167,507

 
$
(485,511
)
 
$
821,101


21


Condensed Consolidating Statement of Operations
For the Three Months Ended April 30, 2018 (unaudited)
(In thousands)

 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenue
$
—

 
$
62,138

 
$
13,672

 
$
—

 
$
75,810

Operating expenses:
 
 
 
 
 
 
 
 
 
Employee related expenses
3

 
23,817

 
4,174

 
—

 
27,994

Rental expense
—

 
10,813

 
1,368

 
—

 
12,181

Repair and maintenance
—

 
3,151

 
306

 
—

 
3,457

Cost of goods sold
—

 
2,753

 
188

 
—

 
2,941

Facility expense
2

 
6,498

 
969

 
—

 
7,469

Professional fees
11

 
1,361

 
134

 
—

 
1,506

Other operating expenses
84

 
2,599

 
1,668

 
—

 
4,351

Depreciation and amortization
—

 
12,959

 
1,942

 
—

 
14,901

Gain on sale of equipment
—

 
(726
)
 
(7
)
 
—

 
(733
)
Impairment of long-lived assets
—

 
196

 
—

 
—

 
196

Total operating expenses
100

 
63,421

 
10,742

 
—

 
74,263

(Loss) income from operations
(100
)
 
(1,283
)
 
2,930

 
—

 
1,547

Other expenses (income):
 
 
 
 
 
 
 
 


Interest expense, net
10,489

 
51

 
(10
)
 
—

 
10,530

Foreign currency exchange loss, net
—

 
519

 
47

 
—

 
566

Total other expenses, net
10,489

 
570

 
37

 
—

 
11,096

(Loss) income before income tax (benefit) expense
(10,589
)
 
(1,853
)
 
2,893

 
—

 
(9,549
)
Income tax (benefit) expense
(866
)
 
1,111

 
853

 
—

 
1,098

(Loss) income before equity in net (loss) earnings of subsidiaries
(9,723
)
 
(2,964
)
 
2,040

 
—

 
(10,647
)
Equity in net (loss) earnings of subsidiaries
(924
)
 
2,040

 
—

 
(1,116
)
 
—

Net (loss) income
$
(10,647
)
 
$
(924
)
 
$
2,040

 
$
(1,116
)
 
$
(10,647
)

22


Condensed Consolidating Statement of Operations
For the Three Months Ended April 30, 2017 (unaudited)
(In thousands)
 
 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenue
$
—

 
$
52,796

 
$
10,343

 
$
—

 
$
63,139

Operating expenses:
 
 
 
 
 
 
 
 
 
Employee related expenses
4

 
21,722

 
3,214

 
—

 
24,940

Rental expense
—

 
7,639

 
1,118

 
—

 
8,757

Repair and maintenance
—

 
2,941

 
227

 
—

 
3,168

Cost of goods sold
—

 
2,880

 
263

 
—

 
3,143

Facility expense
6

 
6,062

 
764

 
—

 
6,832

Professional fees
10

 
1,237

 
112

 
—

 
1,359

Other operating expenses
160

 
2,243

 
1,617

 
—

 
4,020

Depreciation and amortization
—

 
13,062

 
1,659

 
—

 
14,721

Gain on sale of equipment
—

 
(1,081
)
 
(39
)
 
—

 
(1,120
)
Impairment of long-lived assets
—

 
200

 
—

 
—

 
200

Total operating expenses
180

 
56,905

 
8,935

 
—

 
66,020

(Loss) income from operations
(180
)
 
(4,109
)
 
1,408

 
—

 
(2,881
)
Other expenses (income):
 
 
 
 
 
 
 
 
 
Interest expense, net
9,974

 
17

 
(9
)
 
—

 
9,982

Foreign currency exchange loss
—

 
218

 
(58
)
 
—

 
160

Total other expenses (income)
9,974

 
235

 
(67
)
 
—

 
10,142

(Loss) income before income tax (benefit) expense
(10,154
)
 
(4,344
)
 
1,475

 
—

 
(13,023
)
Income tax (benefit) expense
(965
)
 
(4,207
)
 
360

 
—

 
(4,812
)
(Loss) income before equity in net earnings of subsidiaries
(9,189
)
 
(137
)
 
1,115

 
—

 
(8,211
)
Equity in net earnings of subsidiaries
978

 
1,115

 
—

 
(2,093
)
 
—

Net (loss) income
$
(8,211
)
 
$
978

 
$
1,115

 
$
(2,093
)
 
$
(8,211
)
















23


Condensed Consolidating Statement of Comprehensive (Loss)
For the Three Months Ended April 30, 2018 (unaudited)
(In thousands)

 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Net (loss) income
$
(10,647
)
 
$
(924
)
 
$
2,040

 
$
(1,116
)
 
$
(10,647
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
—

 
—

 
(3,029
)
 
—

 
(3,029
)
Total comprehensive loss
$
(10,647
)
 
$
(924
)
 
$
(989
)
 
$
(1,116
)
 
$
(13,676
)

24


Condensed Consolidating Statement of Comprehensive (Loss) Income
For the Three Months Ended April 30, 2017 (unaudited)
(In thousands)
 
 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Net (loss) income
$
(8,211
)
 
$
978

 
$
1,115

 
$
(2,093
)
 
$
(8,211
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
—

 
—

 
2,090

 
—

 
2,090

Total comprehensive (loss) income
$
(8,211
)
 
$
978

 
$
3,205

 
$
(2,093
)
 
$
(6,121
)









25

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended April 30, 2018 (unaudited)
(In thousands)

 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(10,647
)
 
$
(924
)
 
$
2,040

 
$
(1,116
)
 
$
(10,647
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Provision for doubtful accounts
—

 
346

 
—

 
—

 
346

Share-based compensation expense
3

 
78

 
—

 
—

 
81

Gain on sale of equipment
—

 
(726
)
 
(7
)
 
—

 
(733
)
Depreciation and amortization
—

 
12,959

 
1,942

 
—

 
14,901

Amortization of deferred financing costs
787

 
—

 
—

 
—

 
787

Deferred income taxes
(866
)
 
1,110

 
(64
)
 
—

 
180

Amortization of above market lease
—

 
(29
)
 
—

 
—

 
(29
)
Impairment of long-lived assets
—

 
196

 
—

 
—

 
196

Equity in net earnings of subsidiaries, net of taxes
924

 
(2,040
)
 
—

 
1,116

 
—

Changes in assets and liabilities:
 
 
 
 
 
 
 
 

Accounts receivable
—

 
(2,685
)
 
(1,223
)
 
—

 
(3,908
)
Inventories
—

 
(245
)
 
35

 
—

 
(210
)
Prepaid expenses and other assets
(63
)
 
(583
)
 
(879
)
 
—

 
(1,525
)
Accounts payable and other liabilities
4,969

 
(3,458
)
 
1,259

 
—

 
2,770

Net cash (used in) provided by operating activities
(4,893
)
 
3,999

 
3,103

 
—

 
2,209

Investing activities
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
—

 
(8,049
)
 
(1,313
)
 
—

 
(9,362
)
Proceeds from sale of equipment
—

 
867

 
12

 
—

 
879

Net cash used in investing activities
—

 
(7,182
)
 
(1,301
)
 
—

 
(8,483
)
Financing activities
 
 
 
 
 
 
 
 
 
Intercompany investments and loans
5,934

 
(5,279
)
 
(655
)
 
—

 
—

Repayments of long-term debt
(1,041
)
 
—

 
—

 
—

 
(1,041
)
Net cash provided by (used in) financing activities
4,893

 
(5,279
)
 
(655
)
 
—

 
(1,041
)
Effect of foreign currency translation on cash
—

 
—

 
327

 
—

 
327

Net (decrease) increase in cash and cash equivalents
—

 
(8,462
)
 
1,474

 
—

 
(6,988
)
Cash and cash equivalents, beginning of period
—

 
27,276

 
7,166

 
—

 
34,442

Cash and cash equivalents, end of period
$
—

 
$
18,814

 
$
8,640

 
$
—

 
$
27,454


26


Condensed Consolidating Statement of Cash Flows
For the Three Months Ended April 30, 2017 (unaudited)
(In thousands)

 
Parent
 
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Operating activities
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(8,211
)
 
$
978

 
$
1,115

 
$
(2,093
)
 
$
(8,211
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Provision for doubtful accounts, net
—

 
578

 
22

 
—

 
600

Provision for excess and obsolete inventory, net
—

 
55

 
—

 
—

 
55

Share-based compensation expense
4

 
134

 
—

 
—

 
138

Gain on sale of equipment
—

 
(1,081
)
 
(39
)
 
—

 
(1,120
)
Depreciation and amortization
—

 
13,062

 
1,659

 
—

 
14,721

Amortization of deferred financing costs
744

 
—

 
—

 
—

 
744

Deferred income taxes
(965
)
 
(4,209
)
 
125

 
—

 
(5,049
)
Amortization of above market lease
—

 
(38
)
 
—

 
—

 
(38
)
Impairment of long-lived assets
—

 
200

 
—

 
—

 
200

Equity in net earnings of subsidiaries, net of taxes
(978
)
 
(1,115
)
 
—

 
2,093

 
—

Changes in assets and liabilities:
 
 
 
 
 
 
 
 

Accounts receivable
—

 
(6,471
)
 
(316
)
 
—

 
(6,787
)
Inventories
—

 
(646
)
 
(29
)
 
—

 
(675
)
Prepaid expenses and other current assets
(41
)
 
757

 
(151
)
 
—

 
565

Accounts payable and other liabilities
5,068

 
(6,022
)
 
(567
)
 
(33
)
 
(1,554
)
Net cash (used in) provided by operating activities
(4,379
)
 
(3,818
)
 
1,819

 
(33
)
 
(6,411
)
Investing activities
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
—

 
(9,060
)
 
(776
)
 
—

 
(9,836
)
Proceeds from sale of equipment
—

 
406

 
64

 
—

 
470

Net cash used in investing activities
—

 
(8,654
)
 
(712
)
 
—

 
(9,366
)
Financing activities
 
 
 
 
 
 
 
 
 
Intercompany investments and loans
5,420

 
(6,693
)
 
1,693

 
(420
)
 
—

Repayment of long-term debt
(1,041
)
 
—

 
—

 
—

 
(1,041
)
Net cash provided by (used in) financing activities
4,379

 
(6,693
)
 
1,693

 
(420
)
 
(1,041
)
Effect of foreign currency translation on cash
—

 
—

 
(895
)
 
453

 
(442
)
Net (decrease) increase in cash and cash equivalents
—

 
(19,165
)
 
1,905

 
—

 
(17,260
)
Cash and cash equivalents, beginning of period
—

 
30,607

 
13,956

 
—

 
44,563

Cash and cash equivalents, end of period
$
—

 
$
11,442

 
$
15,861

 
$
—

 
$
27,303



27

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis includes historical and forward-looking information that should be read in conjunction with the accompanying condensed consolidated financial statements included in this quarterly report and our consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2018. The following tables show our selected condensed consolidated historical financial data for the stated periods. The financial information presented may not be indicative of our future performance. The following discussion and analysis provides information we believe is relevant to assess and understand our condensed consolidated results of operations and financial condition. The discussion includes the following:

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

Overview
Business
We are a provider of liquid 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 25,500 serialized units as of April 30, 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 serve customers in over 15 industries, including industrial and environmental remediation, environmental services, refining, construction, chemicals, transportation, power, municipal works, pipeline and oil and gas. During the three months ended April 30, 2018, no single customer accounted for more than 10% of our total revenue, and our top ten customers accounted for approximately 19.1% of our total revenue.

The demand for our services in the upstream segment of the oil and gas industry, which comprised approximately 9.7% of our total revenue for the three months ended April 30, 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. 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.


28

We have the opportunity to capitalize on a number of growth initiatives to increase the breadth of the services we offer and differentiate our capabilities with respect to our people, products and solutions. Certain key elements of our long-term strategy include:
•
Commit to safety. We focus on ensuring a safe and healthy working environment for our employees, customers and communities where we live and work. We execute this through a program called BakerZero™. Through this program, we develop and implement policies and procedures to govern and promote workplace safety, including regular management safety reviews, daily branch safety training sessions and a disciplinary action program for incidents that result from non-compliance with our safety programs.
•
Increase our Penetration in Key Industries and Evaluate Opportunities for End Market Expansion. Our low customer concentration, diversity of end markets, and long-standing relationships allow us to capitalize on market and macroeconomic trends while providing a hedge against more volatile industries.
•
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").
•
Expand Geographically. Historically, we have increased penetration in new geographic regions and generated profitable growth by opening new branches within North America and Europe and introducing our products and services. We believe there is an opportunity to continue to open new branches in Europe and in certain under-served regions of North America.
•
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.

Geographic Operations
Our branches and employees by reportable segment were as follows:
 
April 30,
 
 
 
2018
 
2017
 
Change
Branches:
 
 
 
 
 
Number of branches-North American Segment
45

 
46

 
(1
)
Number of branches-European Segment
11

 
11

 
—

Total branches
56

 
57

 
(1
)
Employees:
 
 
 
 
 
Number of employees-North American Segment
830

 
758

 
72

Number of employees-European Segment
159

 
141

 
18

Total employees
989

 
899

 
90


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.

29


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.


30

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 condensed consolidated balance sheets, and (ii) the amounts of revenues and expenses during the reporting period in the accompanying condensed consolidated statements of operations. On an ongoing basis, we evaluate our estimates, judgments and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation, customer rebates, sales returns and allowances, medical insurance claims, litigation accruals, impairment of long-lived assets, intangible assets, and goodwill, depreciation, contingencies, income taxes and share-based compensation. We believe our estimates, judgments and assumptions are reasonable; however, actual results may differ from these judgments and estimates, and they may be adjusted as more information becomes available. Any adjustment may be significant.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably may have been used, or if changes in the estimate that are reasonably likely to occur may materially impact the financial statements. We do not believe that there have been any significant changes during the three months ended April 30, 2018 to the items that we disclosed as our critical accounting policies, estimates, and assumptions included in the Annual Report on Form 10-K for the fiscal year ended January 31, 2018.

Recent Accounting Pronouncements
Refer to Note 3, “Accounting Pronouncements” of the notes to the condensed consolidated financial statements for a discussion of new accounting guidance.

Forward-Looking Statements
This quarterly report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our expectations, beliefs, and projections are expressed in good faith, and we believe we have a reasonable basis to make these statements through our management’s examination of historical operating trends, data contained in our records, and other data available from third parties, but there can be no assurance that our management’s expectations, beliefs, or projections will be achieved.

The discussions of our financial condition and results of operations may include various forward-looking statements about future costs and prices of commodities, production volumes, industry trends, demand for our products and services, and projected results of operations and our projected capital resources and liquidity. Statements that are not historical in nature are considered to be forward-looking statements. They include statements regarding our expectations, hopes, beliefs, estimates, intentions, or strategies regarding the future. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to,” and similar expressions are intended to identify forward-looking statements.

The forward-looking statements set forth in this quarterly report on Form 10-Q 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.

31

•
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.
•
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

For a more complete description of these and other possible risks and uncertainties, please refer to our Annual Report on Form 10-K for the year ended January 31, 2018. Our forward-looking statements herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect events, circumstances or changes in expectations.

32

Condensed Consolidated Statements of Operations (unaudited)
The following table presents our results of operations as follows:
 
Three Months Ended April 30,
 
2018
 
2017
(In thousands, except percentages)
Amount
 
% of
Revenue
 
Amount
 
% of
Revenue
Revenue:
 
 
 
 
 
 
 
Rental revenue
$
62,362

 
82.3
 %
 
$
50,813

 
80.5
 %
Sales revenue
5,225

 
6.9
 %
 
4,698

 
7.4
 %
Service revenue
8,223

 
10.8
 %
 
7,628

 
12.1
 %
Total revenue
75,810

 
100.0
 %
 
63,139

 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
Employee related expenses
27,994

 
36.9
 %
 
24,940

 
39.5
 %
Rental expenses
12,181

 
16.1
 %
 
8,757

 
13.9
 %
Repair and maintenance
3,457

 
4.6
 %
 
3,168

 
5.0
 %
Cost of goods sold
2,941

 
3.9
 %
 
3,143

 
5.0
 %
Facility expenses
7,469

 
9.9
 %
 
6,832

 
10.8
 %
Professional fees
1,506

 
2.0
 %
 
1,359

 
2.2
 %
Other operating expenses
4,351

 
5.7
 %
 
4,020

 
6.4
 %
Depreciation and amortization
14,901

 
19.7
 %
 
14,721

 
23.3
 %
Gain on sale of equipment
(733
)
 
(1.0
)%
 
(1,120
)
 
(1.8
)%
Impairment of long-lived assets
196

 
0.3
 %
 
200

 
0.3
 %
Total operating expenses
74,263

 
98.1
 %
 
66,020

 
104.6
 %
Income (loss) from operations
1,547

 
1.9
 %
 
(2,881
)
 
(4.6
)%
Other expense:
 
 
 
 
 
 
 
Interest expense, net
10,530

 
13.9
 %
 
9,982

 
15.8
 %
Foreign currency exchange loss, net
566

 
0.7
 %
 
160

 
0.3
 %
Total other expenses, net
11,096

 
14.6
 %
 
10,142

 
16.1
 %
Loss before income taxes
(9,549
)
 
(12.7
)%
 
(13,023
)
 
(20.7
)%
Income tax expense (benefit)
1,098

 
1.4
 %
 
(4,812
)
 
(7.6
)%
Net loss
$
(10,647
)
 
(14.1
)%
 
$
(8,211
)
 
(13.1
)%


33

Non-U.S. GAAP Financial Measures
The following is a reconciliation of our net loss to EBITDA and Adjusted EBITDA as follows:
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Net loss
$
(10,647
)
 
$
(8,211
)
Interest expense, net
10,530

 
9,982

Income tax expense (benefit)
1,098

 
(4,812
)
Depreciation and amortization
14,901

 
14,721

EBITDA
15,882

 
11,680

Foreign currency exchange loss
566

 
160

Financing related costs
56

 
36

Sponsor management fees
147

 
133

Share-based compensation expense
81

 
138

Impairment of long-lived assets
196

 
200

Restructure related costs
34

 
75

Other
873

 
680

Adjusted EBITDA
$
17,835

 
$
13,102

Adjusted EBITDA margin
23.5
%
 
20.8
%
EBITDA represents the sum of net loss, interest expense, income taxes and depreciation of rental equipment and non-rental depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding certain expenses detailed within the net loss to Adjusted EBITDA reconciliation above. EBITDA and Adjusted EBITDA, which are used by management to measure performance, are non-GAAP financial measures. Management believes that EBITDA and Adjusted EBITDA are useful to investors. EBITDA is commonly utilized in our industry to evaluate operating performance, and Adjusted EBITDA is used to determine our compliance with financial covenants related to our debt instruments and is a key metric used to determine incentive compensation for certain of our employees, including members of our executive management team. Both EBITDA and Adjusted EBITDA are included as a supplemental measure of our operating performance because in the opinion of management they eliminate items that have less bearing on our operating performance and highlight trends in our core business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures. In addition, Adjusted EBITDA is one of the primary measures management uses for the planning and budgeting processes and to monitor and evaluate our operating results. EBITDA and Adjusted EBITDA are not recognized items under U.S. GAAP and do not purport to be alternatives to measures of our financial performance as determined in accordance with U.S. GAAP, such as net loss. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA may not be, and Adjusted EBITDA as presented herein is not, comparable to similarly titled measures reported by other companies.


34

Results of Operations
Three Months Ended April 30, 2018 Compared to April 30, 2017
 
Three Months Ended April 30,
 
 
 
 
(In thousands, except Operating Data)
2018
 
2017
 
$ Change
 
% Change
North America
 
 
 
 
 
 
 
Rental revenue
$
51,445

 
$
42,704

 
$
8,741

 
20.5
 %
Sales revenue
5,044

 
4,498

 
546

 
12.1
 %
Service revenue
7,271

 
6,976

 
295

 
4.2
 %
Total North America revenue
63,760

 
54,178

 
9,582

 
17.7
 %
Total operating expenses(3)
65,948

 
59,482

 
6,466

 
10.9
 %
Loss from operations
$
(2,188
)
 
$
(5,304
)
 
$
3,116

 
58.7
 %
Europe
 
 
 
 
 
 
 
Rental revenue
$
10,917

 
$
8,109

 
$
2,808

 
34.6
 %
Sales revenue
181

 
200

 
(19
)
 
(9.5
)%
Service revenue
952

 
652

 
300

 
46.0
 %
Total European revenue
12,050

 
8,961

 
3,089

 
34.5
 %
Total operating expenses(3)
8,315

 
6,538

 
1,777

 
27.2
 %
Income from operations
$
3,735

 
$
2,423

 
$
1,312

 
54.1
 %
Consolidated
 
 
 
 
 
 
 
Total revenue
$
75,810

 
$
63,139

 
$
12,671

 
20.1
 %
Total operating expenses
74,263

 
66,020

 
8,243

 
12.5
 %
Total income (loss) from operations
$
1,547

 
$
(2,881
)
 
$
4,428

 
153.7
 %
 
 
 
 
 
 
 
 
Operating Data:
 
 
 
 
 
 
 
North America
 
 
 
 
 
 
 
Average utilization (1)
53.1
%
 
45.5
%
 
760
 bps
 
 
Average daily rental rate (2)
$
29.62

 
$
29.35

 
$
0.27

 
0.9
 %
Average number of rental units
22,934

 
22,710

 
224

 
1.0
 %
Europe
 
 
 
 
 
 
 
Average utilization (1)
42.2
%
 
39.1
%
 
310
 bps
 
 
Average daily rental rate (2)
$
89.70

 
$
81.60

 
$
8.10

 
9.9
 %
Average number of rental units
2,227

 
1,979

 
248

 
12.5
 %
Consolidated
 
 
 
 
 
 
 
Average utilization (1)
52.1
%
 
45.0
%
 
710
 bps
 
 
Average daily rental rate (2)
$
33.93

 
$
32.99

 
$
0.94

 
2.8
 %
Average number of rental units
25,161

 
24,689

 
472

 
1.9
 %
(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 $1.0 million and $1.1 million for the three months ended April 30, 2018 and 2017, respectively.


35

Revenue
North America
Our North American segment, saw overall revenue growth in most of its key industries. Our largest industry growth was seen within our maintenance end market of $6.7 million, or 24.4%. This was driven by an increase in plant maintenance activities with new and existing customers. Our construction industry also grew by $2.3 million, or 20.0% as a result of new construction primarily in our western region. Upstream oil and gas revenue also increased by $1.4 million, or 25.1%. We started to see slight growth in oil and upstream gas revenue beginning in the second quarter of fiscal 2018, which continued into fiscal year 2019 with increased customer commitments. These increases were offset by a decrease in the environmental remediation industry of $0.7 million, or 10.2%. Our average utilization rate increased 760 bps. Our average daily rental rate slightly increased due to the increased demand for our product offering. The rental revenue increase in these industries also positively impacted our sales and service revenue.

Europe
Our European segment revenue increased primarily due to an increase in revenues within our chemical customers of $1.0 million, or 61.5%, our refinery customers of $0.7 million, or 33.9% our environmental remediation customers of $0.6 million, or 59.2% and our manufacturing customers of $0.4 million, or 108.9%. The increases are primarily due to the introduction of our pumps and filtration line of business as well as the overall business growth in Europe. Average utilization increased 310 bps primarily due to the 12.5% growth in the number of rental units as our expansion into the pump and filtration business continues to grow. The slight increase in our average daily rental rate is due to increased demand for our product offering.

Operating Expenses
North America    
The increase in total operating expenses of $6.5 million was due to the following:

•
$3.2 million increase in rental expenses is primarily due to re-bill and re-rent expenses as a result of higher rental revenue.
•
$2.2 million increase in employee related expenses is primarily due to an increase in headcount, adding 72 employees, or 9.5%, since April 30, 2017, representing $1.4 million and a $1.4 million increase in bonus expense. These increases were partially offset by a decrease in insurance expense.
•
$0.4 million increase in facility expense primarily due to property rent and corporate meetings.
•
$0.4 million decrease in the gain on sale of equipment due to lower equipment sales.
•
$0.2 million increase in repair and maintenance expense as part of our initiative to get the majority of our network Rental Ready Optimization Concept (“RROC”) certified. The RROC program has many features, in particular maintaining certain levels of rent readiness throughout the network in anticipation of demand. Our branches prioritize equipment repairs based on customer needs to ensure we meet customer demands.
•
$0.2 million increase in other operating expenses is due to higher personnel recruiting, employee training, travel expenses and insurance expenses partially offset by lower bad debt expense.
•
These increases were partially offset by a $0.1 million decrease in several other various expenses that individually are not material.


36

Europe
The increase in total operating expenses of $1.7 million was due to the following:

•
$0.9 million increase in employee related expenses primarily in wages for operations. Employee related expenses increased primarily due to an increase in headcount of 18 employees, or 12.8%, from 141 employees as of April 30, 2017 to 159 employees as of April 30, 2018, to support the growth in our business.
•
$0.3 million increase in depreciation and amortization expense as a result of the increase in fixed assets specifically related to the increase in our pump and filtration business line rental assets.
•
$0.2 million increase in facility expense due to the increase in rental equipment at our facilities and property rent.
•
$0.2 million increase in rental expense is primarily due to re-bill expenses and truck expenses as a result of higher rental revenue.
•
$0.1 million increase in other operating expense is due to higher personnel recruiting, employee training and travel expenses.
 
Income Tax Expense
Income tax expense during the three months ended April 30, 2018 increased by $5.9 million to $1.1 million from a benefit of $4.8 million during the three months ended April 30, 2017. The tax expense increase was primarily due to a decrease in book losses, a valuation allowance recorded on deferred tax assets related to disallowed interest expense and a taxable income inclusion associated with global intangible low-taxed income (“GILTI”) for the three months ended April 30, 2018.

Liquidity and Capital Resources
Liquidity Summary
We have a history of generating higher cash flow from operations than net 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 finance and reduce debt. We invest in assets that have relatively long useful lives. The Internal Revenue Code allows us to accelerate the depreciation of these assets for tax purposes over a much shorter period allowing us to defer the payment of income taxes.

Cash and cash equivalents by geographic region were the following:
(In thousands)
April 30,
2018
 
January 31,
2018
 
$ Change
 
% Change
United States
$
18,814

 
$
27,276

 
$
(8,462
)
 
(31.0
)%
Europe
7,788

 
6,241

 
1,547

 
24.8
 %
Canada
852

 
925

 
(73
)
 
(7.9
)%
Total cash and cash equivalents
$
27,454

 
$
34,442

 
$
(6,988
)
 
(20.3
)%

Our cash held outside the United States may be repatriated to the United States but, under current law, may be subject to United States 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 compared to the year ended January 31, 2018 primarily as a result of increased capital reinvestment.

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;

37

•
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.

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 (“Notes”) due June 1, 2019 (the “Notes”).

Credit Facility
On February 7, 2013, we entered into a first amendment to our Credit Facility (the “First Amendment”) to refinance our Credit Facility. Pursuant to the First Amendment, we borrowed $384.2 million of term loans (the “Amended Senior Term Loan”) to refinance a like amount of term loans (the “Original Term Loan”) under the Credit Facility. Borrowings under the Credit Facility bear interest at a rate equal to LIBOR plus an applicable margin, subject to a LIBOR floor of 1.25%. The LIBOR margin applicable to the Amended Senior Term Loan is 3.00%, which is 0.75% less than the LIBOR margin applicable to the Original Term Loan. In addition, pursuant to the First Amendment, among other things, (i) the Senior Term Loan maturity date was extended to February 7, 2020, provided that the maturity will be March 2, 2019 if the Notes are not repaid or refinanced on or prior to March 2, 2019, (ii) the Revolving Credit Facility maturity date was extended to February 7, 2018, and (iii) we obtained increased flexibility with respect to certain covenants and restrictions relating to the Company’s ability to incur additional debt, make investments, debt prepayments, and acquisitions. Principal on the Senior Term Loan is payable in quarterly installments of $1.0 million. Furthermore, the excess cash flow prepayment requirement is in effect until the maturity date.
On November 13, 2013, we entered into a second amendment to the Credit Facility (the “Second Amendment”). Pursuant to the Second Amendment, the Company borrowed $35.0 million of incremental term loans (the “Incremental Term Loan”), which may be used for general corporate purposes, including to finance permitted acquisitions. The terms applicable to the Incremental Term Loan are the same as those applicable to the term loans under the Credit Facility.
On November 3, 2016, we entered into a third amendment to our Credit Facility (the “Third Amendment”) to amend the Revolving Credit Facility. The amendment (i) extends 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 Notes are repaid in full or extended or refinanced on or prior to January 30, 2019) and (ii) reduces the revolver commitment from $45.0 million to $40.0 million in addition to certain other amendments to the original terms.
Under the Credit Facility, we may be required to satisfy and maintain a total leverage ratio not in excess of the leverage ratio 6.00:1.00 if there is an outstanding balance on the Revolving Credit Facility of 25% or more of the committed amount on any quarter end. The total leverage ratio is calculated as our net debt (total debt less cash and cash equivalents) divided by our trailing twelve months’ Adjusted EBITDA.
On April 30, 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.

38

The Credit Facility, as amended, during February 2013, November 2013 and November 2016, contains certain restrictive covenants (in each case, subject to exclusions) that limit, among other things, our ability and the ability of our restricted subsidiaries to: (1) create, incur, assume, or permit to exist, any liens; (2) create, incur, assume, or permit to exist, directly or indirectly, any additional indebtedness; (3) consolidate, merge, amalgamate, liquidate, wind up, or dissolve themselves; (4) convey, sell, lease, license, assign, transfer, or otherwise dispose of assets; (5) make certain restricted payments; (6) make certain investments; (7) make any optional prepayment, repayment, or redemption with respect to, or amend or otherwise alter the terms of documents related to, certain subordinated indebtedness; (8) enter into sale leaseback transactions; (9) enter into transactions with affiliates; (10) change our fiscal year end date or the method of determining fiscal quarters; (11) enter into contracts that limit our ability to incur any lien to secure our obligations under the Credit Facility; (12) create any encumbrance or restriction on the ability of any restricted subsidiary to make certain distributions; and (13) engage in certain lines of business. The Credit Facility also contains other customary restrictive covenants. The covenants are subject to various baskets and materiality thresholds.
The Third Amendment is accounted for as debt modification. Costs incurred in connection with the Third Amendment were deferred and amortized over the term of the amended Revolving Credit Facility. In addition, any unamortized deferred costs related to the old arrangement were written off in proportion to the decrease in borrowing capacity.
Costs related to debt financing are deferred and amortized to interest expense over the term of the underlying debt instruments utilizing the straight-line method for our revolving credit facility and the effective interest method for our senior term and revolving loan facilities. We amortized $0.8 million and $0.7 million of deferred financing costs during the three months ended April 30, 2018 and 2017, respectively.

Senior Unsecured Notes due 2019
On June 1, 2011, we issued $240.0 million of fixed rate 8.25% Notes, due June 1, 2019. We may redeem all or any portion of the Notes at the redemption prices set forth in the 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.

Going Concern
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 our Risk Factors included in Item 1A of the Annual Report on Form 10-K for the fiscal year ended January 31, 2018. 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.


39

Interest and Fees
Interest and fees related to our Credit Facility and the Notes were as follows: 
 
Three Months Ended April 30,
(In thousands)
2018
 
2017
Credit Facility interest and fees
$
5,161

 
$
4,859

Notes interest and fees (1)
5,328

 
5,296

Total interest and fees
$
10,489

 
$
10,155

 
 
 
 
Credit Facility interest rate
4.77
%
 
4.30
%
(1)
Interest on the Notes is payable semi-annually based upon a fixed annual rate of 8.25%.

Principal Payments on Debt
As of April 30, 2018, the schedule of minimum required principal payments on our debt for each of the fiscal years ending January 31 are due according to the table below:
(In thousands)
 
Remainder of the fiscal year ending January 31, 2019
$
3,122

2020
244,163

Total
$
637,537


Sources and Uses of Cash
The cash flow to fund our business has historically been generated from operations. Our principal needs for liquidity historically have been for the purchase of rental equipment for our fleet, other capital expenditures, including delivery vehicles and debt service. These will be our principal liquidity needs going forward.
Our largest use of liquidity has been and will continue to be for the acquisition of equipment for our rental fleet. Our large rental fleet requires a substantial ongoing commitment of capital. While we can manage the size and aging of our fleet generally over time, eventually we retire older equipment and either allow our fleet to shrink or replace the older equipment in our fleet with newer models. We have historically financed these new additions to our rental fleet using cash flows from operations. We are also using our liquidity to finance other non-rental equipment capital expenditures, typically consisting of delivery vehicles, through our cash flows from operations or capital leasing.

Cash Provided by Operating Activities
Cash provided by operating activities was $2.2 million for the three months ended April 30, 2018 as compared to cash used in operating activities of $6.4 million for the three months ended April 30, 2017. Net loss of $10.6 million was adjusted by the following non-cash items, such as depreciation and amortization of $14.9 million, amortization of deferred financing costs $0.8 million, gain on sale of equipment $0.7 million, impairment of long-lived assets of $0.2 million and deferred income taxes of $0.2 million. Additionally, our cash flows from operations include a $3.9 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 $2.8 million due to the timing of purchases and payments to our suppliers. Prepaid expenses and other assets was a use of cash of $1.5 million primarily relating to the timing of the amortization of various prepaid expenses.

 
Cash Used In Investing Activities
Cash used in investing activities was $8.5 million for the three months ended April 30, 2018, as compared to $9.4 million for the three months ended April 30, 2017. Cash used for the purchase of rental equipment was $9.4 million for the nine months ended April 30, 2018, compared to $9.8 million for the three months ended April 30, 2017. We received $0.9 million in cash proceeds from the sale of equipment for the three months ended April 30, 2018, compared to $0.5 million for the three months ended April 30, 2017.


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Cash Used In Financing Activities
Cash used in financing activities was $1.0 million for the three months ended April 30, 2018, as compared to $1.0 million for the three months ended April 30, 2017 and represents principal payments on our debt.

Effect of Exchange Rate Changes on Cash
The effect of foreign currency translation on cash resulted in an increase of $0.3 million during the three months ended April 30, 2018, as compared to a $0.4 million decrease to cash and cash equivalents during the three months ended April 30, 2017.

Contractual Obligations
There has been no material change to our contractual obligations as disclosed in our 2018 Annual Report.

Off-Balance Sheet Arrangements
    As of April 30, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
From time to time, we may use interest rate swaps, collars or options to manage our exposure to fluctuations in interest rates. As of April 30, 2018, our total indebtedness was $637.5 million (including $240.0 million aggregate principal amount of Notes and $397.5 million aggregate principal amount outstanding of LIBOR term loans (subject to a 1.25% floor) under our term loan facility). A 100 basis point increase or decrease in the assumed interest rates on the credit facilities would result in a $0.7 million increase or decrease in reported net loss for the three months ended April 30, 2018.

Impact of Foreign Currency Rate Changes
We currently have branch operations outside the United States, and our foreign subsidiaries conduct their business in local currency. Our operations in Canada are denominated in the Canadian dollar, operations in the Netherlands, Germany and France are denominated in the Euro, and operations in the United Kingdom are denominated in the British Pound Sterling. Likewise, we pay our expenses in the local currencies, described above, in the areas in which we operate. We are exposed to foreign exchange rate fluctuations as the financial results of our non-United States operations are translated into U.S. dollars. Based upon the financial results of our international operations during the period relative to the Company as a whole, a 10% change in the exchange rates would not have a material impact on our after-tax earnings.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (its principal executive officer) and the Chief Financial Officer (its principal financial officer), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of April 30, 2018.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended April 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1. Legal Proceedings
The information set forth above under Note 14, “Commitments and Contingencies – Litigation,” contained in the notes to the condensed consolidated financial statements is incorporated herein by reference.

Item 1A. Risk Factors
Our results of operations and financial condition are subject to numerous risks and uncertainties described in our Form 10-K for the year ended January 31, 2018, which risk factors are incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, our business, financial condition and future prospects could be negatively impacted.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable

Item 3. Defaults upon Senior Securities
Not applicable

Item 4. Mine Safety Disclosures
Not applicable

Item 5. Other Information
Not applicable

Item 6. Exhibits
See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
BAKERCORP INTERNATIONAL, INC.
 
 
 
 
Date:
June 15, 2018
By:
/s/ Robert Craycraft
 
 
 
Robert Craycraft
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Michael J. Henricks
 
 
 
Michael J. Henricks
 
 
 
Chief Financial Officer


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EXHIBIT INDEX

Exhibit
Number
 
Description
31.1
 
31.2
 
32
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


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BakerCorp International, Inc. Reports