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| political, social and economic instability; war and civil disturbances;
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| war and civil disturbances;
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the taking of property through nationalization or expropriation without fair compensation; changes in government policies and regulations; ·
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tariffs, taxes and other trade barriers; ·
| changes in government policies and regulations;
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barriers to timely movement or transfer of equipment between countries; and ·
exchange controls and limitations on remittance of dividends or other payments to us by our foreign subsidiaries and affiliates. | tariffs, taxes and other trade barriers;
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| barriers to timely movement or transfer of equipment between countries; and
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| exchange controls and limitations on remittance of dividends or other payments to us by our foreign subsidiaries and affiliates.
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In particular, changes in laws or regulations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, could materially adversely affect our business, growth, financial condition or results of operations. For example, while there are currently no limitations on the repatriation of profits from the countries in which we have subsidiaries, several countries do impose withholding taxes on dividends or fund transfers. Foreign funds transfer restrictions, taxes or limitations may be imposed or increased in the future with regard to repatriation of earnings and investments from countries in which we operate. If foreign funds transfer restrictions, taxes or limitations are imposed, our ability to receive dividends or other payments from affected subsidiaries could be reduced, resulting in an adverse material effect. In addition, corporate, contract, property, insolvency, competition, securities and other laws and regulations in many of the developing parts of the world in which we operate have been, and continue to be, substantially revised. Therefore, the interpretation and procedural safeguards of the new legal and regulatory systems are in the process of being developed and defined, and existing laws and regulations may be applied inconsistently. Also, in some circumstances, it may not be possible to obtain the legal remedies provided for under these laws and regulations in a reasonably timely manner, if at all. We perform work at mining operations in countries which have experienced political and economic instability in the past, or may experience similar instability in the future. The mining industry is subject to regulation by governments around the world, including the regions in which we have operations, relating to matters such as environmental protection, controls and restrictions on production, and, potentially, nationalization, expropriation or cancellation of contract rights, as well as restrictions on conducting business in such countries. In addition, in our foreign operations we face operating difficulties, including political instability, workforce instability, harsh environmental conditions and remote locations. We do not maintain political risk insurance. Adverse events beyond our control in the areas of our foreign operations could reduce the earnings derived from our foreign operations to the extent that contractual provisions and bilateral agreements between countries may not be sufficient to guard our interests. Our operations in foreign countries expose us to devaluations and fluctuations in currency exchange rates. We operate a significant portion of our business in countries outside the U.S. The majority of our costs in those locations are transacted in local currencies. Although we generally contract with our customers in U.S. dollars, some of our contracts are in other currencies, such as the Australian dollar.currencies. We do not currently engage in foreign currency hedging transactions. As exchange rates among the U.S. dollar and other currencies fluctuate, the translation effect of these fluctuations may have a material adverse effect on our results of operations or financial condition as reported in U.S. dollars. Exchange rate policies have not always allowed for the free conversion of currencies at the market rate. Future fluctuations in the value of the U.S. dollar could have an adverse effect on our results. In addition, some of the countries in which we operate have foreign currency restrictions that may prohibit or limit our ability to convert local currencies into U.S. dollars and/or transfer U.S. dollars from such countries to the U.S., which restrictions could affect our liquidity or our ability to use such funds in other countries.
We conduct business in many international markets with complex and evolving tax rules, including value-added tax rules, which subject us to international tax compliance risks. While we obtain advice from legal and tax advisors as necessary to help assure compliance with tax and regulatory matters, most tax jurisdictions that we operate in have complex and subjective rules regarding the valuation of intercompany services, cross-border payments between affiliated companies and the related effects on income tax, value-added tax (“VAT”), transfer tax and share registration tax. Our foreign subsidiaries frequently undergo VAT reviews, and from time to time undergo comprehensive tax reviews and may be required to make additional tax payments should the review result in different interpretations, allocations or valuations of our products or services. Certain countries may, from time to time, make changes to their existing tax structure which might affect our operations. These countries may, with little or no notice, implement additional taxes in the form of severance taxes, windfall profits taxes, production taxes and tariffs, which could negatively impact our results in our segments that perform services in those countries. We earn a significant amountportion of our operating income from outside of the U.S., and any repatriation of funds currently held in foreign jurisdictions may result in additional tax expense. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on foreign earnings. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted, it could have a material impact on our tax expense and cash flows. Turmoil in the credit markets and poor economic conditions could negatively impact the credit worthiness of our financial counterparties. Although we evaluate the credit capacity of our financial counterparties, changes in global economic conditions could negatively impact their ability to access credit. The risks of such reduction in credit capacity include: ·
| ability of institutions with whom we have lines of credit to allow access to those funds; and
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ability of institutions with whom we have lines of credit to allow access to those funds; and ·
| viability of institutions holding our cash deposits or, in the case of U.S. banks, cash deposits in excess of FDIC insurance limits.
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viability of institutions holding our cash deposits or, in the case of U.S. banks, cash deposits in excess of FDIC insurance limits. If these institutions fail to fulfill their commitments to us, our access to operating cash could be restricted. Fluctuations in the prices of raw materials could increase our operating costs. We purchase a significant amount of steel and concrete for use in connection with all of our businesses. We also purchase a significant volume of fuel to operate our trucks and equipment. The manufacture of materials used in our sewer rehabilitation business is dependent upon the availability of resin, a petroleum-based product. At present, we do not engage in any type of hedging activities to mitigate the risks of fluctuating market prices for oil, steel, concrete or fuel and increases in the price of these materials may increase our operating costs. The dollar amount of our backlog, as stated at any given time, is not necessarily indicative of our future earnings.
As of January 31, 2015, our total backlog was approximately $570.8 million. This consists of the expected gross revenue associated with executed contracts, or portions thereof, not yet performed by us. We cannot ensure that the revenue projected in our backlog will be realized or, if realized, will result in profit. In addition, even where a project proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us or poor project performance could increase the cost associated with a project. Further, project terminations, suspensions or adjustments in scope may occur with respect to contracts reflected in our backlog. Reductions in backlog due to cancellation by a customer or scope adjustments adversely affect, potentially to a material extent, the revenue and profit we actually receive from such backlog. We may be unable to complete some projects included in our backlog in the estimated time and, as a result, such projects could remain in the backlog for extended periods of time.
Professional liability, product liability, warranty and other claims against us could reduce our revenue. Any accidents or system failures in excess of insurance limits at locations that we engineer or construct or where our products are installed or where we perform services could result in significant professional liability, product liability, warranty and other claims against us. Further, the construction projects we perform expose us to additional risks, including cost overruns, equipment failures, personal injuries, property damage, shortages of materials and labor, work stoppages, labor disputes, weather problems and unforeseen engineering, architectural, environmental and geological problems. In addition, once our construction is complete, we may face claims with respect to the work performed. If we incur these claims, we could incur substantial losses of revenue.revenue or additional costs.
If our joint venture partners default on their performance obligations, we could be required to complete their work under our joint venture arrangements, which could reduce our profit or result in losses. We sometimes enter into contractual joint ventures in order to develop joint bids on contracts. The success of these joint ventures depends largely on the satisfactory performance of our joint venture partners of their obligations under the joint venture. Under these joint venture arrangements, we may be required to complete our joint venture partner’s portion of the contract if the partner is unable to complete its portion and a bond is not available. In such case, the additional obligations could result in reduced profit or, in some cases, significant losses for us with respect to the joint venture.
Claims for indemnification related to the sale of business units and assets may be substantial and have a negative impact on our financial condition. From time to time, we dispose of business units or assets. As part of a sale, we may agree to indemnify the purchaser for certain preclosing liabilities associated with the business unit or assets that are sold and for any breach of the representations and warranties contained in the asset purchase agreement for the transaction. There can be no guarantee that material claims will not arise during the relevant indemnification periods and that we will not have to provide the requisite indemnification. In addition, legal challenges to any potential claim for indemnification could result in increased legal expenses. Also, as is typical in divestiture transactions, some third parties may be unwilling to release us from guarantees, performance bonds or other credit support provided prior to the sale of the business unit or assets. As a result, after a divestiture, we may remain secondarily liable for some of the obligations guaranteed, bonded or supported to the extent that the buyer of the business unit or assets fails to perform these obligations. If we are unable to satisfy all the conditions precedent to closing the sale of our Heavy Civil business segment, or to achieve the results expected from the sale, our financial condition could be materially affected. As discussed in Note 21 to the Consolidated Financial Statements, on February 8, 2017, we entered into an Asset Purchase Agreement to sell substantially all of the assets of our Heavy Civil business segment. The transaction is subject to certain terms and closing conditions. We may not have the ability to obtain all of the consents and approvals and satisfy all of the other closing conditions to the sale. Until the transaction has closed, there can be no assurance that the sale of our Heavy Civil business segment will provide us additional liquidity to fund general working capital requirements or pursue growth opportunities in our core businesses. Our business is subject to numerous operating hazards, logistical limitations and force majeure events that could significantly reduce our liquidity, suspend our operations and reduce our revenue and future business. Our drilling and other construction activities involve operating hazards that can result in personal injury or loss of life, damage or destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other harm to the environment. To the extent that the insurance protection we maintain is insufficient or ineffective against claims resulting from the operating hazards to which our business is subject, our liquidity could be significantly reduced. In addition, our operations are subject to delays in obtaining equipment and supplies and the availability of transportation for the purpose of mobilizing rigs and other equipment, particularly where rigs or mines are located in remote areas with limited infrastructure support. Our business operations are also subject to force majeure events such as adverse weather conditions, natural disasters and mine accidents or closings. If our drill site or construction operations were interrupted or suspended as a result of any such events, we could incur substantial losses of revenue and future business. If we are unable to retain skilled workers, or if a work stoppage occurs as a result of disputes relating to collective bargaining agreements, our ability to operate our business could be limited and our revenue could be reduced. Our ability to remain productive, profitable and competitive depends substantially on our ability to retain and attract skilled workers with expert geological and other engineering knowledge and capabilities. The demand for these workers is high and the supply is limited. An inability to attract and retain trained drillers and other skilled employees could limit our ability to operate our business and reduce our revenue. As of January 31, 2015,2017, approximately 5% of our workforce was unionized and 84 of our 3121 active collective bargaining agreements are scheduled to expire within the next 12 months. To the extent that disputes relating to existing or future collective bargaining agreements arise, a work stoppage could occur. If protracted, a work stoppage could substantially reduce or suspend our operations and reduce our revenue.
If we are not able to demonstrate our technical competence, competitive pricing and reliable performance to potential customers we will lose business to competitors, which would reduce our profit. We face significant competition and a large part of our business is dependent upon obtaining work through a competitive bidding process. In Water Resources, Inliner and Heavy Civil, Geoconstruction and Energy Services, we compete with many smaller firms on a local or regional level, many of whom may have a lower corporate overhead cost than us. We also compete with larger competitors that are better capitalized than us and may have a lower cost of capital. There are few proprietary technologies or other significant factors which prevent other firms from entering these local or regional markets or from consolidating together into larger companies more comparable in size to our company. Our competitors for the type of construction services we perform are primarily local and regional specialty general contractors. In Mineral Services, we compete with a number of drilling companies, the largest being Boart Longyear Limited, an Australian public company, Major Drilling Group International Inc., a Canadian public company and Foraco International S.A., a French company publicly traded on the Toronto stock exchange. Competition also places downward pressure on our contract prices and profit margins. Competition in all of our markets, and especially in Water Resources, Inliner, Heavy Civil and Geoconstruction, has intensified in the last couple of years due to the continuing difficult economic conditions and such heightened competition is expected to continue for the foreseeable future. If we are unable to meet these competitive challenges, we could lose market share to our competitors and experience an overall reduction in our profit. Additional competition could reduce our profit.
Our failure to comply with the regulations of the U.S. Occupational Safety and Health Administration, the U.S. Mine Safety and Health Administration, the U.S. Department of Transportation and other state and local agencies that oversee transportation and safety compliance could reduce our revenue, profitability and liquidity. OSHA, MSHA and other comparable state and foreign laws establish certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the applicable regulatory authorities and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety in excavation and demolition work may apply to our operations. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA, MSHA and other state, local and foreign laws and regulations, and could incur penalties and fines in the future, including in extreme cases, criminal sanctions. While we have invested, and will continue to invest, substantial resources in worker health and safety programs, the industries in which we operate involve a high degree of operational risk and there can be no assurance that we will avoid significant liability exposure. Although we have taken what are believed to be appropriate precautions, we have suffered employee injuries and fatalities in the past and may suffer additional injuries or fatalities in the future. Serious accidents of this nature may subject us to substantial penalties, civil litigation or criminal prosecution. Personal injury claims for damages, including for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our financial condition, results of operations or cash flows. In addition, if our safety record were to substantially deteriorate, or if we suffered substantial penalties or criminal prosecution for violation of health and safety regulations, customers could cancel existing contracts and not award future business to us, which could materially adversely affect our liquidity, cash flows and results of operations. We have, from time to time, received notice from the U.S. Department of Transportation (DOT)DOT that our motor carrier operations may be monitored and that the failure to improve our safety performance could result in suspension or revocation of vehicle registration privileges. If we were not able to successfully resolve these issues, our ability to service our customers could be damaged, which could lead to a material adverse effect on our results of operations, cash flows and liquidity. The cost of complying with complex governmental regulations applicable to our business, sanctions resulting from non-compliance or reduced demand resulting from increased regulations could increase our operating costs and reduce our profit. Our drilling and other construction services are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws. Our operations are subject to inspection and regulation by various governmental agencies, including the DOT, OSHA and MSHA of the Department of Labor in the U.S., as well as their counterparts in foreign countries. A major risk inherent in drilling and other construction is the need to obtain permits from local authorities. Delays in obtaining permits, the failure to obtain a permit for a project or a permit with unreasonable conditions or costs could limit our ability to effectively provide our services. In addition, these regulations also affect our mining customers and may influence their determination to conduct mineral exploration and development. Future changes in these laws and regulations, domestically or in foreign countries, could cause our customers to incur additional expenses or result in significant restrictions to their operations and possible expansion plans, which could reduce our profit. Our water treatment business is impacted by legislation and municipal requirements that set forth discharge parameters, constrain water source availability and set quality and treatment standards. The success of our groundwater treatment services depends on our ability to comply with the stringent standards set forth by the regulations governing the industry and our ability to provide adequate design and construction solutions cost-effectively.
In most states, one of our employees is required to be a licensed contractor in order for us to bid for, or perform, certain types of construction related projects. From time to time, we are temporarily unable to bid for, or perform work with respect to, those types of construction projects in a particular state, because our licensed employee resigns, is terminated, or dies. Depending upon the length of time to qualify another employee as a licensed contractor in the state and the number and size of the affected projects in that state, the loss of the services of an employee that is a licensed contractor could have a material adverse effect on our results of operations.
The SEC rules require disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies. The SEC rules require that public companies conduct due diligence to determine whether such minerals originated from the DRCDemocratic Republic of Congo (DRC) or an adjoining country. We have incurred additional costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in our products. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals. We may also encounter challenges to satisfy customers that may require all of the components of products purchased to be certified as DRC conflict-free because our supply chain is complex. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier. See Part I, Item 1—Business—Regulation in this Form 10-K for additional information. Our activities are subject to environmental regulation that could increase our operating costs or suspend our ability to operate our business. We are required to comply with foreign, federal, state and local laws and regulations regarding health and safety and the protection of the environment, including those governing the generation, storage, use, handling, transportation, discharge, disposal and clean-up of hazardous substances in the ordinary course of our operations. We are also required to obtain and comply with various permits under current environmental laws and regulations, and new laws and regulations, or changed interpretations of existing requirements, which may require us to obtain and comply with additional permits and/or subject us to enforcement or penalty proceedings. We may be unable to obtain or comply with, and could be subject to revocation of, permits necessary to conduct our business. The costs of complying with environmental laws, regulations and permits may be substantial and any failure to comply could result in fines, penalties or other sanctions. Our operations are sometimes conducted in or near ecologically sensitive areas, such as wetlands, which are subject to special protective measures and which may expose us to additional operating costs and liabilities related to restricted operations, for unpermitted or accidental discharges of oil, natural gas, drilling fluids, contaminated water or other substances or for noncompliance with other aspects of applicable laws and regulations. Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, PCBs, fuel storage and air quality. Certain of our current and historical operations have used hazardous materials and, to the extent that such materials are not properly stored, contained, recycled or disposed of, they could become hazardous waste. Many of our operations involve the production or disposal of significant quantities of water. We may be subject to regulation that restricts our ability to discharge water in the course of these operations. The costs to dispose of this water may increase if any of the following occur: we cannot obtain future permits from applicable regulatory agencies; water of lesser quality or requiring additional treatment is produced; or new laws and regulations require water to be disposed in a different manner. The cost to dispose of, or treat that water or otherwise comply with these regulations concerning water disposal may reduce our profitability.
Various foreign, federal, state and local environmental laws and regulations may impose liability on us with respect to conditions at our current or former facilities, sites at which we conduct or have conducted operations or activities or any third-party waste disposal site to which we send hazardous wastes. We may be subject to claims under various environmental laws and regulations, federal and state statutes and/or common law doctrines for toxic torts and other damages, as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater and other media under laws such as CERCLA. Such claims may arise, for example, out of current or former conditions at project sites, current or former properties owned or leased by us and contaminated sites that have always been owned or operated by third parties. Liability may be imposed without regard to fault and may be strict, joint and several, such that we may be held responsible for more than our share of any contamination or other damages, or even for the entire share, and may be unable to obtain reimbursement from the parties causing the contamination. The costs of investigation or remediation at these sites may be substantial. Environmental laws are complex, change frequently and have tended to become more stringent over time. Compliance with, and liability under, current and future environmental laws, as well as more vigorous enforcement policies or discovery of previously unknown conditions requiring remediation, could increase our operating costs and reduce our revenue. See Part I, Item 1—Business—Regulation in this Form 10-K for additional information. We may face unanticipated water and other waste disposal costs.
Many of our operations involve the production or disposal of significant quantities of water. We may be subject to regulation that restricts our ability to discharge water in the course of these operations.
The costs to dispose of this water may increase if any of the following occur:
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| we cannot obtain future permits from applicable regulatory agencies;
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| water of lesser quality or requiring additional treatment is produced; or
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| new laws and regulations require water to be disposed in a different manner.
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The cost to dispose of, or treat that water or otherwise comply with these regulations concerning water disposal may reduce our profitability.
If our health insurance, liability insurance or workers’ compensation insurance is insufficient to cover losses resulting from claims or hazards, if we are unable to cover our deductible obligations or if we are unable to obtain insurance at reasonable rates, our operating costs could increase and our profit could decline. Although we maintain insurance protection that we consider economically prudent for major losses, we have high deductible amounts for each claim under our health insurance, workers’ compensation insurance and liability insurance. Our current individual claim deductible amount is $200,000 for health insurance, $1,500,000$750,000 for general liability insurance, $500,000 for auto liability insurance and $1,000,000$500,000 for workers’ compensation.compensation insurance. We cannot assure that we will have adequate funds to cover our deductible obligations or that our insurance will be sufficient or effective under all circumstances or against all claims or hazards to which we may be subject or that we will be able to continue to obtain such insurance protection. In addition, we may not be able to maintain insurance of the types or at levels we deem necessary or adequate or at rates we consider reasonable. A successful claim or damage resulting from a hazard for which we are not fully insured could increase our operating costs and reduce our profit. The cost of defending litigation or successful claims against us could reduce our profit or significantly limit our liquidity and impair our operations. We have been and from time to time may be named as a defendant in legal actions claiming damages in connection with drilling or other construction projects and other matters. These are typically actions that arise in the normal course of business, including employment-related claims and contractual disputes or claims for personal injury or property damage that occur in connection with drilling or construction site services. To the extent that the cost of defending litigation or successful claims against us is not covered by insurance, our profit could decline, our liquidity could be significantly reduced and our operations could be impaired. Impairment in the carrying value of long-lived assets, equity method investments, and goodwill could negatively affect our operating results. Under GAAP, long-lived assets are required to be reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause profitability and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill must be evaluated for impairment annually or more frequently if events indicate it is warranted. If the carrying value of our reporting units exceeds their current fair value as determined based on the discounted future cash flows of the related business and other market-related valuation models, the goodwill is considered impaired and is reduced to fair value by a non-cash charge to earnings. Events and conditions that could result in impairment in the value of our long-lived assets, equity method investments and goodwill include changes in the industries in which we operate, particularly the impact of a downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, changes in corporate strategy and business plans or other factors leading to reduction in expected long-term sales or profitability. Layne evaluates itsWe evaluate our long-lived assets, equity method investments and goodwill for impairment at least annually or when events or changes in circumstances indicate there is a loss in value of the investment that is other than a temporary decline. See Note 54 to the consolidated financial statementsConsolidated Financial Statements for a discussion of impairment charges recorded.
Our ability to use U.S. federal net operating loss carryforwards, foreign tax credit carryforwards, capital loss carryforwards and net unrealized built-in losses could be severely limited in the event of certain share transfers of our common stock. We currently have a significant U.S. deferred tax asset, before considering valuation allowances, which results from federal net operating loss carryforwards, foreign tax credit carryforwards, capital loss carryforwards and net unrealized built-in losses. While we have recorded a full valuation allowance against the net deferred tax asset, the carryforwards and the future use of these attributes could provide significant future tax savings to us if we are able to use such losses and credits. However, our ability to use these tax benefits may be restricted due to a future ownership change within the meaning of Section 382 of the Internal Revenue Code. An ownership change could occur that would severely limit our ability to use the tax benefits associated with the net operating loss carryforwards, foreign tax credit carryforwards, capital loss carryforwards and net unrealized built-in losses, which may result in a significantly higher tax cost as compared to the situation where these tax benefits are preserved. If we repatriate earnings from foreign subsidiaries which are currently considered indefinitely reinvested, our income tax expense could be significantly increased. We have not recognized a deferred tax liability on a portion of the undistributed earnings of foreign subsidiaries and certain foreign affiliates as allowed under the indefinite reversal criterion of ASC 740. We consider these amounts to be indefinitely invested based on specific plans for reinvestment of these earnings. However, if liquidity deterioration were to require Layne to change its plans and repatriate all or a portion of these undistributed earnings, a significant amount of our net operating losses could be utilized, or income tax expense and deferred income tax liabilities could be significantly increased.
If we are unable to protect our intellectual property adequately, the value of our patents and trademarks and our ability to operate our business could be harmed. We rely on a combination of patents, trademarks, trade secrets and similar intellectual property rights to protect the proprietary technology and other intellectual property that are instrumental to our operations. We may not be able to protect our intellectual property adequately, and our use of this intellectual property could result in liability for patent or trademark infringement or unfair competition. Further, through acquisitions of third parties, we may acquire intellectual property that is subject to the same risks as the intellectual property we currently own. We may be required to institute litigation to enforce our patents, trademarks or other intellectual property rights, or to protect our trade secrets from time to time. Such litigation could result in substantial costs and diversion of resources and could reduce our profit or disrupt our business, regardless of whether we are able to successfully enforce our rights. We may be exposed to liabilities under the Foreign Corrupt Practices Act and any determination that Layne or any of its subsidiaries has violated the Foreign Corrupt Practices Act could have a material adverse effect on our business. We operate in a number of countries throughout the world, includingsome countries known to have a reputation forexperience corruption. We are committed to doing business in accordance with applicable anti-corruption laws and our code of business conduct and ethics. We are subject, however, to the risk that we, our affiliated entities or their respective officers, directors, employees and agents may take action determined to be in violation of such anti-corruption laws, including the U. S. Foreign Corrupt Practices Act of 1977 (“FCPA”).FCPA. On October 27, 2014, we entered into a settlement with the SEC to resolve allegations concerning the legality of certain payments by us to agents and other third parties interacting with government officials in certain countries in Africa.Africa prior to October 2010. Under the terms of the settlement, without admitting or denying the SEC’s allegations,among other things, we consented to entry of an administrative cease-and-desist order under the books and records, internal controls and anti-bribery provisions of the FCPA. We agreed to pay to the SEC $4.75 million in disgorgement and prejudgment interest, and $375,000 in penalties. We also agreed to undertake certain compliance, reporting and cooperation obligations to the SEC for two years following the settlement date. On November 9, 2016, we made our final report to the SEC and have no further reporting obligations to the SEC under the settlement. The FCPA and related statutes and regulations provide for potential fines, civil and criminal penalties, and equitable remedies, including disgorgement of profits or monetary benefits from such payments, related interest and injunctive relief. CivilThese fines and penalties under the anti-bribery provisions of the FCPA could range up to $10,000 per violation, with a criminal fine up to the greater of $2.0 million per violation or twice the gross pecuniary gain to Layne or twice the gross pecuniary loss to others, if larger. Civil penalties under the accounting provisions of the FCPA can range up to $0.5 million and a company that knowingly commits a violation can be fined up to $25.0 million. In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts. Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA.significant.
Further, detecting, investigating and resolving these types of matters is expensive and could consume significant time and attention of our senior management. We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of rigs or other assets. Our customers in those jurisdictions could seek to impose penalties or take other actions adverse to our interest. We could also face other third-party claims by our directors, officers, employees, affiliates, advisors, attorneys, agents, stockholders, debt holders or other interest holders or constituents. In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets. Future violations of the FCPA may also give rise to an event of default under the agreements governing our debt instruments if such violation were to have a material adverse effect on our business, assets, property, financial condition or prospects or if the amount of any settlement resulted in our failing to satisfy any financial covenants. We could also be subject to additional penalties if we violate the order settling the FCPA investigation or are found to not comply with its compliance, reporting and cooperation obligations. Future climate change could adversely affect us. The prospective impact of potential climate change on our operations and those of our customers remains uncertain. Some scientists have hypothesized that the impacts of climate change could include changes in rainfall patterns, water shortages, snowpack levels, changing sea levels, changing storm patterns and intensities, and changing temperature levels and that these changes could be severe. These impacts could vary by geographic location. At the present time, we cannot predict the prospective impact of potential climate change on our results of operations, liquidity or capital resources, or whether any such effects could be material to us.
Deliberate, malicious acts, including terrorism and sabotage, could damage our facilities, disrupt our operations or injure employees, contractors, customers or the public and result in liability to us. Intentional acts of destruction could hinder our sales or production and disrupt our supply chain. Our facilities could be damaged or destroyed, reducing our operational production capacity and requiring us to repair or replace our facilities at substantial cost. Employees, contractors and the public could suffer substantial physical injury for which we could be liable. Governmental authorities may impose security or other requirements that could make our operations more difficult or costly. The consequences of any such actions could adversely affect our operating results and financial condition. We are dependent on our information systems. Layne is dependent on a variety of information technology systems for the efficient functioning of our business as well as the security of our information. Problems with the implementation of new or upgraded systems as our business grows or with maintenance or discontinuance of existing systems could disrupt or reduce the efficiency of our operations. Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers and suppliers, and personally identifiable information of our employees, in our facilities and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence, which could adversely affect our business. We may pay our suppliers and subcontractors before receiving payment from our customers for the related services. We use suppliers to obtain the necessary materials and subcontractors to perform portions of our services and to manage work flow. In some cases, we pay our suppliers and subcontractors before our customers pay us for the related services. We may pay our suppliers and subcontractors for materials purchased and work performed for customers who fail to pay, or delay paying, us for the related work, which could harm our liquidity and results of operations.
We extend trade credit to customers for purchases of our services, and in the past we have had, and in the future we may have, difficulty collecting receivables from customers that experience financial difficulties. We grant trade credit, generally without collateral, to our customers, which include mining companies, general contractors, commercial and industrial facility owners, state and local governments and developers. Consequently, we are subject to potential credit risk related to changes in business and economic factors in the geographic areas in which our customers are located. If any of our major customers experience financial difficulties, we could experience reduced cash flows and losses in excess of current allowances provided. In addition, material changes in any of our customers’ revenues or cash flows could affect our ability to collect amounts due from them. Risks Related To Our Indebtedness Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations. We have a significant amount of indebtedness. As of January 31, 2017, we had total long-term indebtedness of approximately $162.3 million. Our substantial indebtedness could have important consequences. For example, it could: make it more difficult for us to satisfy our obligations; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which reduces the availability of our cash flow to fund working capital, capital expenditures, development efforts and other general corporate purposes; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds if needed. In addition, the agreements governing our indebtedness and any future indebtedness we incur may contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt. Our growth plans and our ability to make payments of principal or interest on, or to refinance our indebtedness will depend on our future operational performance and our ability to enter into additional debt or equity financings. If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt, to sell assets or to obtain additional financing, which we may be unable to do on favorable terms, if at all. If we are unable to refinance or restructure our Convertible Notes before May 15, 2018, the maturity date of our asset based credit facility will, and the maturity date of our 8.0% Convertible Notes may, accelerate and we may not have sufficient capital resources to repay all of our indebtedness at that time. Our debt facilities currently consist of: $69.5 million of 4.25% Convertible Notes that are due on November 15, 2018, a $100 million senior secured asset-based facility that is due on April 14, 2019 (of which $27.7 million of letters of credits have been issued under the facility) and $99.9 million of 8.0% Convertible Notes that are due on May 1, 2019. However, the maturity date for the asset based credit facility will accelerate to May 15, 2018, if each of the following has not yet occurred on or before such date:
| • | With respect to the 8.0% Convertible Notes, either |
| o | all of the 8.0% Convertible Notes are converted, or |
| o | the maturity date of the 8.0% Convertible Notes is extended to a date which is after October 15, 2019, and |
With respect to the 4.25% Convertible Notes, either | o | all of the 4.25% Convertible Notes are converted, |
| o | the maturity date for the 4.25% Convertible Notes is extended to a date which is after October 15, 2019, or |
| o | the 4.25% Convertible Notes are effectively discharged. |
In addition, if the 4.25% Convertible Notes have not been redeemed, repurchased, otherwise retired, discharged in accordance with their terms or converted into our common stock, or effectively discharged, in each case on or prior to August 15, 2018 or the scheduled maturity date of the 4.25% Convertible Notes has not been extended to a date that is after October 15, 2019, then the 8.0% Convertible Notes will mature on August 15, 2018. The 4.25% Convertible Notes will be effectively discharged if, among other things, we have irrevocably deposited with the trustee of the 4.25% Convertible Notes cash in an amount sufficient to pay any remaining interest and principal payments due on any then remaining unconverted 4.25% Convertible Notes, with irrevocable instructions to the trustee to make such payments to the holders of the 4.25% Convertible Notes as they become due. If we are unable to refinance or restructure our Convertible Notes before May 15, 2018, our asset based credit facility will become due on that date. If we are unable to refinance or restructure our 4.25% Convertible Notes before August 15, 2018, our 8.0% Convertible Notes will become due on that date. We may not have sufficient capital resources to repay all of our indebtedness at that time, which could result in a default under all of our indebtedness. Despite current indebtedness levels, we and our subsidiaries may still incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage. Although the agreements governing our indebtedness contain limitations on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. If we or our subsidiaries incur additional indebtedness, the related risks that we now face would intensify. Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to service our substantial debt. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt because of factors beyond our control. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial conditions at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms which could result in a default on our debt obligations. We may not have sufficient borrowing capacity under our asset-based facility to meet our liquidity requirements, and a reduction in our borrowing base could result in a portion of our borrowings becoming immediately due. We may need to borrow on our asset-based facility in the future for our liquidity needs. If we are unable to borrow under our asset-based facility or otherwise obtain capital as needed to operate our business, our financial performance and position could materially suffer.
Our ability to borrow under our asset-based facility depends on, among other things, the amount of the borrowing base as defined in the asset-based facility and our available capacity under the asset-based facility. Continued operating losses or negative cash flows from our operations may cause Layne to borrow under our asset-based facility and reduce the available capacity under the asset-based facility. Our borrowing base is primarily comprised of a percentage of the net orderly liquidation value of eligible equipment and the value of certain customer and contract receivables. Our borrowing base is reduced by any reserves that the co-collateral agents under our asset-based facility determine to be necessary in good faith and their reasonable business judgment. As of January 31, 2017, our borrowing base under the asset-based facility was $100.0 million, with $27.7 million of letters of credit and no borrowings outstanding, resulting in Excess Availability of $72.3 million. The amount of our borrowing base could be materially and adversely affected by decreases in the value of our eligible equipment and/or receivables, a portion of our equipment and/or receivables being deemed ineligible under the terms of our asset-based facility or the co-collateral agents imposing additional reserve requirements. In addition, if our borrowing base is reduced below the amount of letters of credit and borrowings outstanding under our asset-based facility, then the excess indebtedness would, absent a waiver or amendment, become immediately due and payable and any outstanding letters of credit could require replacement or cash collateralization. We may not have the resources to make any required repayment or cash collateralization, and such repayment obligation or cash collateralization could have a material adverse impact on our liquidity and financial condition. Our indebtedness agreements contain and the terms of any future indebtedness may contain significant operating and financial restrictions. These restrictions may limit our and certain of our subsidiaries’ operating flexibility and, in turn, hinder our ability to make payments on our obligations, impair our ability to make capital expenditures and/or increase the cost of obtaining additional financing. Our asset-based facility includes customary conditions to funding, representations and warranties, covenants and events of default. The terms of the indebtedness could have important consequences to shareholders, including the following: the ability to obtain necessary financing in the future for working capital, acquisitions, capital expenditures, debt service requirements or other purposes may be limited or financing may be unavailable; a portion of cash flow must be dedicated to the payment of interest on the indebtedness and other obligations and will not be available for use in our business; the asset-based credit facility contains various operating and financial restrictions which could limit our ability to incur additional indebtedness and liens, fund our foreign operations, make investments and acquisitions, transfer or sell assets, transact with affiliates and require us to cash collateralize some or all of the outstanding letters of credit; an event of default under the asset-based credit facility, including a subjective event of default if we have experienced a material adverse change, could result in an acceleration of the obligations under the asset-based credit facility, in the foreclosure on assets subject to liens in favor of the asset-based credit facility lenders and the inability to borrow additional amounts under the asset-based credit facility; and acceleration of the indebtedness or payment default under the asset-based credit facility would also be an event of default under the indenture governing our convertible notes. In addition, under our asset-based facility, if Excess Availability is less than the greater of $17.5 million or 17.5% of total availability, in each case for more than one business day, then a “Covenant Compliance Period” will exist until we have Excess Availability for a period of 30 consecutive days equal to or greater than the greater of (a) 17.5 % of the total availability and (b) $17.5 million. During each Covenant Compliance Period, we must maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 and a first lien leverage ratio of not greater than 5.0 to 1.0 for the four fiscal quarter period ended immediately prior to commencement of a Covenant Compliance Period and for every four fiscal quarter period ending during a Covenant Compliance Period. If we had been in a Covenant Compliance Period during the fiscal years ended January 31, 2017 and 2016, we would not have been in compliance with the minimum fixed charge coverage ratio. Furthermore, during a covenant Compliance Period or if an Event of Default has occurred and is continuing all of our funds received on a daily basis will be applied to reduce amounts owing under the asset-based credit facility. Although we do not anticipate being in a Covenant Compliance Period during the next twelve months, a Covenant Compliance Period could occur if the borrowing base is decreased for any of the reasons discussed above or if we are required to borrow more funds than is currently anticipated at a time when we do not meet the minimum fixed charge coverage ratio and the first lien leverage ratio.
We cannot assure that waivers will be granted or amendments made to any of the agreements governing our indebtedness if for any reason we are unable to comply with the obligations thereunder or that we will be able to refinance our debt on acceptable terms, or at all, should we seek to do so. See Note 8 to the Consolidated Financial Statements for a more detailed description of our indebtedness. The conditional conversion feature of theour 4.25% Convertible Notes, if triggered, may adversely affect our financial condition. In the event the conditional conversion feature of the 4.25% Convertible Notes is triggered, holders of the 4.25% Convertible Notes will be entitled to convert such notes at any time during specified periods at their option. If one or more holders elect to convert their 4.25% Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying solely cash in lieu of any fractional share), including if we have irrevocably elected full physical settlement upon conversion, we would be required to make cash payments to satisfy all or a portion of our conversion obligations based on the applicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their 4.25% Convertible Notes, if we have irrevocably elected net share settlement upon conversion we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 4.25% Convertible Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.
We may in certain circumstances elect to settle conversions of our 4.25% Convertible Notes in cash, and the accounting method for convertible debt securities that may be settled in cash could have a material effect on our reported financial results. If we obtain stockholder approval as described below, then, upon conversion,Pursuant to the terms of our 4.25% Convertible Notes, at our election, we will satisfy our conversion obligation for the 4.25% Convertible Notes by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.stock. We refer to these settlement methods as cash settlement, physical settlement and combination settlement, respectively. In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or partially in cash (such as our 4.25% Convertible Notes, if we obtain the stockholder approval described below) in a manner that reflects the issuer’s economic interest cost for non-convertible debt. During the first quarter of FY2016,the fiscal year ended January 31, 2015, the liability component of the convertible debt instrument will initially bewas valued at the fair value of a similar debt instrument that doesdid not have an associated equity component and will bewas reflected as a liability on the balance sheet. The equity component of the convertible debt instrument will bewas included in the additional paid-in capital section of stockholders’ equity on the balance sheet, and the value of the equity component will bewas treated as original issue discount for purposes of accounting for the debt component. This original issue discount must beis being amortized to non-cash interest expense over the term of the convertible debt instrument. Accordingly, we will record a greater amount of non-cash interest expense in current periods as a result of this amortization. We will report lower net income in our financial results because ASC 470-20 will requirerequires the interest expense associated with our 4.25% Convertible Notes to include both the current period’s amortization of the debt discount and our 4.25% Convertible Notes’ coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of our 4.25% Convertible Notes.
If we are requiredelect to settle conversions using physical settlement, then we must include the full number of shares underlying our 4.25% Convertible Notes in the calculation of our diluted earnings per share, regardless of whether the contingent conversion feature of our 4.25% Convertible Notes is triggered. In addition, under certain circumstances, convertible debt instruments whose conversion may be settled entirely or partly in cash (such as our 4.25% Convertible Notes, if we obtain the stockholders approval described below)Notes) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of convertible notes are not included in the calculation of diluted earnings per share unless the conversion value of the convertible notes exceeds their principal amount at the end of the relevant reporting period. If the conversion value exceeds their principal amount, then, for diluted earnings per share purposes, convertible notes are accounted for as if the number of shares of common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, are issued. Accordingly, the treasury stock method could result in more favorable reported diluted earnings per share. BecauseIf we aredo not satisfy the criteria required to settle conversions using physical settlement, we will not be permitted to useutilize the treasury stock method, unless we obtain stockholder approval. will be required to determine diluted earnings per share utilizing the “if converted” method, the effect of which is that the shares issuable upon conversion of the notes are included in the calculation of diluted earnings per share assuming the conversion of the notes at the beginning of the reporting period if the impact is dilutive.We have no obligation to seek stockholder approval, and, even if we do, we may not obtain stockholder approval. Even if we obtain stockholder approval,cannot be sure that the terms of our asset-based facility require us to physically settle conversions which would prevent us from using the treasury stock method. Even still, if we are otherwise able to elect cash settlement or combination settlement, accounting standards in the future may notwill continue to permit the use of the treasury stock method. Additionally, we cannot be sure that we will satisfy the relevant criteria to utilize the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares, if any, issuable upon conversion of our convertible notes, then our diluted earnings per share could be adversely affected.
Conversion of our 8.0% Convertible Notes could dilute the ownership interests of our shareholders. Our 8.0% Convertible Notes are convertible, at the option of the holders, into consideration consisting of shares of our common stock (and cash in lieu of fractional shares) until the close of business on the scheduled trading day immediately preceding the maturity date. To the extent we issue common stock upon conversion of our 8.0% Convertible Notes, that conversion would dilute the ownership interests of our shareholders. We may not have the ability to raise the funds necessary to repurchase our convertible notes upon a fundamental change, asset sale or casualty or condemnation event, and our debt instruments may prohibit some of these payments. As discussed in Note 8 to the Consolidated Financial Statements, if a “fundamental change” (as defined in the indentures governing our convertible notes) occurs, holders of our convertible notes may require us to repurchase all or a portion of such notes in cash. Any such cash payment could be significant, and we may not have enough available cash or be able to obtain financing so that we can make payments on our convertible notes when due. In addition, except in very limited circumstances involving a refinancing of the 8.0% Convertible Notes in a manner permitted by our asset-based facility, our asset-based facility prohibits us from making or offering to make certain voluntary repurchases of the convertible notes, except that we may repurchase the 8.0% Convertible Notes if certain “payment conditions” are satisfied. This provision may prohibit us from repurchasing the convertible notes at the holders’ election following a fundamental change or, with respect to the 8.0% Convertible Notes, certain asset sales and casualty and condemnation events. If we fail to repurchase our convertible notes when required, we will be in default under the indentures for the convertible notes. In addition, such a failure could also be a default under our asset-based facility, which may allow the lenders under that agreement to cause all outstanding amounts under the facility to become immediately due and payable. Certain provisions in the indentures governing our convertible notes could delay or prevent an otherwise beneficial takeover or takeover attempt of us. Certain provisions in the indentures governing our convertible notes could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change (as defined in the indentures governing our convertible notes), holders of our convertible notes will have the right to require us to repurchase their convertible notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their convertible notes in connection with such takeover. In either case, and in other cases, our obligations under our convertible notes and the indentures could increase the cost of acquiring us or otherwise discourage a third party from acquiring us.
Risks Related To Ownership of Our Common Stock Provisions in our organizational documents, and Delaware law and the indentures governing our convertible notes could prevent or frustrate attempts by stockholders to replace our current management or effect a change of control of Layne. Our certificate of incorporation, bylaws and the Delaware General Corporation Law contain provisions that could make it more difficult for a third party to acquire us without consent of our board of directors. In addition, under our certificate of incorporation, our board of directors may issue shares of preferred stock and determine the terms of those shares of stock without any further action by our stockholders. Our issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby effect a change in the composition of our board of directors. Our certificate of incorporation also provides that our stockholders may not take action by written consent. Our bylaws require advance notice of stockholder proposals and nominations, and permit only our board of directors, or authorized committee designated by our board of directors, to call a special stockholder meeting. These provisions may have the effect of preventing or hindering attempts by our stockholders to replace our current management. In addition, Delaware law prohibits us from engaging in a business combination with any holder of 15% or more of our capital stock until the holder has held the stock for three years unless, among other possibilities, our board of directors approves the transaction. Our board may use this provision to prevent changes in our management. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future. In addition, provisions of Delaware law may also discourage, delay or prevent a third party from acquiring or merging with us or obtaining control of Layne.
If a “fundamental change” (as such terms are defined in the indentures governing our convertible notes) occurs, holders of the convertible notes will have the right, at their option, to require us to repurchase all or a portion of their convertible notes. A “fundamental change” generally occurs when there is a change in control of Layne (acquisition of 50% or more of our voting stock, liquidation or sale of Layne not for stock) or trading of our stock is terminated. In the event of a “make-whole fundamental change” (as is defined in the indentures for the convertible notes), we may also be required to increase the conversion rate applicable to the convertible notes surrendered for conversion in connection with such make-whole fundamental change. A “make-whole fundamental change” is generally a sale of Layne not for stock in another publicly traded company. In addition, the indentures for the convertible notes prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the convertible notes. The market price of our common stock could be loweredreduced by future issuances or sales of our common stock. Sales by us or our shareholders of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. In addition to outstanding shares eligible for future sale, as of January 31, 2015, 1.52017, 2.6 million shares of our common stock were issuable, subject to vesting requirement, under currently outstanding stock options and restricted stock units granted to officers, directors and employees and an additional 1.50.3 million shares are available to be granted under our stock option and employee incentive plans. We are restricted from paying dividends. We have not paid any cash dividends on our common stock since our initial public offering in 1992, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our current credit arrangements restrict our ability to pay cash dividends.
Our share price could behas been volatile and could decline, resulting in a substantial or complete loss of your investment. Because the trading of our common stock is characterized by low trading volume, it could be difficult for you to sell the shares of our common stock that you hold. The stock markets, including the NASDAQ Global Select Market, on which we list our common stock, have experienced significant price and volume fluctuations. As a result, the market price of our common stock could be similarly volatile, and you may experience a decrease in the value of the shares of our common stock that you may hold, including a decrease unrelated to our operating performance or prospects. In addition, the trading of our common stock has historically been characterized by relatively low trading volume, and the volatility of our stock price could be exacerbated by such low trading volumes. The market price of our common stock could be subject to significant fluctuations in response to various factors or events, including among other things: ·
| our operating performance and the performance of other similar companies;
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our operating performance and the performance of other similar companies; ·
| actual or anticipated differences in our operating results;
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actual or anticipated differences in our operating results; ·
| changes in our revenue or earnings estimates or recommendations by securities analysts;
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changes in our revenue or earnings estimates or recommendations by securities analysts; ·
| publication of research reports about us or our industry by securities analysts;
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publication of research reports about us or our industry by securities analysts; ·
| additions and departures of key personnel;
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additions and departures of key personnel; ·
| strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
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strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; ·
| the passage of legislation or other regulatory developments that adversely affect us or our industry;
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the passage of legislation or other regulatory developments that adversely affect us or our industry; ·
| speculation in the press or investment community;
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speculation in the press or investment community; ·
| actions by institutional stockholders;
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actions by institutional stockholders; ·
| changes in accounting principles;
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changes in accounting principles; ·
| general market conditions, including factors unrelated to our performance.
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general market conditions, including factors unrelated to our performance.
These factors may lower the trading price of our common stock, regardless of our actual operating performance, and could prevent you from selling your common stock at or above the price that you paid for the common stock. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may lower the market price of our common stock. Item 1B. | Unresolved Staff Comments |
We have no unresolved comments from the Securities and Exchange Commission staff. Our corporate headquartersprimary facilities are located in The Woodlands, Texas (a suburb of Houston, Texas), in approximately 51,000 square feet of office space leased by Layne pursuant to a written lease agreement which expires in 2025 and has two, five-year extensions. As of January 31, 2015, we (excluding foreign affiliates) owned or leased approximately 520 drill and well service rigs throughout the world, approximately of which 390 were locatedsummarized in the U.S. The total rig number includes rigs used primarily in each of our service lines as well as multi-purpose rigs. In addition, as of January 31, 2015, our foreign affiliates owned or leased approximately 195 drill rigs.
Oil and Gas Operations
As further discussed in Note 15 to the consolidated financial statements, during FY2013, we completed the sale of substantially all of the assets of our former Energy segment, which was disposed of on October 1, 2012. At January 31, 2015 and 2014, we had no oil and gas producing activities. Accordingly, the information presented includes information of our operations through the completion of the sale on October 1, 2012. We did not have a reserve study performed during FY2013.table below:
Location | | Segment | | Owned/Leased | | Square Footage | | | Purpose | The Woodlands, Texas | | Corporate | | Leased(1) | | | 51,152 | | | Corporate headquarters | Redlands, California | | Water Resources | | Owned | | | 75,378 | | | Field office | Stuttgart, Arkansas | | Water Resources | | Owned | | | 35,100 | | | Field office | Aurora, Illinois | | Water Resources | | Owned | | | 21,500 | | | Field office | Chandler, Arizona | | Water Resources and Mineral Services | | Owned | | | 38,323 | | | Field office | Orleans, Indiana | | Inliner and Heavy Civil | | Owned | | | 111,880 | | | Field office | Paoli, Indiana | | Inliner | | Owned | | | 115,000 | | | Manufacturing facility | Hermosillo, Mexico | | Mineral Services | | Owned | | | 57,092 | | | Field office | | | | | | | | | | | |
| (1) | The term of the lease expires in 2025 and has two, five-year extensions. We have subleased approximately 19,000 square feet of our corporate facilities under a sublease agreement that expires in 2025. |
We are, from time to time, a party to legal or regulatory proceedings arising in the ordinary course of our business. The discussion in Note 15 to the Consolidated Financial Statements included elsewhere in this Form 10-K is incorporated herein by reference. Currently, there are no other legal or regulatory proceedings that management believes, either individually or in the aggregate, would have a material adverse effect upon our consolidated financial statements. In connectionaccordance with updating its FCPA policy, questions were raised internally in September 2010 about, among other things,U.S. GAAP, we record a liability when it is both probable that a liability has been incurred and the legalityamount of certain payments by Laynethe loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to agentsreflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other third parties interacting with government officials in certain countries in Africa. The audit committee of the board of directors engaged outside counselinformation and events pertaining to conduct an internal investigation to review these payments with assistance from outside accounting firms. Layne made a voluntary disclosure to the DOJ and SEC regarding the results of the investigation and cooperated with those agencies in connection with their review of the matter. On August 6, 2014, the DOJ notified Layne that the DOJ’s inquiry into this matter had been closed. On October 27, 2014, Layne entered into a settlement with the SEC to resolve the allegations concerning potential violations of the FCPA. For further discussion on this and other legal proceedings, see Note 14 to the consolidated financial statements.particular case or proceeding.
Item 4. | Mine Safety Disclosures |
The operations Layne performs on mine sites are subject to regulation by the Federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Form 10-K.
PARTPART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Layne’sOur common stock is traded on the NASDAQ Global Select Market under the symbol LAYN. The following table sets forth the range of high and low sales prices of Layne’sour stock by quarter for FY2015the fiscal years ended January 31, 2017 and FY2014,2016, as reported by the NASDAQ Global Select Market.
| | | | | | | | | | | | | | | | | Fiscal Year 2015 | | High | | | Low | | | Fiscal Year 2017 | | | High | | | Low | | First Quarter | | $ | 18.92 | | | $ | 15.81 | | | $ | 9.22 | | | $ | 4.90 | | Second Quarter | | | 17.47 | | | | 10.45 | | | | 9.32 | | | | 6.50 | | Third Quarter | | | 11.99 | | | | 5.90 | | | | 9.56 | | | | 7.15 | | Fourth Quarter | | | 10.39 | | | | 6.73 | | | | 11.42 | | | | 8.17 | | | | | | | | | | | | | | | | | | | Fiscal Year 2014 | | High | | | Low | | | Fiscal Year 2016 | | | High | | | Low | | First Quarter | | $ | 23.63 | | | $ | 17.42 | | | $ | 8.68 | | | $ | 4.35 | | Second Quarter | | | 22.64 | | | | 18.68 | | | | 10.51 | | | | 6.31 | | Third Quarter | | | 20.75 | | | | 18.12 | | | | 8.80 | | | | 5.56 | | Fourth Quarter | | | 20.14 | | | | 13.88 | | | | 7.21 | | | | 3.75 | | | | | | | | | | | | | | | | | | |
At April 6, 2015,March 31, 2017, there were 74138 owners of record of Layne’sour common stock. Layne hasWe have not paid any cash dividends on itsour common stock. Moreover, theour Board of Directors of Layne does not anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend on a number of factors including our future earnings, capital requirements, financial condition and prospects of Layne and such other factors as the Board of Directors may deem relevant, as well as restrictions under Layne’sour indebtedness agreements. Layne’sOur indebtedness agreements currently contain restrictions on theour ability of Layne to pay cash dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of January 31, 2015, with respect to shares of Layne’s common stock that have been authorized for issuance under Layne’s 2006 Equity Plan.
The table does not include information with respect to shares subject to outstanding options granted under equity compensation plans that are no longer in effect. Footnote 1 to the table sets forth the total number of shares of common stock issuable upon the exercise of options under expired plans as of January 31, 2015, and the weighted average exercise price of those options. No additional options may be granted under such plans.
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | | | (a)(1) | | | (b) | | | (c)(2) | | | Equity compensation plans approved by security holders | | | 1,015,514 | | | $ | 21.15 | | | | 1,539,950 | | |
(1)
| Shares issuable pursuant to outstanding options under the 2006 Equity Plan. As of January 31, 2015, an additional 18,750 shares of Layne common stock were issuable upon the exercise of outstanding options under the expired 1996 Option Plan and 2002 Option Plan. The weighted-average exercise price of those options is $27.87 per share. No additional options may be granted under the 1996 Option Plan or the 2002 Option Plan.
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(2)
| All shares listed are issuable pursuant to future awards under the 2006 Equity Plan.
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The following graph provides a comparison of our five-year, cumulative total shareholder return(1) from January 31, 20102012 through January 31, 20152017 to the return of S&P 500the Russell 3000, and a custom peer group selected by Layne. The peer group includes Aegion Corp, Nuverra Environmental Solutions Inc., Matrix Service Company, Primoris Services Corp., Tutor-Perini Corp., Boart Longyear Limited, Major Drilling Group International Inc., Foraco International SA and Forage Orbit Garant Drilling Inc. The comparisons shown in the graph are based on historical data. The stock price performance shown in the graph is not necessarily indicative of, nor is it intended to forecast, the potential future performance of Layne’s common stock. Information used in the graph was obtained from Research DataRussell Investment Group, a source believed to be reliable, but we are not responsible for any errors or omission in such information. The following performance graph and related text are being furnished to and not filed with the SEC, and will not be deemed to be “soliciting material” or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate such information by reference into such filing.  
Item 6. | Selected Financial Data |
The following selected historical financial information as of and for each of the five fiscal years ended January 31, 2015,2017, has been derived from Layne’sour audited consolidated financial statements. The acquisitions, as noted below, have been accounted for under the acquisition method of accounting and, accordingly, Layne’s consolidated results include the effects of the acquisitions from the date of each acquisition. All periods presented below reflect the effects of operations discontinued during each of the years in FY2015, FY2014 and FY2013.the table below.
The information below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and the consolidated financial statements and notes thereto under Item 8 included elsewhere in this Form 10-K. | | | | | | | | | | | | | | | | | | | | | As of and Years Ended January 31, | | 2015(1) | | | 2014(2) | | | 2013(3) | | | 2012 | | | 2011(4) | | Income Statement Data (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | | $ | 1,083,513 | | | $ | 975,891 | | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below) | | | (682,559 | ) | | | (666,295 | ) | | | (836,394 | ) | | | (852,465 | ) | | | (762,017 | ) | Selling, general and administrative expenses | | | (122,240 | ) | | | (134,314 | ) | | | (152,108 | ) | | | (157,690 | ) | | | (133,796 | ) | Depreciation and amortization | | | (49,283 | ) | | | (56,302 | ) | | | (57,571 | ) | | | (53,671 | ) | | | (44,279 | ) | Impairment charges(6) | | | — | | | | (14,646 | ) | | | (8,431 | ) | | | (96,579 | ) | | | — | | Loss on remeasurement of equity method investment(7) | | | — | | | | — | | | | (7,705 | ) | | | — | | | | — | | Equity in earnings (losses) of affiliates | | | 1,388 | | | | (2,974 | ) | | | 20,572 | | | | 24,647 | | | | 13,153 | | Restructuring costs | | | (2,698 | ) | | | — | | | | — | | | | — | | | | — | | Interest expense | | | (13,707 | ) | | | (7,132 | ) | | | (3,301 | ) | | | (2,357 | ) | | | (1,594 | ) | Other income, net | | | 659 | | | | 6,751 | | | | 6,003 | | | | 9,880 | | | | 684 | | (Loss) income from continuing operations before income taxes | | | (70,839 | ) | | | (76,567 | ) | | | (25,011 | ) | | | (44,722 | ) | | | 48,042 | | Income tax benefit (expense)(5) | | | 3,945 | | | | (53,177 | ) | | | 10,029 | | | | (8,988 | ) | | | (20,483 | ) | Net (loss) income from continuing operations | | | (66,894 | ) | | | (129,744 | ) | | | (14,982 | ) | | | (53,710 | ) | | | 27,559 | | Net (loss) income from discontinued operations | | | (42,433 | ) | | | 1,693 | | | | (21,041 | ) | | | 528 | | | | 4,028 | | Net (loss) income | | | (109,327 | ) | | | (128,051 | ) | | | (36,023 | ) | | | (53,182 | ) | | | 31,587 | | Net income attributable to noncontrolling interest | | | (824 | ) | | | (588 | ) | | | (628 | ) | | | (2,893 | ) | | | (1,596 | ) | Net (loss) income attributable to Layne Christensen Company | | $ | (110,151 | ) | | $ | (128,639 | ) | | $ | (36,651 | ) | | $ | (56,075 | ) | | $ | 29,991 | | Earnings per share information attributable to | | | | | | | | | | | | | | | | | | | | | Layne Christensen Company shareholders: | | | | | | | | | | | | | | | | | | | | | Basic (loss) income per share-continuing operations | | $ | (3.45 | ) | | $ | (6.65 | ) | | $ | (0.80 | ) | | $ | (2.91 | ) | | $ | 1.34 | | Basic (loss) income per share-discontinued operations | | | (2.16 | ) | | | 0.09 | | | | (1.08 | ) | | | 0.03 | | | | 0.21 | | Basic (loss) income per share | | $ | (5.61 | ) | | $ | (6.56 | ) | | $ | (1.88 | ) | | $ | (2.88 | ) | | $ | 1.55 | | Diluted (loss) income per share-continuing operations | | $ | (3.45 | ) | | $ | (6.65 | ) | | $ | (0.80 | ) | | $ | (2.91 | ) | | $ | 1.33 | | Diluted (loss) income per share - discontinued operations | | | (2.16 | ) | | | 0.09 | | | | (1.08 | ) | | | 0.03 | | | | 0.20 | | Diluted (loss) income per share | | $ | (5.61 | ) | | $ | (6.56 | ) | | $ | (1.88 | ) | | $ | (2.88 | ) | | $ | 1.53 | | Balance Sheet Data (in thousands): | | | | | | | | | | | | | | | | | | | | | Working capital, including current maturities of debt | | $ | 104,832 | | | $ | 121,330 | | | $ | 125,079 | | | $ | 136,404 | | | $ | 93,309 | | Total assets | | | 545,513 | | | | 646,618 | | | | 812,226 | | | | 805,836 | | | | 816,652 | | Total long-term debt, excluding current maturities | | | 132,137 | | | | 107,118 | | | | 95,142 | | | | 52,716 | | | | — | | Total Layne Christensen Company stockholders' equity | | | 181,215 | | | | 289,464 | | | | 412,737 | | | | 448,665 | | | | 501,402 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | As of and Years Ended January 31, | | 2017 | | | 2016(1) | | | 2015(4) | | | 2014(6) | | | 2013(7) | | Income Statement Data (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | Revenues | | $ | 601,972 | | | $ | 683,010 | | | $ | 720,568 | | | $ | 772,102 | | | $ | 935,879 | | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below) | | | (502,050 | ) | | | (570,078 | ) | | | (610,844 | ) | | | (645,078 | ) | | | (774,326 | ) | Selling, general and administrative expenses (exclusive of depreciation, amortization and impairment charges shown below) | | | (97,202 | ) | | | (108,159 | ) | | | (117,085 | ) | | | (126,315 | ) | | | (143,050 | ) | Depreciation and amortization | | | (26,911 | ) | | | (32,685 | ) | | | (41,978 | ) | | | (48,792 | ) | | | (49,475 | ) | Impairment charges(2) | | | — | | | | (4,598 | ) | | | — | | | | — | | | | (8,431 | ) | Equity in earnings (losses) of affiliates | | | 2,655 | | | | (612 | ) | | | (2,002 | ) | | | (2,974 | ) | | | 16,700 | | Restructuring costs | | | (17,348 | ) | | | (9,954 | ) | | | (2,698 | ) | | | — | | | | — | | Gain on extinguishment of debt(3) | | | — | | | | 4,236 | | | | — | | | | — | | | | — | | Interest expense | | | (16,883 | ) | | | (18,011 | ) | | | (13,707 | ) | | | (7,132 | ) | | | (3,301 | ) | Other income, net | | | 4,951 | | | | 2,354 | | | | 1,352 | | | | 6,696 | | | | 5,389 | | Loss from continuing operations before income taxes | | | (50,816 | ) | | | (54,497 | ) | | | (66,394 | ) | | | (51,493 | ) | | | (20,615 | ) | Income tax (expense) benefit (5) | | | (1,420 | ) | | | 1,635 | | | | 3,945 | | | | (56,884 | ) | | | 10,024 | | Net loss from continuing operations | | | (52,236 | ) | | | (52,862 | ) | | | (62,449 | ) | | | (108,377 | ) | | | (10,591 | ) | Net income (loss) from discontinued operations | | | — | | | | 8,057 | | | | (46,878 | ) | | | (19,674 | ) | | | (25,432 | ) | Net loss | | | (52,236 | ) | | | (44,805 | ) | | | (109,327 | ) | | | (128,051 | ) | | | (36,023 | ) | Net loss (income) attributable to noncontrolling interest | | | — | | | | 28 | | | | (824 | ) | | | (588 | ) | | | (628 | ) | Net loss attributable to Layne Christensen Company | | $ | (52,236 | ) | | $ | (44,777 | ) | | $ | (110,151 | ) | | $ | (128,639 | ) | | $ | (36,651 | ) | (Loss) income per share information attributable to | | | | | | | | | | | | | | | | | | | | | Layne Christensen Company shareholders: | | | | | | | | | | | | | | | | | | | | | Loss per share from continuing operations - basic and diluted | | $ | (2.64 | ) | | $ | (2.68 | ) | | $ | (3.22 | ) | | $ | (5.56 | ) | | $ | (0.58 | ) | Income (loss) per share from discontinued operations - basic and diluted | | | — | | | | 0.41 | | | | (2.39 | ) | | | (1.00 | ) | | | (1.30 | ) | Loss per share - basic and diluted | | $ | (2.64 | ) | | $ | (2.27 | ) | | $ | (5.61 | ) | | $ | (6.56 | ) | | $ | (1.88 | ) | Balance Sheet Data (in thousands): | | | | | | | | | | | | | | | | | | | | | Working capital, including current maturities of debt | | $ | 105,545 | | | $ | 131,280 | | | $ | 104,832 | | | $ | 121,330 | | | $ | 125,079 | | Total assets | | | 436,151 | | | | 488,657 | | | | 541,942 | | | | 642,499 | | | | 812,226 | | Total long-term debt, excluding current maturities | | | 162,346 | | | | 158,986 | | | | 128,566 | | | | 102,999 | | | | 95,142 | | Total Layne Christensen Company shareholders' equity | | | 82,220 | | | | 128,658 | | | | 181,215 | | | | 289,464 | | | | 412,737 | | | | | | | | | | | | | | | | | | | | | | |
(1) | During the second quarter of FY2015, Layne authorized the sale of its Costa Fortuna operation and sold it on July 31, 2014. Layne purchased 50% of Costa Fortuna on July 15, 2010 and accounted for it using the equity method of investment until May 30, 2012 when Layne acquired the remaining 50%. In accordance with accounting guidance, Layne did not account for Costa Fortuna as discontinued operations for the periodsfiscal year ended January 31, 2011 and 2012, when it was accounted for as an equity method investment. For the period ended January 31, 2013, Layne accounted for Costa Fortuna as discontinued operations for the period in which Layne held 100% of the business of Costa Fortuna. In the third quarter of FY2015, Layne2016, we sold its Tecniwellour Geoconstruction business, and accounted for it as a discontinued operation. This business was sold on October 31, 2014. Both Costa Fortuna and Tecniwell were accounted for as discontinued operations in FY2015. |
(2) | See Note 4 to the Consolidated Financial Statements for a discussion of impairment charges recorded during the fiscal year ended January 31, 2016. During the first quarterfiscal year ended January 31, 2013, we determined $8.4 million of FY2014, Layne authorized the sale of its SolmeteX operation and accounted for it as a discontinued operation. The operation was sold on July 31, 2013.our intangible assets were impaired. |
(3) | During FY2013, Layne accountedthe fiscal year ended January 31, 2016, we recognized a gain on extinguishment of debt of $4.2 million in connection with the partial redemption of the 4.25% Convertible Notes in exchange for the former Energy segment, which was sold in October 2013, as a discontinued operation. 8.0% Convertible Notes. |
| (4) | During FY2011, Layne acquired certain assets of Intevras Technologies, LLC, 50% ofthe fiscal year ended January 31, 2015, we sold Costa Fortuna and 100% ofTecniwell, both previously reported in the stock of Bencor Corporation of America. The impact of Intevras was not material to the FY2011 consolidated financial statements. Bencor contributed $33.8 million of net income to the FY2011 consolidated financial statements. Costa Fortuna wasGeoconstruction operating segment, and were accounted for using the equity method of accounting.as discontinued operations. |
(5) | A $78.3$73.4 million valuation allowance on deferred tax assets was recorded during FY2014.the fiscal year ended January 31, 2014. Of the $78.3$73.4 million valuation allowance, $54.4 million related to deferred tax assets established in a prior year, and $23.9$19.0 million related to deferred tax assets established in FY2015. See Note 9 to the consolidated financial statements.current year. |
(6) | See Note 5 toDuring the consolidated financial statementsfiscal year ended January 31, 2014, we accounted for our SolmeteX operation, which was sold on July 31, 2013, as a discussion of FY2014 and FY2013 impairment charges. During FY2012, Layne performed its annual goodwill impairment and determined $86.2 million of its then existing goodwill was impaired. Also during FY2013, Layne determined $8.4 million of its intangible assets were impaired.discontinued operation.
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(7) | See Note 2 toDuring the consolidated financial statements.fiscal year ended January 31, 2013, we accounted for the former Energy segment, which was sold on October 1, 2012, as a discontinued operation.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of financial condition and results of operations should be read in conjunction with Layne’sour consolidated financial statements and notes thereto under Item 8. Cautionary Language Regarding Forward-Looking Statements This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Such statements may include, but are not limited to, statements of plans and objectives, statements of future economic performance and statements of assumptions underlying such statements, and statements of management’s intentions, hopes, beliefs, expectations or predictions of the future. Forward-looking statements can often be identified by the use of forward-looking terminology, such as “should,” “intended,” “continue,” “believe,” “may,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “estimate” and similar words or phrases. Such statements are based on current expectations and are subject to certain risks, uncertainties and assumptions, including but not limited to: estimates and assumptions regarding our strategic direction and business strategy, the timely and effective execution of turnaround strategy for Water Resources, the extent and timing of a recovery in the mining industry, prevailing prices for various commodities, (including gold, copper, crude oil and natural gas), the duration of the current slowdown in the mineral drilling services market,longer term weather patterns, unanticipated slowdowns in Layne’sour major markets, the availability of credit, the risks and uncertainties normally incident to theour construction industry, the timing for the completion of the existing unprofitable contracts in Heavy Civil, the ability to successfully obtain profitable contracts in Energy Services,industries, the impact of competition, the effect of any deregulation or other initiatives by the Trump Administration, the effectiveness of operational changes expected to reduce operating expenses and increase efficiency, and productivity and reduce costs,profitability, the satisfaction of all of the closing conditions for the sale of our Heavy Civil business segment in a timely manner, the availability of equity or debt capital needed for our business, including the refinancing of our existing indebtedness as it matures, worldwide economic and political conditions and foreign currency fluctuations that may affect worldwideour results of operations. Many of the factors that will determine these items are beyond Layne’s ability to control or predict. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, estimated or projected. These forward-looking statements are made as of the date of this filing, and Layne assumeswe assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. Management’s Overview The following Management’s DiscussionWe provide a wide range of diverse water-related products and Analysisservices, pipe rehabilitation solutions and mineral services throughout North America and Brazil, and through our foreign affiliates in Latin America. Our customers are diverse ranging from governmental agencies, investor-owned utilities, industrial companies, global mining companies, consulting engineering firms, heavy civil construction contractors, oil and gas companies, power companies and agribusiness. Over the past several years our strategy has been to divest of Financial Conditionour non-core business lines, realign our strategy around our core water businesses and Results of Operations (“MD&A”) is intended to help the reader understand Layne, its operationsreduce our overall cost structure.
Within our Mineral Services business, we offer unique technologies for mineral exploration and our present business environment. MD&A is provided as a supplement to and should be read in connection with the consolidated financial statements and the accompanying notes thereto contained in Item 8 of this report. MD&A includes the following sections: ·
| Business—a general description of Layne’s business and key FY 2015 events.
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| Consolidated Review of Operations—an analysis of Layne’s consolidated results of operations for the three years presented in the consolidated financial statements.
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| Operating Segment Review of Operations—an analysis of Layne’s results of operations for the three years presented in the consolidated financial statements for Layne’s reporting segments: Water Resources, Inliner, Heavy Civil, Geoconstruction, Mineral Services and Energy Services.
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| Liquidity and Capital Resources—an analysis of cash flows, aggregate financial commitments and certain financial condition ratios.
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| Critical Accounting Policies and Estimates—a discussion of Layne’s critical accounting policies and estimates that involve a higher degree of judgment or complexity.
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Business
Layne is a globalmine water management constructionservices. This business is highly cyclical based on commodity prices movements, and drilling company. Layne provides responsible solutions for water, mineralinfluenced by global industrial demand. With the depressed commodity prices in recent years, we have restructured, reducing our overall cost structure and energy challenges. Layne managesrefocused the business on North and reports its operations through its six segments: Water Resources, Inliner, Heavy Civil, Geoconstruction, Mineral ServicesSouth America, exiting Australia and Energy Services.Africa, so that we are positioned to capitalize on future opportunities when commodity prices return to higher levels.
Key Fiscal Year 20152017 Events OnEffective with the first quarter of fiscal year ended January 2, 2015, Layne hired Michael Caliel as its President31, 2017, changes were made to simplify our business and Chief Executive Officer. Mr. Caliel replaced David Brown,streamline our operating and reporting structure. Our Collector Wells group was shifted from Heavy Civil to Water Resources to better align their operational expertise. We also shifted certain other smaller operations out of our “Other” segment and into our four reporting segments, and no longer report an “Other” segment. These changes better reflect how our business is managed and performance is evaluated. Information for prior periods has been recast to conform to the current Chairmanpresentation.
During the second quarter of fiscal year ended January 31, 2017, we continued our efforts by initiating a plan to reduce costs and improve our profitability in our Water Resources segment (“Water Resources Business Performance Initiative”). The Water Resources Business Performance Initiative involves cost rationalization, increased standardization of functions such as sales, pricing and estimation, disposal of underutilized assets, and process improvements to drive efficiencies. We recorded approximately $3.2 million in restructuring costs related to the Water Resources Business Performance Initiative for the fiscal year ended January 31, 2017.
During the fiscal year ended January 31, 2017, we continued the implementation of our FY2016 Restructuring Plan, which involves the exit of our operations in Africa and Australia and other actions to support our strategic focus in simplifying the business and improving profitability (“FY2016 Restructuring Plan”). For the fiscal year ended January 31, 2017, we recognized approximately $14.1 million of restructuring expenses under the FY2016 Restructuring Plan, primarily related to the closure of our Australian and African entities resulting in the impairment of our assets held for sale. In calculating the impairment, the carrying amount of the Board, who had been serving as CEO on an interim basis.assets included the cumulative currency translation adjustment related to our Australian and African entities. Also included are severance costs and other personnel-related costs, and other costs to support our business focus and strategy. Mineral Services continues to be impacted by the global slowdown in spending for mineral drilling services, both in the markets served by Layne’s wholly-owned operations and Layne’s Latin American affiliates. Global spending for minerals drilling services has decreased significantly over the past two years in every geographic region. This has reduced the revenues generated by Mineral Services and has adversely affected our results of operations and cash flows. During FY 2015, revenues decreased by 30.5% from the same period last year. FY2016 will likely see further reductions until such time as the market becomes stabilized, if at all. Given that the assets within the division are in good working order and, geographically diversified and the division has the ability to deploy rapidly to new sites when requested, Layne believes it will be able to react in an expedient manner when the market improves.
Heavy Civil’s revenues decreased by 22.5% during FY 2015 compared to FY 2014. As previously reported, this segment is being more selective in its pursuit of municipal bid projects. This strategy may result in lower revenues in the future, but is anticipated to provide more stable margins and decreased risk for the segment. Heavy Civil has continued to experience cost overruns associated with the completion of certain contracts.
Geoconstruction announced in August 2014 that is had been awarded a $132.5 million contract with the U.S. Army Corps of Engineers for the East Branch Dam located in Pennsylvania. The project has commenced and is expected to be completed by the end of FY 2019.
Energy Services loss from continuing operations has increased in FY 2015 as compared to FY 2014 by 14.0%. The recent decrease in oil and gas prices is expected to result in a slower growth rate for the segment than was previously expected. Expansion of this business beyond its current operations in the Permian Basin in West Texas will be undertaken cautiously when, and if, market conditions are favorable.
On August 6, 2014, Layne was notified by the DOJ that inquiry into potential violations of the FCPA, as discussed in Note 14 to the consolidated financial statements, had been closed. On October 27, 2014, Laynewe entered into a settlement with the SECSecurities and Exchange Commission ("SEC") to resolve the allegations concerning potential violations of the FCPA. This settlement with the SEC resolved all outstanding government investigations with respect to Layne concerning potential FCPA violations.Foreign Corrupt Practices Act. Under the terms of the settlement, without admitting or denying the SEC’s allegations, Layne consented to entry of an administrative cease-and-desist order under the books and records, internal controls and anti-bribery provisions of the FCPA. In connection with the settlement, Layne paid to the SEC $4.7 million in disgorgement and prejudgment interest, and $0.4 million in penalties on November 6, 2014. Layne alsoamong other things, we agreed to undertake certain compliance, reporting and cooperation obligations to the SEC for two years following the settlement date. On November 9, 2016, we made our final report to the SEC and have no further reporting obligations to the SEC under the settlement.
The BoardEffective April 15, 2016, we appointed Lisa Curtis as Vice President and Chief Accounting Officer. Prior to joining us, Ms. Curtis worked for Cameron International Corporation since November 2009. During her time at Cameron, she served in positions of Directors approved a restructuring planincreasing responsibility, most recently as controller, external reporting, accounting policies and internal controls. From October 2008 to November 2009, Ms. Curtis served as chief accounting officer of Trico Marine Services, Inc.
Subsequent Event As disclosed in Note 21 to the Consolidated Financial Statements, on February 8, 2017, we entered into an Asset Purchase Agreement (the “Plan”"Asset Purchase Agreement") in June 2014, designed to generate a series of short and long term cost reductions. Management hassell substantially implemented the Plan. The savings generated from the Plan will be derived from various areas within Layne, including workforce reductions, operational and functional reorganization and redesign of company processes. A full year impact of these savings will become realized in FY 2016. In addition, Layne is continuing to undertake a strategic review of its operations to evaluate alternatives for under-performing divisions, service lines or non-core assets to improve profitability and/or liquidity. On July 31, 2014, Layne sold Costa Fortuna, an operation within Geoconstruction, as part of its assessment of under-performing assets. Costa Fortuna was sold to Aldo Corda, the original owner and the then current managerall of the assets of our Heavy Civil business at the time of disposal. In a continuationfor $10.1 million, subject to certain working capital adjustments. The purchaser of the assessmentHeavy Civil business is Reycon Partners LLC (the "Buyer"), which is owned by a group of under-performing assets, Layne sold Tecniwell, a lineprivate investors, including members of business within Geoconstruction on October 31, 2014. Both dispositions are discussed in Note 15the current Heavy Civil senior management team. The Buyer has the option to the consolidated financial statements.
Layne entered into a five year asset-based credit facility on April 15, 2014. The asset-based credit facility provides for an aggregate principal amount of $135.0 million (subject to a borrowing base requirement), of whichpay up to an aggregate principal amount$3.7 million of $75.0 million will be availablethe consideration in the form of letters of credit and up to an aggregate principal amount of $15.0 million is available for short-term swingline borrowings. Layne terminated its previous credit agreement on April 15, 2014. See Liquidity and Capital Resources for additional information.
On February 4, 2015, Layne announced it had entered into Exchange and Subscription Agreements with certain investors that held approximately $55.5 million of our 4.25% Convertible Notes. The investors exchanged the 4.25% Convertible Notescommon stock currently owned by themthe owners of the Buyer (valued at the weighted average price of Layne's common stock for approximately $49.9the 10 trading days immediately prior to the closing date). The total purchase price for the assets will increase or decrease on a dollar-for-dollar basis to the extent the Heavy Civil division's working capital is more or less than an agreed upon target working capital amount. In addition, Layne and the Buyer have agreed to split equally any amounts received with respect to a $3.5 million outstanding receivable related to a job contract that is substantially completed. Subject to satisfaction of new 8.0% Convertible Notesclosing conditions, including obtaining any required consents and purchased approximately $49.9 millionapprovals, the transaction is expected to close within 90 days from the date of additional new 8.0% Convertible Notes. The transaction closedthe Asset Purchase Agreement. We expect to recognize a loss on March 2, 2015. Layne received net cash proceeds from the sale of our Heavy Civil business during the new 8.0% Convertible Notes, net of expenses related to the offering of approximately $45.0 million. Layne used a portionfirst half of the net cash proceeds to repay amounts outstanding under its asset-based credit facility. The remainder of the net cash proceeds will be used for future working capital purposesfiscal year ended January 31, 2018.
Non-GAAP Financial Measures Layne uses certain financial measuresWe use Adjusted EBITDA to assess our performance, which areis not defined in generally accepted accounting principles (GAAP). These measures areOur measure of Adjusted EBITDA, which may not be comparable to other companies’ measure of Adjusted EBITDA, represents income or loss from continuing operations before interest, taxes, depreciation and amortization, non-cash equity-based compensation, equity in earnings or losses from affiliates, certain non-recurring items such as impairment charges, restructuring costs, gain on extinguishment of debt, and certain other gains or losses, plus dividends received from affiliates. Adjusted EBITDA is included as a complement to results provided in accordance with GAAP because management believes thesethis non-GAAP financial measures helpmeasure helps us explain underlyingunderstand and evaluate our operating performance and trends in the business and provideprovides useful information to both management and investors. TheseIn addition, we use Adjusted EBITDA as a factor in incentive compensation decisions and our credit facility agreement uses measures similar to Adjusted EBITDA to assess compliance with certain covenants. Adjusted EBITDA should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. See Note 17 to the Consolidated Financial Statements for the reconciliation of Adjusted EBITDA to income (loss) from continuing operations before income taxes, which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA.
Other non-GAAP measures include the presentations of division income before certain charges and effective income tax rates excluding those charges.
Consolidated ReviewResults of Operations The following table, which is derived from Layne’sour consolidated financial statements included in Item 8, presents, for the periods indicated, the percentage relationship which certain items reflected in Layne’sour results of operations bear to revenues and the percentage increase or decrease in the dollar amount of such items period-to-period.revenues. | | | | | | | | | | | | | | Period-to-Period | | | | | Fiscal Years Ended January 31, | | | Change | | | | | | | | | | | | | | | | | 2015 | | | 2014 | | | | | 2015 | | | 2014 | | | 2013 | | | vs. 2014 | | | vs. 2013 | | | Revenues: | | | | | | | | | | | | | | | | | | | | | | Water Resources | | | 24.6 | | % | | 22.0 | | % | | 21.1 | | % | | 11.6 | | % | | (17.9 | ) | % | Inliner | | | 21.9 | | | | 18.6 | | | | 13.1 | | | | 17.9 | | | | 11.4 | | | Heavy Civil | | | 26.0 | | | | 33.5 | | | | 27.4 | | | | (22.5 | ) | | | (3.9 | ) | | Geoconstruction | | | 9.7 | | | | 3.3 | | | | 7.7 | | | | 193.5 | | | | (66.4 | ) | | Mineral Services | | | 15.1 | | | | 21.7 | | | | 29.8 | | | | (30.5 | ) | | | (42.8 | ) | | Energy Services | | | 2.5 | | | | 0.8 | | | | 0.6 | | | | 219.0 | | | | 7.7 | | | Other | | | 2.4 | | | | 2.4 | | | | 1.1 | | | | (3.8 | ) | | | 73.2 | | | Intersegment Eliminations | | | (2.2 | ) | | | (2.3 | ) | | | (0.8 | ) | | | (6.8 | ) | | | 103.9 | | | Total net revenues | | | 100.0 | | % | | 100.0 | | % | | 100.0 | | % | | (0.1 | ) | | | (21.3 | ) | | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below) | | | (85.6 | ) | % | | (83.5 | ) | % | | (82.5 | ) | % | | 2.4 | | | | (20.3 | ) | | Selling, general and administrative expenses | | | (15.3 | ) | | | (16.8 | ) | | | (15.0 | ) | | | (9.0 | ) | | | (11.7 | ) | | Depreciation and amortization | | | (6.2 | ) | | | (7.1 | ) | | | (5.7 | ) | | | (12.5 | ) | | | (2.2 | ) | | Impairment charges | | | — | | | | (1.8 | ) | | | (0.8 | ) | | * | | | * | | | Loss on remeasurement of equity method investment | | | — | | | | — | | | | (0.8 | ) | | * | | | * | | | Equity in earnings (losses) of affiliates | | | 0.2 | | | | (0.4 | ) | | | 2.0 | | | | 146.7 | | | | (114.5 | ) | | Restructuring costs | | | (0.3 | ) | | | — | | | | — | | | * | | | * | | | Interest expense | | | (1.7 | ) | | | (0.9 | ) | | | (0.3 | ) | | | 92.2 | | | | 116.1 | | | Other income, net | | | 0.1 | | | | 0.8 | | | | 0.6 | | | | (90.2 | ) | | | 12.5 | | | Loss from continuing operations | | | (8.8 | ) | | | (9.7 | ) | | | (2.5 | ) | | | (7.5 | ) | | | 206.1 | | | Income tax benefit (expense) | | | 0.4 | | | | (6.6 | ) | | | 1.0 | | | | (107.4 | ) | | * | | | Net loss from continuing operations | | | (8.4 | ) | | | (16.3 | ) | | | (1.5 | ) | | | (48.4 | ) | | | 766.0 | | | Net (loss) income from discontinued operations | | | (5.3 | ) | | | 0.3 | | | | (2.1 | ) | | * | | | * | | | Net loss | | | (13.7 | ) | | | (16.0 | ) | | | (3.6 | ) | | | (14.6 | ) | | | 255.5 | | | Net income attributable to noncontrolling interests | | | (0.1 | ) | | | (0.1 | ) | | | — | | | | 40.1 | | | | (6.4 | ) | | Net loss attributable to Layne Christensen Company | | | (13.8 | ) | % | | (16.1 | ) | % | | (3.6 | ) | % | | (14.4 | ) | % | | 251.0 | | % | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Fiscal Years Ended January 31, | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | Revenues: | | | | | | | | | | | | | | Water Resources | | | 34.0 | | % | | 35.2 | | % | | 31.7 | | % | Inliner | | | 32.7 | | | | 28.4 | | | | 24.3 | | | Heavy Civil | | | 22.8 | | | | 24.1 | | | | 27.5 | | | Mineral Services | | | 10.6 | | | | 12.6 | | | | 16.8 | | | Intersegment Eliminations | | | (0.1 | ) | | | (0.3 | ) | | | (0.3 | ) | | | | | 100.0 | | % | | 100.0 | | % | | 100.0 | | % | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below) | | | (83.4 | ) | % | | (83.5 | ) | % | | (84.8 | ) | % | Selling, general and administrative expenses (exclusive of depreciation, amortization and impairment charges shown below) | | | (16.1 | ) | | | (15.8 | ) | | | (16.2 | ) | | Depreciation and amortization | | | (4.5 | ) | | | (4.8 | ) | | | (5.8 | ) | | Impairment charges | | | — | | | | (0.7 | ) | | | — | | | Equity in earnings (losses) of affiliates | | | 0.4 | | | | (0.1 | ) | | | (0.3 | ) | | Restructuring costs | | | (2.9 | ) | | | (1.5 | ) | | | (0.4 | ) | | Gain on extinguishment of debt | | | — | | | | 0.6 | | | | — | | | Interest expense | | | (2.8 | ) | | | (2.6 | ) | | | (1.9 | ) | | Other income, net | | | 0.8 | | | | 0.4 | | | | 0.2 | | | Loss from continuing operations before income taxes | | | (8.5 | ) | | | (8.0 | ) | | | (9.2 | ) | | Income tax (expense) benefit | | | (0.2 | ) | | | 0.3 | | | | 0.5 | | | Net loss from continuing operations | | | (8.7 | ) | | | (7.7 | ) | | | (8.7 | ) | | Net income (loss) from discontinued operations | | | — | | | | 1.1 | | | | (6.6 | ) | | Net loss | | | (8.7 | ) | | | (6.6 | ) | | | (15.3 | ) | | Net income attributable to noncontrolling interests | | | — | | | | — | | | | (0.1 | ) | | Net loss attributable to Layne Christensen Company | | | (8.7 | ) | % | | (6.6 | ) | % | | (15.4 | ) | % | | | | | | | | | | | | | | |
Revenues, equity in earnings (losses) of affiliates and income (loss) before income taxesCertain financial information pertaining to Layne’sour operating segments areis presented below. Unallocated corporate expenses primarily consist of general and administrative functions performed on a company-wide basis and benefiting all operating segments. These costs include accounting, financial reporting, internal audit, safety, treasury, corporate and securities law,legal, tax compliance, executive management and Board of Directors.
| | Fiscal Years Ended January 31, | | | Fiscal Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | Water Resources | | $ | 196,243 | | | $ | 175,875 | | | $ | 214,091 | | | $ | 204,577 | | | $ | 239,897 | | | $ | 227,626 | | Inliner | | | 175,001 | | | | 148,384 | | | | 133,256 | | | | 196,845 | | | | 193,704 | | | | 175,001 | | Heavy Civil | | | 207,036 | | | | 267,192 | | | | 278,131 | | | | 137,189 | | | | 164,905 | | | | 198,511 | | Geoconstruction | | | 77,032 | | | | 26,242 | | | | 78,045 | | | Mineral Services | | | 120,217 | | | | 172,960 | | | | 302,119 | | | | 63,777 | | | | 86,390 | | | | 121,247 | | Energy Services | | | 20,209 | | | | 6,336 | | | | 5,885 | | | Other | | | 19,179 | | | | 19,936 | | | | 11,509 | | | Intersegment Eliminations | | | (17,316 | ) | | | (18,580 | ) | | | (9,112 | ) | | | (416 | ) | | | (1,886 | ) | | | (1,817 | ) | Total revenues | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | | $ | 601,972 | | | $ | 683,010 | | | $ | 720,568 | | Equity in earnings (losses) of affiliates | | | | | | | | | | | | | | | | | | | | | | | | | Geoconstruction | | $ | 3,390 | | | $ | — | | | $ | 3,872 | | | Mineral Services | | | (2,002 | ) | | | (2,974 | ) | | | 16,700 | | | $ | 2,655 | | | $ | (612 | ) | | $ | (2,002 | ) | Total equity in earnings (losses) of affiliates | | $ | 1,388 | | | $ | (2,974 | ) | | $ | 20,572 | | | Income (loss) from continuing operations before income taxes | | | | | | | | | | | | | | | | | | | | | | | | | Water Resources | | $ | 14,356 | | | $ | 1,016 | | | $ | (1,290 | ) | | $ | (17,551 | ) | | $ | 5,867 | | | $ | 10,209 | | Inliner | | | 22,870 | | | | 17,650 | | | | 9,936 | | | | 25,981 | | | | 22,946 | | | | 21,996 | | Heavy Civil | | | (21,502 | ) | | | (7,781 | ) | | | (32,308 | ) | | | (5,187 | ) | | | (6,882 | ) | | | (23,456 | ) | Geoconstruction | | | (4,443 | ) | | | (24,810 | ) | | | (4,127 | ) | | Mineral Services | | | (14,909 | ) | | | (9,534 | ) | | | 49,406 | | | | (9,154 | ) | | | (29,176 | ) | | | (16,011 | ) | Energy Services | | | (3,661 | ) | | | (3,212 | ) | | | (7,444 | ) | | Other | | | (55 | ) | | | 193 | | | | 126 | | | Unallocated corporate expenses | | | (49,788 | ) | | | (42,957 | ) | | | (36,009 | ) | | | (28,022 | ) | | | (33,477 | ) | | | (45,425 | ) | Interest expense | | | (13,707 | ) | | | (7,132 | ) | | | (3,301 | ) | | Interest expense/Other items | | | | (16,883 | ) | | | (13,775 | ) | | | (13,707 | ) | Total loss from continuing operations before income taxes | | $ | (70,839 | ) | | $ | (76,567 | ) | | $ | (25,011 | ) | | $ | (50,816 | ) | | $ | (54,497 | ) | | $ | (66,394 | ) | Adjusted EBITDA | | | | | | | | | | | | | | Water Resources | | | $ | (2,410 | ) | | $ | 23,870 | | | $ | 22,740 | | Inliner | | | | 32,036 | | | | 27,949 | | | | 27,881 | | Heavy Civil | | | | (3,226 | ) | | | (4,031 | ) | | | (20,570 | ) | Mineral Services | | | | 8,635 | | | | 1,878 | | | | 10,205 | | Unallocated corporate expenses | | | | (23,830 | ) | | | (29,319 | ) | | | (41,798 | ) | Total Adjusted EBITDA | | | $ | 11,205 | | | $ | 20,347 | | | $ | (1,542 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
Comparison of Fiscal Year 2015 (FY 2015)2017 to Fiscal Year 2014 (FY 2014)2016 Consolidated Results Revenues remained relatively flat during FY 2015, decreasing $0.7decreased $81.0 million, or 0.1%11.9%, to $797.6$602.0 million, for the fiscal year ended January 31, 2017, compared to $798.3$683.0 million for FY 2014. However, therethe fiscal year ended January 31, 2016. The decrease in revenues was primarily due to declines in Heavy Civil resulting from the continuing strategic shift towards more selective opportunities, in Mineral Services reflecting the exit from operations in Africa and Australia and weak market conditions during the first half of the year, and decreased drilling activity levels in the western U.S. in Water Resources due to significant variation by segment. A further discussion of results of operations by segment is presented below.precipitation levels in the region. Cost of revenues increased $16.3(exclusive of depreciation, amortization and impairment charges) decreased $68.0 million, or 2.4% to $682.6$502.1 million (85.6%(83.4% of revenues) for FY 2015,the fiscal year ended January 31, 2017, compared to $666.3$570.1 million (83.5% of revenues) for FY 2014.the fiscal year ended January 31, 2016. Cost of revenues contains direct costs, which increased $17.9 million to $614.6 million (90.0%as a percentage of cost of revenues) in FY 2015revenues for the fiscal year ended January 31, 2017 decreased from $596.7 million in FY 2014 (89.6% of cost of revenues), and field expenses which decreased slightly for FY 2015 (9.7% of cost of revenues) compared to FY 2014 (10.1% of cost of revenues). Direct costs primarily include material costs and labor costs associated with specific projects. The increase in direct costs isthe prior year, primarily due to an increasethe $7.9 million write down of inventory in the costs to complete some projectsprior year combined with improved margins in Heavy Civil.Civil and Inliner. Heavy Civil margins improved as a result of the strategic focus towards more selective opportunities. Inliner’s margins increased primarily due to the product mix of contracts combined with increased crew efficiency during the fiscal year ended January 31, 2017. Selling, general and administrative expenses were $122.2decreased $11.0 million, or 10.1%, to $97.2 million for FY 2015,the fiscal year ended January 31, 2017, compared to $134.3$108.2 million for FY 2014.the fiscal year ended January 31, 2016. The decrease iswas primarily relateddue to decreases in relocation expenses of $6.7 million, FCPA investigation related expenses of $11.8 million, temporary services of $0.9 million and compensation expenses of $0.6 million. The decreases in relocation and temporary services from FY 2014 are a result ofreduced Corporate overhead costs, incurred in FY 2014 for Layne’s move from Mission, Kansas to The Woodlands, Texas. The net decrease in FCPA investigation related expenses is a result of the investigation having been mostly completed as of the end of FY 2014 and the reversal of a prior accrual as a result of the DOJ declining to take any action against Layne as discussed in Note 14 to the consolidated financial statements. These decreases were offset by increasesincluding reductions in legal and professional fees and compensation expenses. Depreciation and amortization decreased $5.8 million, or 17.7%, to $26.9 million, for the fiscal year ended January 31, 2017, compared to $32.7 million for the fiscal year ended January 31, 2016. The decrease represents reductions in capital expenditures, and the disposal or write down of $5.0 million, $2.6 millionassets. These decreases were partially offset by increased depreciation related to additional capital expenditures in incentive compensation, $0.3 million in safety expensesInliner to expand crews and $0.1 million in dues and subscriptions. manufacturing capabilities.
Depreciation and amortization were $49.3 million for FY 2015, compared to $56.3 million for FY 2014. The decrease is primarily due to the reductions in capital expenditures as Layne continued to restrict its capital spending.
In connection with management’s restructuring plan approved by the Board of Directors in June 2014, Layne incurred restructuring costs of $2.7 million for FY 2015. These primarily consisted of severance and other related costs associated with workforce reductions and costs to move and consolidate equipment and inventories. During FY 2015, Layne has:
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| identified and completed the sale of Costa Fortuna and Tecniwell as discussed in Note 15 to the consolidated financial statements,
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| implemented workforce reductions,
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| consolidated certain offices within the U.S., and
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| consolidated or closed certain African locations in Mineral Services.
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Equity in earnings (losses) of affiliates improved to earnings of $1.4$2.7 million for FY 2015,the fiscal year ended January 31, 2017, compared to a loss of $3.0$0.6 million for FY 2014. Layne’s internationalthe fiscal year ended January 31, 2016, primarily due to increased margins from our affiliates in Chile. Restructuring costs of $17.3 million were recorded lossesfor the fiscal year ended January 31, 2017, compared to $10.0 million for the fiscal year ended January 31, 2016. Restructuring costs for the fiscal year ended January 31, 2017 primarily related to the closure of $2.0our Australian and African entities resulting in the impairment of our assets held for sale. In calculating the impairment, the carrying amount of the assets included the cumulative currency translation adjustment related to our Australian and African entities. Also included are the restructuring costs associated with our Water Resources Business Performance Initiative, as discussed in Note 18 to the Consolidated Financial Statements. For the fiscal year ended January 31, 2016, restructuring costs related to $3.9 million due primarily toin asset write-downs, combined with $6.1 million of severance and other costs, as part of our exit from Africa and Australia. Interest expense decreased $1.1 million, or 6.3%, to $16.9 million for the fiscal year ended January 31, 2017, compared to $18.0 million for the fiscal year ended January 31, 2016. The decrease in interest expense was mainly due to a $1.0 million write-off of unamortized deferred financing fees as a result of the reduction in the borrowing base available under the asset-based facility during the third quarter of the fiscal year ended January 31, 2016. Income tax (expense) benefit from continuing operations were downsizedof ($1.4) million was recorded for the fiscal year ended January 31, 2017, compared to $1.6 million for the fiscal year ended January 31, 2016. We currently record no tax benefit on domestic deferred tax assets and certain foreign deferred tax assets. The effective tax rate for the fiscal year ended January 31, 2017 was 2.8%, compared to (3.0%) for the fiscal year ended January 31, 2016. The differences between the effective tax rates and the statutory tax rate resulted primarily from valuation allowances recorded during each period on current year losses. The result of operations for the fiscal year ended January 31, 2016 included net income from discontinued operations of $8.1 million, primarily related to the gain on the sale of our Geoconstruction business. Segment Operating Results Water Resources | | Fiscal Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | Revenues | | $ | 204,577 | | | $ | 239,897 | | | | | | | | | | | Adjusted EBITDA | | | (2,410 | ) | | | 23,870 | | Adjusted EBITDA as a percentage of revenues | | | (1.2 | %) | | | 10.0 | % |
Revenues for Water Resources decreased $35.3 million, or 14.7%, to $204.6 million, for the fiscal year ended January 31, 2017, compared to $239.9 million for the fiscal year ended January 31, 2016. The decline in responserevenues was primarily due to market conditions. Layne’s domestic affiliates, consistingreduced activity in agricultural drilling projects in the western U.S. stemming largely from increased precipitation over the course of joint ventures formedthe past year, and lower pump and well-related equipment sales. Adjusted EBITDA decreased $26.3 million to ($2.4) million, for specific geoconstructionthe fiscal year ended January 31, 2017, compared to $23.9 million for the fiscal year ended January 31, 2016. The decrease in Adjusted EBITDA was primarily due to reduced drilling activity described above, higher maintenance costs on equipment and higher costs and margin degradation on several large water well and injection well drilling projects. Inliner | | Fiscal Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | Revenues | | $ | 196,845 | | | $ | 193,704 | | | | | | | | | | | Adjusted EBITDA | | | 32,036 | | | | 27,949 | | Adjusted EBITDA as a percentage of revenues | | | 16.3 | % | | | 14.4 | % |
Revenues for Inliner increased $3.1 million, or 1.6%, to $196.8 million, for the fiscal year ended January 31, 2017, compared to $193.7 million for the fiscal year ended January 31, 2016. Revenues increased due in part to the increase in the number of crews, from
34 at the start of fiscal year ended January 31, 2016 to 38 crews at the end of fiscal year ended January 31, 2017. Increased activity and a favorable product mix of a higher volume of larger diameter pipe projects had earningsalso contributed to the increase in revenues. Adjusted EBITDA increased $4.1 million, or 14.6%, to $32.0 million, for the fiscal year ended January 31, 2017, compared to $27.9 million for the fiscal year ended January 31, 2016. The increase in Adjusted EBITDA represents improved results across most operating regions as compared to the prior year. The increase in Adjusted EBITDA as a percentage of $3.4revenues was attributable to a higher volume of large diameter pipe installations combined with increased crew efficiency. Heavy Civil | | Fiscal Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | Revenues | | $ | 137,189 | | | $ | 164,905 | | | | | | | | | | | Adjusted EBITDA | | | (3,226 | ) | | | (4,031 | ) | Adjusted EBITDA as a percentage of revenues | | | (2.4 | %) | | | (2.4 | %) |
Revenues for Heavy Civil decreased $27.7 million, or 16.8%, to $137.2 million, for the fiscal year ended January 31, 2017, compared to $164.9 million for the fiscal year ended January 31, 2016. The decline in revenues for Heavy Civil is primarily a result of a reduced volume of contracts due to our continuing strategic shift towards more selective opportunities. Adjusted EBITDA improved $0.8 million, or 20.0%, to ($3.2) million, for the fiscal year ended January 31, 2017, compared to ($4.0) million for the fiscal year ended January 31, 2016. The increase in Adjusted EBITDA, despite a reduction in revenues, was primarily due to improved job margins. Mineral Services | | Fiscal Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | Revenues | | $ | 63,777 | | | $ | 86,390 | | | | | | | | | | | Adjusted EBITDA | | | 8,635 | | | | 1,878 | | Adjusted EBITDA as a percentage of revenues | | | 13.5 | % | | | 2.2 | % |
Revenues for Mineral Services decreased $22.6 million, or 26.2%, to $63.8 million, for the fiscal year ended January 31, 2017, compared to $86.4 million for the fiscal year ended January 31, 2016. Revenues declined primarily due to our exit from our operations in Africa and Australia during the fiscal year ended January 31, 2016, which contributed to approximately $12.4 million in FY 2015,revenue decline for the fiscal year ended January 31, 2017, compared to no earningsthe prior year. Lower activity levels in FY 2014. the United States and Mexico during the first half of the year, also contributed to the decline in revenues. Adjusted EBITDA increased $6.7 million to $8.6 million for the fiscal year ended January 31, 2017, compared to $1.9 million for the fiscal year ended January 31, 2016. The increase in Adjusted EBITDA was due to a $2.2 million value added tax recovery during the current year, $1.1 million increased dividends received from our Latin American affiliates, and increased margins in Brazil and Mexico. Unallocated Corporate Expenses Unallocated corporate expenses reflected in our Adjusted EBITDA were $23.8 million for the fiscal year ended January 31, 2017, compared to $29.3 million for the fiscal year ended January 31, 2016. The improvement was primarily due to reductions in legal and professional fees, and compensation expenses related to reduced headcount.
Comparison of Fiscal Year 2016 to Fiscal Year 2015 Consolidated Results Revenues decreased $37.6 million, or 5.2%, to $683.0 million, for the fiscal year ended January 31, 2016, compared to $720.6 million for the fiscal year ended January 31, 2015. The decrease in revenues was primarily due to lower revenues at Mineral Services and Heavy Civil, partially offset by increases in revenues at Water Resources and Inliner. Cost of revenues (exclusive of depreciation, amortization and impairment charges) decreased $40.8 million, to $570.1 million (83.5% of revenues) for the fiscal year ended January 31, 2016, compared to $610.8 million (84.8% of revenues) for the fiscal year ended January 31, 2015. Cost of revenues as a percentage of revenues for the fiscal year ended January 31, 2016 decreased from the prior year, primarily due to improved margins in Heavy Civil and Water Resources partially offset by a $7.9 million (1.2% of revenues) write-down of inventory as part of our restructuring activities in Africa and Australia. Selling, general and administrative expenses decreased $8.9 million, or 7.6%, to $108.2 million for the fiscal year ended January 31, 2016, compared to $117.1 million for the fiscal year ended January 31, 2015. The decreases were primarily due to the overall effort to reduce overhead costs, including reductions in consulting expenses, compensation expenses and office rent due to the FY2015 Restructuring Plan, and relocation costs included in the fiscal year ended January 31, 2015 that were not repeated in the fiscal year ended January 31, 2016. Depreciation and amortization decreased $9.3 million, or 22.1%, to $32.7 million, for the fiscal year ended January 31, 2016, compared to $42.0 million for the fiscal year ended January 31, 2015. The decrease was primarily due to reductions in capital expenditures over the past several years, disposal of underutilized assets and impairment of certain fixed assets during the fiscal year ended January 31, 2016. An asset impairment charge of $4.6 million was recorded during the fiscal year ended January 31, 2016 for the Energy Services segment, which was previously reported as a separate segment prior to being combined with Water Resources beginning in the third quarter of the fiscal year ended January 31, 2016. The impairment charge was recorded to reflect reductions in the estimated fair value of certain long-lived assets. Restructuring costs of $10.0 million were recorded for the fiscal year ended January 31, 2016, compared to $2.7 million for the fiscal year ended January 31, 2015. For the fiscal year ended January 31, 2016, restructuring costs related to a $3.9 million asset write-down, combined with $6.1 million of severance and other costs, as part of the restructuring activities in Africa and Australia. Restructuring costs for the fiscal year ended January 31, 2015 primarily consisted of severance and other cost reduction efforts associated with the FY2015 Restructuring Plan. A gain on extinguishment of debt of $4.2 million was recognized during the fiscal year ended January 31, 2016 in connection with the partial redemption of the 4.25% Convertible Notes in exchange for 8.0% Convertible Notes, as discussed in Note 8 to the Consolidated Financial Statements. Interest expense increased $4.3 million, or 31.4%, to $18.0 million for the fiscal year ended January 31, 2016, compared to $13.7 million for FY 2015, compared with $7.1 million for FY 2014. Included in interest expense for FY 2015 and FY 2014 is the amortization of debt issuance costs of $1.4 million and $0.2 million, respectively and the amortization of the discount related to the 4.25% Convertible Notes of $3.3 million and $0.8 million, respectively.fiscal year ended January 31, 2015. The remaining increase in interest expense was primarilymainly due to a higher debt balance and higher average interest rate with the 4.25%issuance of the 8.0% Convertible Notes being outstanding forduring the full period in FY 2015. Other income, net for FY 2015, consisted primarilyfirst quarter of gains on the sale of non-core assets, including real estate.fiscal year ended January 31, 2016.
An income tax benefit from continuing operations of $3.9$1.6 million was recorded onfor the fiscal year ended January 31, 2016, compared to $3.9 million for the fiscal year ended January 31, 2015. The income tax benefit from continuing operations for FY 2015, comparedthe fiscal year ended January 31, 2016 included $3.6 million of benefit recorded as an offset to an equal amount of tax expense in discontinued operations less $2.0 million of tax expense relating to other items in continuing operations. The income tax expense of $53.2 millionbenefit from continuing operations for FY 2014. The FYthe fiscal year ended January 31, 2015 tax benefit was primarily due to the carryback of prior year tax losses upon which no tax benefit had previously been recorded because of the valuation allowance that was recorded during FY 2014.recorded. A cash refund of $3.9 million was received in early FYduring the first quarter of the fiscal year ended January 31, 2016. Excluding The result of operations for the priorfiscal year tax loss carryback, the FY 2015 provision was zero dueended January 31, 2016 included net income from discontinued operations of $8.1 million, primarily to valuation allowances provided on deferred tax assets generated in the current year. Tax expense recorded during FY 2014 resulted primarily from a $54.4 million tax charge due to a valuation allowance provided on deferred tax assets established in a prior year. In total, a $78.3 million valuation allowance on deferred tax assets was recorded during FY 2014. Of this amount, $54.4 million related to deferred tax assets established in a prior year resulting in a change to income tax expense, and $23.9 million related to deferred tax assets established in the current year for whichgain on the sale of our Geoconstruction business. A net tax expenses recorded was zero. Tax expenseloss from discontinued operations of $3.7$46.9 million was recorded for the fiscal year ended January 31, 2015, primarily related to operating losses of the Geoconstruction business segment and the loss on discontinued operationsthe sale of Costa Fortuna and $7.1 million of tax expense was recorded to equityTecniwell businesses, both included in connection with the 4.25% Convertible Notes issuance.Geoconstruction business segment.
Segment Operating Segment Review of OperationsResults Water Resources | | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 196,243 | | | $ | 175,875 | | | $ | 20,368 | | | | 11.6 | % | Income before income taxes | | | 14,356 | | | | 1,016 | | | | 13,340 | | | * | |
| | Fiscal Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Revenues | | $ | 239,897 | | | $ | 227,626 | | | | | | | | | | | Adjusted EBITDA | | | 23,870 | | | | 22,740 | | Adjusted EBITDA as a percentage of revenues | | | 10.0 | % | | | 10.0 | % |
Revenues for Water Resources increased $12.3 million, or 5.4%, to $239.9 million, for the fiscal year ended January 31, 2016, compared to $227.6 million for the fiscal year ended January 31, 2015. The revenue growth in Water Resources was driven mainly by drilling projects in the western U.S. related to drought conditions. The revenue growth in the western region was partially offset by declines in water management services for the energy market as a result of the decline in oil and natural gas prices. Adjusted EBITDA increased $1.1 million, or 5.0%, to $23.9 million, for the fiscal year ended January 31, 2016, compared to $22.7 million for the fiscal year ended January 31, 2015. The increase in Adjusted EBITDA was primarily due to margin improvements from projects in the western region, partially offset by operating losses generated in our energy market. Inliner | | Fiscal Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Revenues | | $ | 193,704 | | | $ | 175,001 | | | | | | | | | | | Adjusted EBITDA | | | 27,949 | | | | 27,881 | | Adjusted EBITDA as a percentage of revenues | | | 14.4 | % | | | 15.9 | % |
Revenues for Inliner increased $18.7 million, or 10.7%, to $193.7 million, for the fiscal year ended January 31, 2016, compared to $175.0 million for the fiscal year ended January 31, 2015. Revenues increased primarily due to the increase in activity and work orders under our longer term multi-year contracts. Adjusted EBITDA remained flat at $27.9 million for the fiscal year ended January 31, 2016, compared to fiscal year ended January 31, 2015, as the revenue increase was offset by margin decrease due to higher subcontractor work. Heavy Civil | | Fiscal Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Revenues | | $ | 164,905 | | | $ | 198,511 | | | | | | | | | | | Adjusted EBITDA | | | (4,031 | ) | | | (20,570 | ) | Adjusted EBITDA as a percentage of revenues | | | (2.4 | %) | | | (10.4 | %) |
Revenues for Heavy Civil decreased $33.6 million, or 16.9%, to $164.9 million, for the fiscal year ended January 31, 2016, compared to $198.5 million for the fiscal year ended January 31, 2015. The decline in revenues for Heavy Civil is due to the continuing strategic shift towards more selective opportunities including negotiated and alternative delivery contracts and less emphasis on traditional fixed-price contracts. These negotiated and alternative delivery contracts are typically lower risk and contributed to improved margins. Furthermore, certain large projects closed or are neared completion and reduced revenues recognized during the current period. Adjusted EBITDA increased $20.4$16.5 million, or 80.4%, to $196.2($4.0) million, for the fiscal year ended January 31, 2016, compared to ($20.6) million for the fiscal year ended January 31, 2015. The improvement in FY 2015 from $175.9 million in FY 2014. Income before income taxes increased $13.3 millionAdjusted EBITDA is due to $14.4 million (7.3% of revenues) in FY 2015 from $1.0 million (0.6% of revenues) in FY 2014.less cost degradation on fixed-price troubled contracts, improving performance on alternative delivery projects, and lower selling, general and administrative expenses as Heavy Civil focused on effectively managing its cost structure.
Water Resources experienced growthMineral Services
| | Fiscal Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Revenues | | $ | 86,390 | | | $ | 121,247 | | | | | | | | | | | Adjusted EBITDA | | | 1,878 | | | | 10,205 | | Adjusted EBITDA as a percentage of revenues | | | 2.2 | % | | | 8.4 | % |
Revenues for Mineral Services decreased $34.9 million, or 28.7%, to $86.4 million, for the fiscal year ended January 31, 2016, compared to $121.2 million for the fiscal year ended January 31, 2015 primarily as a result of projectsthe continuation of declining global commodity prices and significant reductions in mining activities around the world. Revenues outside the United States declined more dramatically as our foreign locations were more severely impacted by the drop in commodity prices due to the higher costs of production. Activity in the western portion of the U.S. Inadequate water infrastructure in those regions, combined with lingering drought conditions have resulted in additional opportunities to provide water management services, particularly in the agribusiness market. Direct costs as a percentage of revenue decreased from 67.4% in FY 2014 to 63.4% in FY 2015. The growth in revenues, combined with slight margin improvements across most of its operations, and better leverage of our fixed costs have resulted in improved earnings. Water Resources has been carefully analyzing its locations and overhead expenses to increase efficiencies and lower costs, but still provide locations to best service the areas where projects are located. As a result, selling costs in FY 2015 were reduced by $1.3 million, to 14.6% of revenues, from 17.1% of revenues in FY 2014.
Inliner
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 175,001 | | | $ | 148,384 | | | $ | 26,617 | | | | 17.9 | % | Income before income taxes | | | 22,870 | | | | 17,650 | | | $ | 5,220 | | | | 29.6 | % |
Inliner revenues increased $26.6 million to $175.0 million in FY 2015 from $148.4 million in FY 2014. Income before income taxes increased $5.2 million to $22.9 million (13.1% of revenues) in FY 2015 compared to $17.7 million (11.9% of revenues) in FY 2014.
Inliner’s revenues have continued to grow across all of its markets, and alsoUnited States benefited from the introductionsgrowth of its fiberglass based lining products, which accounted for approximately $6.1 million in revenue in FY 2015. Overall direct costs improved as a percentage of revenues from 78.4% in FY 2014 to 76.7% in FY 2015. Continued leverage of fixed costs plus slight margin improvements have resulted in improved earnings over last fiscal year.
Heavy Civil mine water management services.
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 207,036 | | | $ | 267,192 | | | $ | (60,156 | ) | | | -22.5 | % | Loss before income taxes | | | (21,502 | ) | | | (7,781 | ) | | $ | (13,721 | ) | | * | |
Heavy Civil experienced aAdjusted EBITDA decreased $8.3 million, to $1.9 million, for the fiscal year ended January 31, 2016, compared to $10.2 million for the fiscal year ended January 31, 2015. The decrease in revenues of $60.2 million to $207.0 million for FY 2015 compared to $267.2 million in FY 2014. Loss before income taxes increased by $13.7 million to $(21.5) million (-10.4% of revenues) in FY 2015 from $(7.8) million (-2.9% of revenues) in FY 2014. Low gross profit margins have resulted in operating results not sufficient to offset overhead costs. Projects which were already experiencing cost overruns were delayed even further than anticipated and several jobs in the northeastern portion of the U.S. experienced adverse weather conditions in the first quarter of FY 2015 and during January 2015. Adverse weather conditions cause an increase in expenses on projectsAdjusted EBITDA was primarily due to crew and equipment standby costs, and, once the weather subsides, work may have to be restarted out of sequence to try and meet time constraints implicit within the contracts of certain projects, there by further reducing profitability.
The delays in completing projects have led to additional costs. The estimated costs to complete these projects have been updated to reflect the best information available to us at this time and all estimated future losses have been recorded. It remains possible that, as we reach completion for these projects, we could encounter unforeseen conditions or events which would cause us to revise our estimates and could result in further losses. During FY 2015 estimated losses recorded on our larger revenue contracts were approximately $13.5 million. In FY 2014 estimated losses of approximately $9.3 million were recorded on our larger revenue contracts.
Heavy Civil continues with its strategic decision, to reduce its volume of fixed bid type contracts and to concentrate on increasing its opportunities for negotiated or alternative delivery contracts, which Layne believes have less risk. Accordingly, as we have previously discussed, we expected our revenuelower activity levels to decline as compared to prior periods until we have a more appropriate mix of contracts.
Margins will continue to be suppressed as contracts executed before the implementation of the strategic shift are completed. Management is involved in the monitoring of these low margin contracts. Management is also involved in the contract bidding guidelines for this segment to ensure the previously communicated strategic decision to move away from fixed price bid municipal contracts to negotiated or alternative delivery contracts is achieved.
Geoconstruction
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 77,032 | | | $ | 26,242 | | | $ | 50,790 | | | | 193.5 | % | Loss before impairments and income taxes | | | (4,443 | ) | | | (10,164 | ) | | $ | 5,721 | | | | 56.3 | % | Less: Impairment charges | | | — | | | | (14,646 | ) | | $ | 14,646 | | | | 100.0 | % | Loss before income taxes | | $ | (4,443 | ) | | $ | (24,810 | ) | | $ | 20,367 | | | | 82.1 | % | Equity in earnings of affiliates, included in above earnings | | $ | 3,390 | | | $ | — | | | $ | 3,390 | | | | 100.0 | % |
Geoconstruction experienced an increase in revenues of $50.8 million to $77.0 million for FY 2015 compared to $26.2 million for FY 2014. Loss before income taxes decreased by $20.4 million to a loss before income taxes of ($4.4) million (-5.8% of revenues) for FY 2015 from $(24.8) million (-94.5% of revenues) for FY 2014. The comparison of loss before income taxes is impacted by a goodwill impairment charge of $14.6 million in the second quarter of FY 2014.
Equity in earnings of affiliates of $3.4 million was associated with joint venture projects in Seattle, WA and Iowa.
Geoconstruction revenues and earnings have been positively impacted by multiple projects in San Francisco and Hawaii which were awarded during the third quarter of FY 2014. Results have been negatively impacted by additional costs incurred on a project in San Francisco which currently has claims in dispute. Due to the dispute, no revenues associated with the potential recovery of such costs have been recognized. The current amount of the claims being sought are approximately $7.0 million. Layne continues to work with the general contractor towards resolution of this dispute. Additional FY 2015 results were impacted by non-cash write-downs of inventory of $1.2 million in the fourth quarter and a $3.5 million settlement in the second quarter FY 2015 of a long-standing contract dispute.
Mineral Services
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 120,217 | | | $ | 172,960 | | | $ | (52,743 | ) | | | -30.5 | % | Loss before income taxes | | | (14,909 | ) | | | (9,534 | ) | | $ | (5,375 | ) | | | -56.4 | % | Equity in losses of affiliates, included in above earnings | | | (2,002 | ) | | | (2,974 | ) | | $ | 972 | | | | 32.7 | % |
Revenues decreased by $52.7 million to $120.2 million in FY 2015 from $173.0 million in FY 2014 and loss before income taxes increased $5.4 million from ($9.5) million (-5.5% of revenues) to ($14.9) million (-12.4% of revenues).
Included in the loss before income taxes for FY 2015 is a decrease to the accrual related to the FCPA investigation of $5.2 million as a result of the DOJ’s decision to close its investigation without bringing any charges against Layne, as compared to an increaseextended downturn in the accrual of $6.7 million in FY 2014.
Equity in lossesminerals market, as well as our exit from the affiliates in South America also continued to be impacted by market conditions during FY 2015. Equity in losses of affiliates decreased by $1.0 million to ($2.0) million in FY 2015 from ($3.0) million in FY 2014. Reductions in the workforce that occurred in FY 2014 and again to a lesser degree in FY 2015 in response to the depressed mineral drilling services market resulted in slightly better results during FY 2015.
Mineral Services continues to be impacted by the global slowdown in mineral drilling services, markets served by Layne’s wholly owned operations and Layne’s Latin American affiliates. Mineral drilling services is a cyclical industry, and global spending has decreased significantly over the past two years in every geographic region. This global slowdown can be attributed in part to several factors. Commodity prices for gold and copper have decreased significantly over the last several years. The supply of copper has exceeded the demand, driving its price down. Future copper prices are expected to continue to be volatile and are likely to be influenced by demand from China and economic activity in the U.S. Gold prices have fluctuated at a level that is below the full cost of production for many mines. The decreasing prices for both gold and copper led to a material decrease in the rate of mineral exploration and development within the industry. The second factor involves regulatory actions taken by government authorities to impose additional taxes on mining companies. These taxes have had a severe impact on mining in the regions where they have been imposed, and companies react to the increased taxation by reducing or stopping production. The third factor contributing to the decline in Mineral Services financial results are labor issues in areas outside the U.S. As labor groups request additional pay concessions, the mining companies have reacted by reducing or halting production. Another factor was the Ebola outbreak in Africa which has caused mining activity to decline or halt in the affected regions. These factors have reduced the revenues generated by Mineral Services and have adversely affected our results of operations and cash flows. While we believe we are in the trough of the current industry cycle, the downturn is not expected to improve until such time as the market factors stabilize, which we believe will not occur before the end of FY 2016. Activity in the trough of a cycle is frequently shorter in duration, involving frequent work stoppages and extended mine shutdowns, particularly around the year-end holidays. This causes Mineral Services to experience higher costs due to frequent mobilization or demobilization of labor and equipment between locations. The requirements for overhead costs are much harder to predict and may not be covered by the lower activity levels.
Mineral Services has reacted to the slowdown in a number of ways. Labor costs are monitored to react to the level of work within each region. Offices and locations have been consolidated to improve efficiencies and certain locations in Africa have been closed. Non-core assets have been sold or re-deployed to other areas within Layne. Mineral Services has utilized its customer relationships to engage in other revenue producing activities such as water supply drilling until such time as the mineral drilling services market rebounds.
Energy Services
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 20,209 | | | $ | 6,336 | | | $ | 13,873 | | | | 219.0 | % | Loss before income taxes | | | (3,661 | ) | | | (3,212 | ) | | | (449 | ) | | | -14.0 | % |
Energy Services revenue increased $13.9 million to $20.2 million in FY 2015 from $6.3 million in FY 2014. The loss before income taxes remained relatively flat from FY 2015 to FY 2014. Results for FY 2015 were negatively impacted by the payment of $0.8 million associated with an intellectual property agreement and $0.6 million of settlement costs associated with one contract.
The recent decline in oil and gas prices has led to a decline in production and delays by some of Energy Services customers. The delays and the decline in production have slowed down the growth that Energy Services had experienced during previous quarters of FY 2015. Energy Services is carefully analyzing its planned future growth into different geographies in conjunction with the slowdown in the industry.
Energy Services continues to market its capabilities as an end-to-end provider of water solutions within the energy industry. In comparison, management believes that many of Energy Services competitors only have the ability to perform a portion of the services that Energy Services is able to deliver. The division’s entry to the marketplace has taken longer than expected in part due to the time needed to market its portfolio of services within the industry. .
Other
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2015 | | | 2014 | | | $ Change | | | % Change | | Revenues | | $ | 19,179 | | | $ | 19,936 | | | $ | (757 | ) | | | -3.8 | % | (Loss) income before income taxes | | | (55 | ) | | | 193 | | | | (248 | ) | | | -128.5 | % |
Other revenues and (loss) income before income taxes are primarily from a small specialty and purchasing operations. The majority of the revenues are eliminated between segments, but the operation can produce positive earnings from purchasing discounts and third party sales. The decrease in revenues of $0.7 million to $19.2 million in FY 2015 from $19.9 million in FY 2014 is due to segments within Layne taking advantage of the purchasing expertise within this operation. This operation is able to centralize some of Layne’s purchasing in order to take advantage of purchase discounts offered from various vendors.Australia.
Unallocated Corporate Expenses CorporateUnallocated corporate expenses not allocated to individual divisions, primarily includedreflected in selling, general and administrative expenses,our Adjusted EBITDA were $49.8$29.3 million for FY 2015the fiscal year ended January 31, 2016, compared to $43.0$41.8 million for FY 2014.the fiscal year ended January 31, 2015. The $6.8 million increasedecrease in corporate expenses was primarily due to increasesdecrease in compensation expenses from a workforce reduction as part of the FY2015 Restructuring Plan, as well as decreases in consulting fees, legal and professional fees, of $5.2 million, $3.4 million in consulting expenses, $0.7 million in restructuring expenses and $1.9 million in rent expense, partially offset by reductions of $2.0 million in relocation expense and $1.1 million in temporary services expenses and $1.5 million in compensation expense.expenses.
Comparison of Fiscal Year 2014 (FY 2014) to Fiscal Year 2013 (FY 2013)
Revenues decreased $215.6 million, or 21.3% to $798.3 million, for FY 2014, compared to $1,013.9 million for FY 2013. A further discussion of results of operations by segment is presented below.
Cost of revenues decreased $170.1 million or 20.3% to $666.3 million (83.5% of revenues) for FY 2014, compared to $836.4 million (82.5% of revenues) for FY 2013. Cost of revenues contains direct costs which decreased $147.4 million to $596.7 million (89.6% of cost of revenues) in FY 2014 from $744.1 million in FY 2013 (89.0% of cost of revenues) and field expenses which were relatively flat as a percentage of revenue for FY 2014 (10.1% of cost of revenues) compared to FY 2013 (10.9% of cost of revenues). The change in these expenses is related to the reduction in the revenue during FY 2014. Due to the reduction in the number of contracts and corresponding reduction in revenues, the workforce in some segments worked reduced hours and certain areas reduced their workforce or positions that became vacant as a result of natural attrition were not filled until contracts were executed and additional personnel were needed. As additional contracts were being negotiated throughout the year, Layne did not reduce its workforce further, in order to retain the knowledge and expertise of key members within the organization.
Selling, general and administrative expenses were $134.3 million for FY 2014, compared to $152.1 million for FY 2013. The decrease was due in part to decreases of $7.3 million in compensation expense, $10.5 million in incentive compensation expense, $1.2 million in travel expenses, $4.8 million in legal expenses and $6.7 million in fringe benefits expenses. These expenses were partially offset by an increase in relocation expenses associated with the move of the headquarters to The Woodlands, Texas of $5.9 million, and an increase in the accrual related to the FCPA investigation of $6.7 million. The decreases in compensation, incentive compensation and fringe benefits were due to the changes in workforce and reduction in revenues and a loss from continuing operations.
Depreciation and amortization expenses were $56.3 million for FY 2014, compared to $57.6 million for FY 2013. The decrease is the result of sales of non-core assets in FY 2014 and FY 2013.
Impairment charges of $14.6 million were recorded during FY 2014 associated with Geoconstruction, as it was determined the carrying value of goodwill exceeded its fair value and an impairment charge of that amount was recorded. During FY 2013 Layne recorded impairment charges totaling $8.4 million for certain product lines which it concluded did not fit within the overall strategic direction of Layne. The amount included $2.9 million related to intangible assets, with the remainder consisting of adjustments to record tangible assets at an expected realizable value. Charges of $4.4 million were associated with Water Resources and $4.0 million were associated with Energy Services.
Loss on remeasurement of equity investments was $7.7 million in FY 2013 due to the purchase of the remaining 50% of Costa Fortuna during that year. Previously Layne owned 50% and reported the earnings under the equity method of accounting.
Equity in (losses) earnings of affiliates was ($3.0) million for FY 2014, compared to $20.6 million for FY 2013. The decrease in equity earnings from Layne’s Latin American affiliates was a result of a similar reduction in the use of mineral drilling services by mining clients, which Layne experienced in its wholly-owned operations. In addition, during the second quarter of FY 2013, Layne acquired the remaining 50% interest in Costa Fortuna, resulting in Costa Fortuna changing from an equity method investment to a consolidated, wholly-owned subsidiary. Costa Fortuna provided $3.9 million of equity in earnings of affiliates in FY 2013.
Interest expense increased to $7.1 million for FY 2014, compared to $3.3 million for FY 2013. The increase was the result of increased borrowing on Layne’s revolving credit facility to fund operations and the result of a higher interest rate on those borrowings as a result of certain amendments to its revolving credit facility. During FY 2014 $0.7 million of fees in connection with the June 2013 and September 2013 amendments to the revolving credit facility were written off due to the reduction in the amount of credit available for borrowing.
Other income, net, for FY 2014 was relatively flat at $6.8 million compared to $6.0 million in FY 2013.
Income tax expense of $53.2 million was recorded on continuing operations for FY 2014, compared to an income tax benefit on continuing operations of $10.0 million for FY 2013. Tax expense recorded during FY 2014 resulted primarily from a $54.4 million tax charge due to a valuation allowance provided on deferred tax assets established in a prior year and a tax benefit of $10.8 million recorded on continuing operations offsetting $3.7 million of tax expense recorded on discontinued operations and $7.1 million of tax expense recorded to equity in connection with the 4.25% Convertible Notes issuance. The effective tax rate for continuing operations for FY 2014 excluding these items was 18.7%. The difference between this adjusted tax rate and the statutory rate was primarily due to certain nondeductible expenses and the taxation of Layne’s foreign subsidiaries. Layne had several items impacting the tax rate for FY 2013. There was no tax benefit recorded on the previously disclosed loss associated with the equity investment in Costa Fortuna. Additionally, certain of Layne’s tax years in the U.S. and foreign jurisdictions were closed with no adjustments, resulting in the reversal of previously established reserves for uncertain tax positions totaling $4.2 million. The effective tax rate for continuing operations for FY 2013 excluding these items was 33.5%. See Note 9 to the consolidated financial statements.
Operating Segment Review of Operations
Water Resources
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 175,875 | | | $ | 214,091 | | | $ | (38,216 | ) | | | -17.9 | % | Income (loss) before impairments and income taxes | | | 1,016 | | | | 3,143 | | | | (2,127 | ) | | | -67.7 | % | Less: Impairment charges | | | - | | | | (4,433 | ) | | | 4,433 | | | | 100.0 | % | Income (loss) before income taxes | | $ | 1,016 | | | $ | (1,290 | ) | | $ | 2,306 | | | | 178.8 | % |
Water Resources revenues decreased $38.2 million to $175.9 million in FY 2014 compared to $214.1 million in FY 2013. Water Resources experienced a decline in revenues throughout FY 2014 in comparison with FY 2013, which also affected income before impairments and income taxes. The decline in revenues was due, in part, to a reduction in the number of bid opportunities in the markets in which the segment operates. The reduction in bid opportunities, in turn, resulted in pricing pressure from increased competition. This pricing pressure resulted in lower margins on jobs awarded to the division in than those awarded in the prior year. A portion of Water Resources’ projects involve various state and local municipalities. During the early part of FY 2014, state and local municipalities struggled with the effects of sequestration. This forced those entities to place projects on hold as they were uncertain as to the length of this federal action. In addition these entities continued to balance their constrained budgets with the need for improvement of infrastructure. Another portion of Water Resources business involves fabrication for the minerals industry. With the downturn in that market, Water Resources saw a reduction in revenue of $3.1 million associated with this business.
The injection well operation, which is included in Water Resources, saw a decrease in revenues of $18.6 million in FY 2014, compared to FY 2013. This work is very specialized in nature, often subject to complex technical and environmental requirements. These projects by their nature are very large projects which can sometimes take over a year to complete. Contracts that involved this type of work were virtually nonexistent in FY 2014 due to tight governmental spending. This operation incurred costs as it mobilized to the site of a new contract in February 2013, which was cancelled shortly after mobilization was complete. Another $7.0 million contract awarded in August 2013 was subsequently placed on hold as a competitor in the bidding process protested. The protest was ultimately withdrawn and Water Resources began work on the project in FY 2015.
In response to the lower revenue levels, Water Resources reduced its selling expenses by $5.1 million in FY 2014 from FY 2013 as a result of a strategic consolidation of offices within the segment. The reduction in expenses helped provide an offset to the overall reduction in revenues.
Inliner
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 148,384 | | | $ | 133,256 | | | $ | 15,128 | | | | 11.4 | % | | | | | | | | | | | | | | | | | | Income before income taxes | | | 17,650 | | | | 9,936 | | | | 7,714 | | | | 77.6 | % |
Inliner revenues increased $15.1 million to $148.4 million in FY 2014 from $133.3 million in FY 2013. Income before income taxes increased $7.7 million to $17.7 million (11.9% of revenues) in FY 2014 compared to $9.9 million (7.4% of revenues) in FY 2013.
Inliner’s increase in revenues and the resultant increase income before taxes are due to the increased work performed on projects in the northeast region of the U.S. Excluding these projects; the results for Inliner in FY 2014 would have been consistent with FY 2013. Management in this segment seeks opportunities which allow for a reasonable and consistent profit among their projects.
Heavy Civil
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 267,192 | | | $ | 278,131 | | | $ | (10,939 | ) | | | -3.9 | % | | | | | | | | | | | | | | | | | | Loss before income taxes | | | (7,781 | ) | | | (32,308 | ) | | | 24,527 | | | | 75.9 | % | | | | | | | | | | | | | | | | | |
Heavy Civil experienced a decrease in revenues of $10.9 million to $267.2 million for FY 2014 compared to $278.1 million in FY 2013. Loss before income taxes decreased by $24.5 million to ($7.8) million (-2.9% of revenues) in FY 2014 from ($32.3) million (-11.6% of revenues) in FY 2013.
A strategic shift in Heavy Civil was implemented in early FY 2013 and continued during FY 2014. The primary component of this shift involves moving away from projects that do not fit into Layne’s strategic profile, including selected types of fixed price bid municipal contracts. These projects are often extremely complex and difficult in nature, expending over multiple years. The reduced revenues experienced in FY 2014 over FY 2013 of $10.9 million is a result of moving away from such fixed price bid municipal contracts; Heavy Civil acknowledges that in the short-term, revenues may be reduced as more profitable contracts are executed. During FY 2014 losses recorded for jobs of this nature were $9.3 million. In FY 2013 losses of $24.6 million were recorded.
A secondary component of the FY 2013 strategic shift involved a realignment of management and a reduction in the number of personnel. The realignment allowed Heavy Civil reduced the number of personnel to match the capabilities of their workforce with the type of contracts it would begin to actively seek. This reduction, which occurred in FY 2013, involved 22.5% of the workforce. The full effects of this reduction in personnel have been recognized during FY 2014 with a reduction in compensation expenses of $2.8 million. Selling expenses decreased in FY 2014 by $4.9 million as a result of these changes.
The reduction in the loss before income taxes ($7.8 million) in FY 2014 compared to ($32.3 million) in FY 2013 demonstrates the impact of moving towards more profitable contracts as Heavy Civil completes the remaining fixed price bid municipal contracts in its backlog that were not profitable. During the fourth quarter of FY 2014, Heavy Civil’s revenues were lower as a result of project delays due to the extreme weather conditions experienced in December 2013 and January 2014, particularly in the northeastern part of the U.S.
Geoconstruction
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 26,242 | | | $ | 78,045 | | | $ | (51,803 | ) | | | -66.4 | % | | | | | | | | | | | | | | | | | | Loss before impairment and income taxes | | | (10,164 | ) | | | (4,127 | ) | | | (6,037 | ) | | | 146.3 | % | Less: Impairments | | | (14,646 | ) | | | — | | | | (14,646 | ) | | | 100.0 | % | Loss before income taxes | | | (24,810 | ) | | | (4,127 | ) | | | (20,683 | ) | | * | | Equity in earnings of affiliates, included in above earnings | | | — | | | | 3,872 | | | | (3,872 | ) | | | -100.0 | % |
Geoconstruction experienced a decrease in revenues of $51.8 million to $26.2 million for FY 2014 compared to $78.0 million for FY 2013. Loss before income taxes increased by $20.7 million to a loss before income taxes of $24.8 million (-94.5% of revenues) for FY 2014 from a loss of $4.1 million (-5.3% of revenues) for FY 2013.
Geoconstruction experienced weakness for FY 2014 compared to FY 2013. The division had predicted significant contracts would be executed during the second quarter of FY 2014. In certain cases, contracts were delayed or even cancelled before the final bid was awarded due to the effects of sequestration during the earlier half of FY 2014. Government spending was reduced or eliminated causing the same effect on certain projects. In response to these factors, Layne concluded there was an indicator of impairment related to the goodwill associated with this segment. Based on this conclusion, an interim recoverability test was performed and it was determined the carrying value of goodwill exceeded its fair value. A non-cash impairment charge of $14.6 million was recorded during the second quarter of FY 2014, representing the total carrying value of this segment’s goodwill.
During the third quarter of FY 2014, Geoconstruction executed two contracts totaling $76.0 million for work to be performed in San Francisco. The first contract consists of specialized foundation work for the TransBay Tower, a new sixty-one story building located adjacent to the TransBay Transit Center. The second San Francisco project is the construction of foundations for three new underground subway stations for the Central Subway Project.
Mineral Services
| | Fiscal Years Ended January 31, | | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | | Revenues | | $ | 172,960 | | | $ | 302,119 | | | $ | (129,159 | ) | | | -42.8 | % | | (Loss) income before income taxes | | | (9,534 | ) | | | 49,406 | | | | (58,940 | ) | | | -119.3 | % | | (Losses) earnings of affiliates, included in above earnings | | | (2,974 | ) | | | 16,700 | | | | (19,674 | ) | | | -117.8 | % | |
Revenues decreased by $129.2 million to $173.0 million in FY 2014 from $302.1 million in FY 2013 and (loss) income before income taxes decreased $58.9 million from $49.4 million (16.4% of revenues) in FY 2013 to ($9.5) million (-5.5% of revenues) in FY 2014.
Equity in (losses) earnings from the affiliates in Latin America was also impacted during FY 2014. Equity in (losses) earnings of affiliates decreased by $19.7 million to ($3.0) million in FY 2014 from $16.7 million in FY 2013. Chile is the locale with the largest operations for our affiliates. The employment laws in Chile are extremely favorable to the workforce by requiring significant separation expenses to be incurred by the employer for any large layoff. As our affiliates reacted to slowdowns or shutdowns, they incurred large labor costs as some of the associated workforce was laid off.
Included in (loss) income before income taxes for FY 2014 are increases to accrued liabilities related to the FCPA investigation of $6.7 million (3.9% of revenues). Mineral Services as well as our affiliates have attempted to control costs by consolidating operations where possible and managing expenses, however the decreased earnings caused by the continued market declines exceeded these cost reductions, resulting in a loss before income taxes.
During FY 2014 revenues decreased by 42.8% compared to FY 2013. Equity in earnings from Layne’s affiliates decreased by 117.8% during FY 2014 compared to FY 2013. Mineral Services continued to be impacted by the global slowdown in the demand for mineral drilling services, both in the markets served by Layne’s wholly-owned operations and Layne’s Latin American affiliates. Global spending for minerals drilling services decreased significantly in FY 2014 in every geographic region. This global slowdown can be attributed in part to several factors. The first factor involves regulatory actions taken by government authorities to impose additional taxes on mining companies. These taxes have had a severe impact on mining in the regions where they have been imposed, as companies react to the increased taxation by reducing or stopping production. The second factor contributing to the decline in Mineral Services financial results are labor issues in areas other than the U.S. which have imposed economic stresses on the mining companies. As labor groups request additional pay concessions, the mining companies have reacted by reducing or halting production. Another economic factor involves some of Layne’s customers who are in multiple businesses. Their capital needs may cause them to adjust their activities within their mining divisions. This impacts Layne as its customers react to their own strategic process. Layne believes the mineral drilling services industry to be a cyclical business. Commodity prices decreased significantly during calendar years 2012, 2013 and continued to decline in calendar 2014. The supply of copper has exceeded the demand, driving its price down. Future copper prices are expected to continue to be volatile and are likely to be influenced by demand from China and economic activity in the U.S. Gold prices decreased to a level that is below the full cost of production for many mines. The decreasing prices for both gold and copper led to a material decrease in the rate of mineral exploration and development within the industry. This reduced the revenues generated by Mineral Services and adversely affected our results of operations and cash flows.
Energy Services
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 6,336 | | | $ | 5,885 | | | $ | 451 | | | | 7.7 | % | Loss before impairments and income taxes | | | (3,212 | ) | | | (3,446 | ) | | | 234 | | | | 6.8 | % | Less: Impairment charges | | | — | | | | (3,998 | ) | | | 3,998 | | | | 100.0 | % | Loss before income taxes | | $ | (3,212 | ) | | $ | (7,444 | ) | | $ | 4,232 | | | | -56.9 | % |
Energy Services revenue increased $0.4 million to $6.3 million in FY 2014 from $5.9 million in FY 2013. The division continues to market its capabilities as an end-to-end provider of water solutions within the energy industry. In comparison, management believes that many of Energy Services’ competitors only have the ability to perform a portion of the services that Energy Services is able to deliver. The segment’s entry into the marketplace has taken longer than expected in part due to the time needed to market its portfolio of services within the industry. The entry into this marketplace continues to develop and management is committed to growing this segment.
The loss before impairments and income taxes remained relatively flat from FY 2013 to FY 2014. During FY 2013 Layne recorded an impairment charge related to non-producing assets totaling $4.0 million.
Other
| | Fiscal Years Ended January 31, | | | | | | | | | | (in thousands) | | 2014 | | | 2013 | | | $ Change | | | % Change | | Revenues | | $ | 19,936 | | | $ | 11,509 | | | $ | 8,427 | | | | 73.2 | % | Income before income taxes | | | 193 | | | | 126 | | | | 67 | | | | 53.2 | % |
Other revenues and income before income taxes are primarily from small specialty and purchasing operation. The majority of the revenues are eliminated between segments, but the operation can produce positive earnings from purchasing discounts and third party sales. The increase in revenues of $8.4 million to $19.9 million in FY 2014 from $11.5 million in FY 2013 is due to the segments within Layne taking advantage of the purchasing expertise within this operation. This operation is able to centralize some of Layne’s purchasing in order to take advantage of purchase discounts offered from various vendors.
Unallocated Corporate Expenses
Corporate expenses not allocated to individual segments, primarily included in selling, general and administrative expenses, were $43.0 million for FY 2014 compared to $36.0 million for FY 2013. The $7.0 million increase in corporate expenses was primarily due to the $5.9 million increase in expenses related to the relocation of the corporate headquarters.
Inflation Management does not believe the operations for the periods discussed have been significantly adversely affected by inflation or changing prices from its suppliers. Liquidity and Capital Resources Management exercises discretion regarding the liquidity and capital resource needs of its business segments. This includes the ability to prioritize the use of capital and debt capacity, to determine cash management policies and to make decisions regarding capital expenditures. Layne’sOur primary sources of liquidity have historically been cash from operations, supplemented by borrowings under itsour credit facilities.facilities, issuances of Convertible Notes, and sale of assets.
Cash flow is affected by a number of factors, some of which are beyond Layne’s control. These factors include prices and demand for Layne’s services, operational risks, volatility in commodity prices, industry and economic conditions, conditions in the financial markets and other factors. Layne’s financial performance has been challenged and tempered by a variety of the risks inherent to the industries and geographies it serves. Among them is the cyclical nature of minerals mining which can be affected significantly and quickly by factors beyond Layne’s control. During FY 2015, the global slowdown in minerals drilling services continued. Factors such as mining company exploration budgets, commodity prices, changes in taxation policy, increasing labor costs and global credit markets have affected Mineral Services financial performance. Management expects this trend to continue during FY 2016.
Heavy Civil has experienced significant losses on certain long-term construction contracts during FY 2013, FY 2014 and FY 2015. Due to schedule delays and cost overruns on these contracts, Layne’s financial results have been adversely impacted. Management continues to face operational challenges as the contracts approach final completion. As of January 31, 2015, Layne has provided for estimated future losses on these contracts. Although Layne strives to improve its ability to estimate contract costs2017, our total liquidity was $141.3 million, consisting of Excess Availability under our asset-based facility and profitability associated with these projects, it is reasonably possible that current estimates could change and adjustments to overall contract costs may continue and be significant in future periods. Any material changes would put significant additional strain on liquidity and could have a material adverse impact on Layne’s financial position, results of operationstotal cash and cash flows.
In Geoconstruction, weak demand for infrastructure projects in the U.S. during FY 2015 impacted its results. New projects were awarded to Geoconstruction during the third quarter of FY 2014, continuing into FY 2015. However, certain of these projects experienced delays in the initial stages. These delays were not controllable by Layne, but rather by the owner of the jobs. These jobs resumed in the second quarter of FY 2015. Delays can have a significant adverse effect on Geoconstruction’s financial results as the operating segment was often mobilized to the sites, but was unable to continue work. In August 2014, Layne announced that Geoconstruction had been awarded a $132.5 million contract with the U.S. Army Corps of Engineers for the East Branch Dam located in Pennsylvania. The project commenced in the fourth quarter of FY 2015 and is expected to be completed by the end of FY 2019.
Due to its recent operating results, Layne is tightly managing cash and its liquidity position. Layne continues to discuss additional initiatives that could be implemented to enhance its liquidity position. As discussed in Note 17 to the consolidated financial statements, the Board of Directors approved management’s restructuring Plan to implement a series of short-term and long-term cost reduction actions in order to improve Layne’s liquidity and results of operations. These actions are expected to generate annual savings of approximately $20.0 million with a total expected cost to implement of $2.7 million. The Plan has been substantially implemented as of January 31, 2015. Management believes the restructuring Plan will assist Layne to have sufficient funds and adequate financial resources available to meet its anticipated liquidity needs. Layne may incur other material charges not currently anticipated due to events that could be beyond Layne’s control that occur as a result of, or materially associated with, the restructuring Plan and related activities and as such, actual results could differ materially from current estimates.
Layne is continuing a global strategic review of its operations to evaluate under-performing divisions, service lines or non-core assets and expects this review to continue into FY 2016. As part of this reassessment, Layne examined the strategy of expanding the Geoconstruction operating segment into Brazil and other South American markets through its subsidiary operation, Costa Fortuna. Due to the sluggish economy in Brazil, weak infrastructure project demand and a need for additional capital to fund the business, management recommended and the Board of Directors approved the disposition of Costa Fortuna as a necessary shift away from the geoconstruction business in South America. On July 31, 2014, Layne disposed of its Costa Fortuna business to Aldo Corda, the former owner and the current manager of Costa Fortuna for Layne. Layne sold all of the issued and outstanding shares of Costa Fortuna’s parent company, Holub, S.A., a Uruguay Sociedad Anonima, and its subsidiaries in exchange for $4.4 million of consideration.
In conjunction with the transaction, Layne acquired certain equipment with an estimated value of $2.1 million by reducing the intercompany receivable owed by Costa Fortuna. The remaining intercompany receivable due from Costa Fortuna was assigned as part of the transaction in exchange for $1.3 million.
The purchase price for the shares and remaining intercompany receivable is payable in future years, beginning with the calendar year ended December 31, 2015, based on 33.33% of Costa Fortuna’s income before taxes for such year. The unpaid portion of the purchase price will accrue interest at the rate of 2.5% per annum. The unpaid balance of the purchase price, plus accrued interest, is due and payable to Layne on July 31, 2024. While this transaction did not generate immediate cash at the time of the transaction, Layne expects to realize cash benefits from not funding the operations of Costa Fortuna in the future.
In the third quarter of FY 2015, Layne examined its operations in Italy, Tecniwell, a business within the Geoconstruction segment. This business manufactured equipment for the ground stabilization industry. Management considered the expected operating income, as well as the expected imminent and future financing needs of the business, and determined the expected return on the investment in business was insufficient to warrant continued involvement.
On October 31, 2014, Layne disposed of Tecniwell to Alberto Battini (50%) and Paolo Trubini (50%), an employee of Tecniwell at the time of disposal. The transaction was a sale by Layne of all quotas representing 100% of the corporate capital of Tecniwell in exchange for $0.9 million cash. Layne received $0.5 million on October 31, 2014. The remaining $0.4 million was received on January 22, 2015. Layne expects to realize cash benefits from not funding the operations of Tecniwell in the future.
During the third quarter of FY 2015, Layne also sold certain real estate and other non-core assets. These items, totaling $1.9 million in the third quarter, are reflected in the gain on the sale of assets in the consolidated financial statements. These items were considered during management’s strategic evaluation of non-core assets. Layne expects to evaluate additional assets during the coming months as part of this strategic evaluation.
Working Capital
Layne’s working capital as of January 31, 2015 and 2014 was $104.8 million and $121.3 million, respectively. The decrease in working capital as of January 31, 2015 as compared to January 31, 2014 of $16.5 million is due to a variety of factors. Increases of $22.6 million in customer receivables and $1.4 million in net contract receivables were due to increases in revenue volume in the fourth quarter and a heightened emphasis on billings. An increase in accounts payable of $21.6 million was partially due to an increase in volume of revenue and partially due to extending vendor payment terms. Other significant items affecting working capital were the liquidation of $10.6 million of cash surrender value of life insurance policies, an increase in accrued costs related to the departure of the former Chief Executive Officer as well as other individuals and costs related to our restructuring efforts, and a decrease of $10.4 million in the accrual related to potential FCPA liability reflecting the settlement with the SEC, $5.2 million of which represented a cash payment. The net effect of the working capital changes was a net decrease in cash of $9.2 million.
Available Cash and Cash Equivalents
Layne’sequivalents. Our cash and cash equivalents as of January 31, 2015,2017, were $21.7$69.0 million, compared to $30.9$65.6 million as of January 31, 2014. Of Layne’s cash2016. Cash and cash equivalents amounts held by foreign subsidiaries as of January 31, 20152017 were $11.7$8.2 million, compared to $25.0$10.8 million as of January 31, 2014. Repatriation of cash balances from some of Layne’s foreign subsidiaries could result in withholding taxes in the local jurisdictions.2016. Of the amounts held by foreign subsidiaries at January 31, 2015, $1.12017, $0.1 million could be subject to repatriation restrictions if the amounts were needed for domestic operations. The amounts subjectIf the cash held at our foreign subsidiaries is repatriated to repatriation, if needed for domestic operations,the U.S., we would be subjectrequired to U.S. federalaccrue and statepay U.S. income taxes less applicableon these funds, based on the unremitted amount. As a consequence of our exit from operations in Africa and Australia, we brought back residual cash to the U.S. through intercompany debt repayment. We believe the cash remitted from our subsidiaries in Africa and Australia would not result in a repatriation of earnings and therefore will not result in a U.S. tax liability. With respect to our remaining foreign tax credits. However, Layne’ssubsidiaries in Mexico, Canada and South America, it is our intention is to permanently reinvest funds outsidetheir earnings except to the extent of $2.6 million which we expect to repatriate during the fiscal year ended January 31, 2018. The expected withholding tax obligation on the repatriation has been accrued as of January 31, 2017. We do not expect to incur U.S. andincome tax on the dividend due to our net operating loss carryforward. Our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Restrictions on the transfer
As of foreignJanuary 31, 2017, our working capital was $105.5 million compared to $131.3 million as of January 31, 2016. Adjusted Working Capital (working capital excluding cash and cash equivalents have not significantly impacted Layne’s overall liquidity. Certain countries in Africa have begun to require companies to transact in local currency rather than the U.S. dollar. These new requirements did not significantly impact Layne’s liquidity. Layne continues to monitor developments in the foreign countries in which it operates for changes in currency regulation. Layne’s asset-based facility (see discussion below) limits the amount of cash that it may hold in foreign jurisdictions to not more than $30.0 million. Layne does not expect the applicable foreign cash balances to exceed $30.0$69.0 million and $65.6 million at January 31, 2017 and 2016, respectively), decreased $29.2 million to $36.5 million as of January 31, 2017 from $65.7 million as of January 31, 2016, primarily due to improved cash flows from operations, and lower customer receivables and costs and estimated earnings in excess of billings on uncompleted contracts as a result of lower activity levels during the unlikely event foreign cash balances were to reach $30.0 million, management would take action to repatriate amounts sufficient to comply with this covenant.fiscal year ended January 31, 2017.
Cash Flows Cash provided by (used in) operating activities was $13.0 million, ($0.3) million and ($23.1) million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. The improvement in cash flow was primarily due to better working capital management. Cash (used in) provided by investing activities was ($8.4) million, $22.4 million and ($3.6) million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. Cash used in investing activities for the fiscal years ended January 31, 2017 and 2015 consisted primarily of capital expenditures partially offset by the sales of assets. We are selectively investing capital expenditures in growth businesses, while continuing to dispose of underutilized assets. Cash provided by investing activities for the fiscal year ended January 31, 2016 primarily relates to proceeds from the sale of our Geoconstruction business segment in August 2015. Cash flows (used in) provided by financing activities were ($0.1) million, $21.9 million, and $14.9 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. Cash provided by financing activities for the fiscal year ended January 31, 2016 primarily relates to proceeds from the issuance of 8.0% Convertible Notes, partially offset by net payments on our asset-based credit facility. Cash provided by financing activities for the fiscal year ended January 31, 2015 primarily relates to net borrowings on our asset-based credit facility. Financing Agreements Below is a summary of certain provisions of our debt instruments and credit facility. For more information about our indebtedness, see Note 8 to the Consolidated Financial Statements in this Form 10-K. 4.25% Convertible Senior Notes due 2018. We have outstanding $69.5 million in aggregate principal amount of our 4.25% Convertible Notes as of January 31, 2017. The 4.25% Convertible Notes bear interest payable semi-annually in arrears in cash on May 15 and November 15 of each year, which began on May 15, 2014.year. The 4.25% Convertible Notes will mature on November 15, 2018, unless earlier repurchased, redeemed or converted. The 4.25% Convertible Notes will beare contingently convertible, at the option of the holders, into consideration consisting of, at Layne’sour election, cash, shares of Layne’sour common stock or a combination of cash and shares of Layne’sour common stock (and cash in lieu of fractional shares) until the close of business on the scheduled trading day immediately preceding May 15, 2018 (except that we must settle2018. The initial conversion inrate is 43.6072 shares of our common stock beforeper $1,000 principal amount of 4.25% Convertible Notes (which is equivalent to an initial conversion price of approximately $22.93 per share of our common stock). The conversion rate is subject to adjustment upon the occurrence of certain events. In addition, we obtainmay be obligated to increase the conversion rate for any necessary stockholder approval required by NASDAQ’s listing standards.conversion that occurs in connection with certain corporate events, including our call of the 4.25% Convertible Notes for redemption. On and after November 15, 2016, and prior to the maturity date, Laynewe may redeem all, but not less than all, of the 4.25% Convertible Notes for cash if the sale price of Layne’sour common stock equals or exceeds 130% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date Layne deliverswe deliver notice of the redemption. The redemption price will equal 100% of the principal amount of the 4.25% of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a fundamental change (as defined in the Indenture), holders of the 4.25% Convertible Notes will have the right, at their option, to require Layneus to repurchase their 4.25% Convertible Notes in cash at a price equal to 100% of the principal amount of the 4.25% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. On March 2, 2015, Layne completed an offering of approximately $100.08.0% Senior Secured Second Lien Convertible Notes. We have outstanding $99.9 million in aggregate principal amount of our 8.0% Convertible Notes.Notes as of January 31, 2017. The 8.0% Convertible Notes, were offeredissued pursuant to certain investors that held approximately $55.5 million of Layne’s 4.25%the 8.0% Convertible Notes pursuant to termsIndenture, bear interest at a rate of 8.0% per annum, payable semi-annually in which the investors agreed to (i) exchangearrears on May 1 and November 1 of each year. The 8.0% Convertible Notes will mature on May 1, 2019; provided, however, that, unless all of the 4.25% Convertible Notes owned by them for approximately $49.9 million(or any permitted refinancing indebtedness in respect thereof) have been redeemed, repurchased , otherwise retired, discharged in accordance with their terms or converted into our common stock, or have been effectively discharged, in each case on or prior to August 15, 2018 or the scheduled maturity date of the 4.25% Convertible Notes (or any permitted refinancing indebtedness incurred in respect thereof) is extended to a date that is after October 15, 2019, the 8.0% Convertible Notes and (ii) purchase approximately $49.9 million aggregatewill mature on August 15, 2018.
The 8.0% Convertible Notes are convertible, at the option of the holders, into consideration consisting of shares of our common stock (and cash in lieu of fractional shares) until the close of business on the scheduled trading day immediately preceding the maturity date. No holder will have the right to convert any 8.0% Convertible Notes into shares of common stock to the extent that the conversion would cause that holder to beneficially own more than 9.9% of the shares of our common stock then outstanding after giving effect to the proposed conversion.
The initial conversion rate is 85.4701 shares of our common stock per $1,000 principal amount of 8.0% Convertible Notes at a cash(equivalent to an initial conversion price equalof approximately $11.70 per share of our common stock). The conversion rate is subject to adjustment upon the principal amount thereof. The amountoccurrence of accrued interest oncertain events. In addition, we may be obligated to increase the 4.25% Convertible Notes delivered by the investorsconversion rate for any conversion that occurs in exchange was credited to the cash purchase price payable by the investors in the purchase. The saleconnection with certain corporate events, including our call of the 8.0% Convertible Notes generated netfor redemption.
At any time prior to the maturity date, we may redeem for cash proceedsall, but not less than all, of approximately $45.0 million after deducting discounts and commissions, estimated offering expenses and accrued interest on the 4.25%8.0% Convertible Notes; provided, however, that we may not redeem the 8.0% Convertible Notes being exchanged. Layne usedon a portion of the net cash proceeds to repay the then outstanding balance on the asset-based facility of $18.2 million. The remainder of the proceeds will be used for future working capital needs. As of March 31, 2015, Layne’s cash and cash equivalents were $65.5 million, with no borrowings outstanding on the asset-based facility. Layne’s asset-based facility provides revolving credit borrowings of up to $135.0 million of which up toredemption date that is outside an aggregate principal amount of $75.0 million will be available in the form of letters of credit and up to an aggregate principal amount of $15.0 million is available for short-term swingline borrowings. Availability under the asset-based facility will be the lesser of (i) $135.0 million and (ii) the borrowing baseOpen Redemption Period (as defined in the asset-based8.0% Convertible Notes Indenture) unless the last reported sale price of our common stock equals or exceeds 140% of the conversion price of the 8.0% Convertible Notes in effect on each of at least 20 trading days during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we deliver the redemption notice.
In addition, upon the occurrence of a “fundamental change” (as defined in the 8.0% Convertible Notes Indenture), holders of the 8.0% Convertible Notes will have the right, at their option, to require us to repurchase their 8.0% Convertible Notes in cash at a price equal to 100% of the principal amount of the 8.0% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Asset-based revolving credit facility agreement). As of January 31, 2015, the borrowing base2017, availability under our asset-based facility was approximately $108.3$100.0 million, and $21.9 million was borrowed under the asset-based facility andwith outstanding letters of credit totaled $31.3amounting to $27.7 million, leaving Excess Availability of $55.1$72.3 million. The asset-based facility is guaranteed by Layne’sour direct and indirectly wholly-owned domestic subsidiaries, subject to certain exceptions described in the asset-based facility. The obligations under the asset-based facility are secured by a lien on substantially all of our assets and the assets of Layne and the guarantor subsidiaries, subject to certain exceptions described in the asset-based facility, includeincluding a pledge of up to 65%65.0% of the equity interest of Layne’sour first tier foreign subsidiaries. Layne must maintain a cumulative minimum cash flow as defined in the agreement of not less than negative $45.0 million and during any twelve consecutive month period (or until March 31, 2015, the cumulative period from May 1, 2014), a minimum cash flow of not less than negative $25.0 million, until:
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| for a period of 30 consecutive days, Excess Availability is greater than the greater of 17.5% of the Total Availability or $25.0 million, and
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| for two consecutive fiscal quarters after the closing date, the fixed charge coverage ratio (tested on a trailing four fiscal quarter basis) has been in excess of 1.0 to 1.0.
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Minimum cash flow is defined as consolidated EBITDA minus the sum of:
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| any regularly scheduled amortized principal payments on indebtedness,
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| any amount in excess of $10.0 million paid with respect to the FCPA investigation.
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A comparison of the required covenants under the asset-based facility to the current compliance is as follows:
(in millions) | | Cumulative from May 1, 2014 thru April 30, 2015 | | | Any trailing twelve month period ending on or after April 30,2015 | | | Cumulative from May 1, 2014 | | Minimum Cash Flow cannot be less than | | $ | (25.0 | ) | | $ | (25.0 | ) | | $ | (45.0 | ) | Actual as of January 31, 2015 | | | (19.4 | ) | | n/a | | | | (19.4 | ) |
If Excess Availability generally defined as the amount by which the Total Availability (the lesser of Layne’s borrowing based and the Maximum Credit) exceeds outstanding loans and letters of credit under the asset-based facility, is less than the greater of 17.5% of Total Availability or $25.0$17.5 million for more than one business day, then a “Covenant Compliance Period” (as defined in the asset-based facility agreement) will exist until Excess Availability has been equal to or greater than the greater of 17.5% of the Total Availability or $25.0$17.5 million for a period of 30 consecutive days. During a Covenant Compliance Period, LayneWe must maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 and a maximum first lien leverage ratio of not greater than 5.0 to 1.0 for the four fiscal quarters ended immediately preceding any Covenant Compliance Period and for any four fiscal quarter period ending during a Covenant Compliance Period. If Layne had been in a Covenant Compliance Period during FY 2015 itWe would not have been in compliance with the minimum fixed charge coverage ratio.ratio had we been in a Covenant Compliance Period as of the fiscal years ended January 31, 2017 and 2016. The
During the fiscal year ended January 31, 2016, we had two consecutive four-quarter periods with a fixed charge coverage ratio of not less than 1.0 to 1.0 and therefore, we are no longer required to maintain a cumulative minimum cash flow (as defined in the asset-based facility was amended on March 2, 2015 to permit the issuanceagreement) of the 8.0% Convertible Notes, the exchangenot less than negative $45.0 million and a minimum cash flow of approximately $55.5not less than negative $25.0 million of the 4.25% Convertible Notes for approximately $49.9 million of the 8.0% Convertible Notes and the grant of the second liens securing the 8.0% Convertible Notes. In addition, the amendment will, among other things:during any twelve consecutive month period. ·
| reduced the maximum amount that may be borrowed under the asset-based facility from $135.0 million to $120.0 million until Layne has delivered to the agent under the asset-based facility financial statements and a compliance certificate for any fiscal quarter commencing after the date of the amendment demonstrating, for such fiscal quarter and for the immediately preceding fiscal quarter, a Consolidated Fixed Charge Coverage Ratio (as defined in the asset-based credit agreement) of at least 1.00 to 1.00 for four consecutive quarters ending with such fiscal quarters;
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| increase the quarterly commitment fee on unused commitments from 0.375% to 0.5% if the daily average Total Revolving Exposure (as defined in the asset-based facility) during the quarter exceeds 50% of the Total Revolving Commitments (as defined in the asset-based facility);
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| eliminated any of Layne’s owned real estate from the borrowing base, which real estate accounted for approximately $4.2 million of Layne’s borrowing base at the time of the amendment;
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| Requires Layne to deliver each month a forecast of cash flows for the following 13-weeks;
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| if at the end of any business day, Layne or any of the co-borrowers under the asset-based facility have cash or cash equivalents (less any outstanding checks and electronic funds transfers) in excess of $15.0 million (excluding any amounts in bank accounts used solely for payroll, employee benefits or withholding taxes), requires Layne to use such excess amounts to prepay any revolving loans then outstanding by the end of the following business day; and
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| Will accelerate the maturity date to May 15, 2018 if each of the following has not yet occurred on or before such date: (i) either (a) all of the 8.0% Convertible Notes (or Permitted Refinancing Indebtedness (as defined in the asset-based facility) in respect thereof) are converted or (b) the maturity date of the 8.0% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a date which is after October 15, 2019, and (ii) either (a) all of the 4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) are converted, (b) the maturity date for the 4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a date which is after October 15, 2019, or (c) the 4.25% Convertible Notes are effectively discharged. The 4.25% Convertible Notes will be effectively discharged after, among other things, Layne has irrevocably deposited with the trustee of the 4.25% Convertible Notes cash in an amount sufficient to pay any remaining interest and principal payments due on any then remaining unconverted 4.25% Convertible Notes, with irrevocable instructions to the trustee to make such payments to the holders of the 4.25% Convertible Notes as they become due.
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The asset-based facility, as amended in March 2015, will permit Layne to make certain voluntary prepayments, payments, repurchases or redemptions, retirements, defeasances or acquisitions for value of the 8.0% Convertible Notes if the following payment conditions are satisfied:
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| there is no default before or after such action;
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| the Supplemental Reserve (as defined in the asset-based credit agreement) is zero;
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| thirty-day Excess Availability and Excess Availability (each as defined in the asset-based credit agreement) on a pro forma basis is equal to or exceeds the greater of (A) 22.5% of the Total Availability and (B) $30.0 million; and
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| Layne has on a pro forma basis a Consolidated Fixed Charge Coverage Ratio of not less than 1.10:1.00.
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The asset-based facility also contains a subjective acceleration clause that can be triggered if the lenders determine that Layne haswe have experienced a material adverse change. If triggered by the lenders, this clause would create an Event of Default Period (as defined in the asset-based facility agreement) which in turn would permit the lenders to accelerate repayment of outstanding obligations. In general, during a Covenant Compliance Period ofor if an Event of Default has occurred and is continuing, all of Layne’sour funds received on a daily basis will be applied to reduce amounts owing under the asset-based facility. Based on current projections, Layne doeswe do not anticipate being in a Covenant Compliance Period during the next twelve months. If an EventManagement believes that our cash flows from operations, current reserves of Default (as defined in the asset-based facility agreement) occurscash and is continuing, the interest ratecash equivalents, availability under the asset-based facility will increase by 2% per annum and the lenders may accelerate all amounts owing under the asset-based facility.
As is customary in the construction business, Layne is required to provide surety bonds to secure its performance under certain construction contracts. Layne’s continued ability to obtain surety bonds will primarily depend upon Layne’s capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time.
Layne’s reimbursement obligation to its surety providers is secured by a security interest in certain assets, including certain accounts receivable, inventory, equipment, documents, contract rights and other instruments as well as the explicit right to utilize certain of Layne’s specialized construction equipment if any claims are made under certain surety bonds. In addition, our surety providers may in the future require us to provide additional collateral or other security sufficient to discharge any claim made or anticipated claim under a surety bond.
With respect to Layne’s joint ventures, the ability to obtain a bond may also depend on the credit and performance risks of its joint venture partners.
In addition, events that generally affect the insurance and bonding markets may result in bonding becoming more difficult to obtain in the future, available only at a significantly greater cost or not being available at all. If Layne is unable to obtain performance bonds on future projects, our results of operations would be materially and adversely affected. The amount of Layne’s surety bonds as of January 31, 2015 was $359.5 million, as measured by the amount of contract revenue remaining to be recognized.
Layne’s ability to maintain sufficient liquidity for the next twelve months to fund its operations is contingent on improving the current trend in operating results, realizing cost savings from executing the restructuring Plan, managing capital expenditures, reviewing its working capital practices, focusing on reducing costs, strategic bid acceptance and contract management in Heavy Civil. There are risks associated with these plans. Any substantial increase in projected cash outflow or operating losses could have a material adverse impact on our ability to secure surety bonds that are necessary for a substantial portion of work in several of our divisions, access to the asset-based facility, and the ability to amend, extend or refinance its credit agreements. If operating losses continue or further decline, Layneother sources of liquidity and capital resources described above will be required to borrow additional amounts under the asset-based facility, make further reductions in capital expenditures and make additional reductions in the operating cost structure. Other actions to improve liquidity could include seeking to raise additional capital, selling under-performing assets or divesting certain businesses. Some of the action that Layne elects to take may require lender approval under the asset-based facility.
Management believes that it has the ability to implement and execute measures so that we will have sufficient and adequate funds to meet itsour anticipated liquidity needs for the next twelve months. Further, Layne iswe are in compliance with itsour covenants related to all of our outstanding indebtedness as of January 31, 2015,2017, and expectsexpect to remain in compliance with those covenants during the next twelve months.
Operating Activities
Cash (used in) provided by operating activities was ($23.1) million, ($1.1) million and $24.8 million for FY 2015, FY 2014 and FY 2013, respectively. Layne’s cash used in operating activities in FY 2015 was primarily due to an increase in working capital components of $12.8 million, and operating losses.
Investing Activities
Capital expenditures of $16.2 million and $34.4 million for FY 2015 and FY 2014, respectively, were to maintain and upgrade Layne’s equipment and facilities. This spending compares to spending in FY 2013 of $75.8 million to maintain and upgrade its equipment and facilities and $1.7 million spent on unconventional natural gas exploration and production prior to its sale in the third quarter of FY 2013. Since the first quarter, Layne had reduced its capital expenditures to minimal levels, increased its collection activities and extended its payment terms with vendors to manage its liquidity. Layne received $5.9 million and $8.7 million in FY 2015 and FY 2014, respectively, for proceeds from disposals of property and equipment, compared to proceeds of $6.2 million for FY 2013.
During FY 2015, Layne sold its Tecniwell business, receiving proceeds of $0.9 million, along with cash divested of $3.9 million.
Corporate owned life insurance policies on certain management level employees were determined no longer necessary and were redeemed. The redemption resulted in net proceeds of $10.6 million for FY 2015 and $3.6 million for FY 2014. An additional $0.5 million in insurance proceeds were received from death benefits during FY 2015.
During FY 2014, Layne sold the SolmeteX operations for $10.6 million and received the final proceeds from the sale of the Energy segment of $1.5 million.
During FY 2013, Layne invested $17.5 million net of cash acquired, for the acquisition of the remaining 50% of Costa Fortuna, as well as invested $0.8 million to acquire 100% of the stock of Fursol Informatica S.r.l. (Fursol). Layne paid an additional $0.2 million for Fursol on October 4, 2013 pursuant to the terms of the purchase agreement. Layne sold the Energy segment in October 2013 and received $13.5 million in proceeds in FY 2013.
Financing Activities
As discussed in Note 7 to the condensed consolidated financial statements, Layne entered into an asset-based facility for up to $135.0 million in April 2014. Layne capitalized and is amortizing the associated cash expenditure for the asset-based facility of $4.3 million.
During the fourth quarter of FY 2014, Layne entered into a Purchase Agreement for the sale of 4.25% Convertible Notes in a total amount of $125.0 million. See Note 7 to the consolidated financial statements for an additional discussion of the 4.25% Convertible Notes. Layne also capitalized and is amortizing the associated expenses of the Purchase Agreement and the discount and commission paid to the Initial Purchaser of $5.0 million.
During FY 2015, FY 2014 and FY 2013, Layne had net (repayments) or borrowings of $19.1 million, ($91.6) million and $42.5 million under its long-term revolving agreement. Net borrowings under all sources of long-term debt were primarily used to fund capital expenditures, acquisitions, and working capital needs. During FY 2015, Layne decreased the amount of capital expenditures and has also not engaged in any acquisitions, thus lowering net borrowings. Additionally, proceeds from the Convertible Notes issuance of $105.4 million and $10.6 million from the sale of SolmeteX were used to pay down balances outstanding under the Credit Agreement during FY 2014.
During FY 2015, FY 2014 and FY 2013, Layne distributed $1.6 million, $1.7 million and $4.2 million, respectively, to its non-controlling interest partners as either distribution of joint project income or, in the case of a Mineral Services subsidiary in Brazil, to buy out the non-controlling interest.
Contractual Obligations and Commercial Commitments Contractual obligations and commercial commitments as of January 31, 2015,2017, are summarized as follows: | | Payments/Expiration by Period | | | Payments/Expiration by Period | | (in thousands) | | Total | | | Less than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | | | Total | | | Less than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | | Contractual obligations and other commercial commitments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.25% Convertible Notes | | $ | 146,250 | | | $ | 5,313 | | | $ | 10,625 | | | $ | 130,312 | | | $ | — | | | Asset-based credit facility | | | 21,964 | | | | — | | | | — | | | | 21,964 | | | | — | | | 4.25% Convertible Notes (including interest) | | | $ | 75,408 | | | $ | 2,954 | | | $ | 72,454 | | | $ | — | | | $ | — | | 8.0% Convertible Notes (including interest) | | | | 117,880 | | | | 7,992 | | | | 109,888 | | | | — | | | | — | | Operating leases | | | 28,918 | | | | 6,547 | | | | 11,160 | | | | 11,211 | | | | — | | | | 11,469 | | | | 3,734 | | | | 4,959 | | | | 2,776 | | | | — | | Capitalized leases (including interest) | | | 270 | | | | 148 | | | | 114 | | | | 8 | | | | — | | | | 17 | | | | 9 | | | | 8 | | | | — | | | | — | | Supplemental retirement benefits | | | 6,212 | | | | 339 | | | | 678 | | | | 678 | | | | 4,517 | | | | 5,391 | | | | 339 | | | | 678 | | | | 677 | | | | 3,697 | | Income tax uncertainties | | | 7,870 | | | | 7,870 | | | | — | | | | — | | | | — | | | Income tax uncertainties, current | | | | 5,923 | | | | 5,923 | | | | — | | | | — | | | | — | | Total contractual obligations | | | 211,484 | | | | 20,217 | | | | 22,577 | | | | 164,173 | | | $ | 4,517 | | | $ | 216,088 | | | $ | 20,951 | | | $ | 187,987 | | | $ | 3,453 | | | $ | 3,697 | | Standby letters of credit | | | 31,266 | | | | 31,266 | | | | - | | | | - | | | | - | | | | 27,695 | | | | 27,695 | | | | — | | | | — | | | | — | | Total contractual obligations and commercial commitments | | $ | 242,750 | | | $ | 51,483 | | | $ | 22,577 | | | $ | 164,173 | | | $ | 4,517 | | | $ | 243,783 | | | $ | 48,646 | | | $ | 187,987 | | | $ | 3,453 | | | $ | 3,697 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Layne expectsWe expect to meet itsour cash contractual obligations in the ordinary course of operations, and that the standby letters of credit will be renewed in connection with itsour annual insurance renewal process.
The 4.25% Convertible Notes bear interest at a rate of 4.25% per year, payable semi-annually in arrears in cash on May 15 and November 15 of each year. The 4.25% Convertible Notes will mature on November 15, 2018 unless earlier repurchased, redeemed or converted (under the terms of the Purchase Agreement)4.25% Convertible Notes Indenture). The 8.0% Convertible Notes bear interest at a rate of 8.0% per annum, payable semi-annually in arrears on May 1 and November 1 of each year. The 8.0% Convertible Notes will mature on May 1, 2019, subject to certain provisions in the 8.0% Convertible Notes Indenture. Capitalized leases are obligations for certain vehicles and equipment. Theequipment, bearing interest rates on these obligations are fixed, but range from 1.1% to 3.1% annually, depending onat the lease.rate of 6.2% annually. Layne hasWe have income tax uncertainties in the amount of $13.3$13.1 million at January 31, 2015,2017, that are classified as non-current on the balance sheet as resolution of these matters is expected to take more than a year. The ultimate timing of resolution of these items is uncertain, and accordingly the amounts have not been included in the table above.
We have surety bonds to secure performance of our projects, amounting to $223.8 million as of January 31, 2017. The amount is not included in the table above as information on the timing of the resolution of the amounts is not available. Additional obligations in the ordinary course of operations are also incurred. These obligations, including but not limited to income tax payments, are expected to be met in the normal course of operations. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Layne’s
Our accounting policies are more fully described in Note 1 to the consolidated financial statements,Consolidated Financial Statements, located in Item 8 of this Form 10-K. Layne believesWe believe that the following accounting policies represent management’s more critical policies. Critical accounting policies, practices and estimates are a subset of significant accounting policies that are considered most important to the description of Layne’sour financial condition and results, and that require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Revenue Recognition – The significant estimates with regard to these consolidated financial statements relate to the estimation of total forecasted construction contract revenues, costs and profits in accordance with the criteria established in Accounting Standards Codification (“ASC”) Topic 605-35 “Construction-type and Production-type Contracts”.
Based on experience and itsour current processes Layne produceswe produce materially reliable estimates of total contract revenue and cost during any accounting period. However, many factors can and do change during a contract performance period which can result in a change to contract profitability from one financial reporting period to another. Some of the factors that can change the estimate of total contract revenue and cost include differing site conditions (to the extent that contract remedies are unavailable), the availability of skilled contract labor, the performance of major material suppliers, the performance of major subcontractors, unusual weather conditions and unexpected changes in material costs. These factors may result in revisionrevisions to costs and income and are recognized in the period in which the revisions to costs and revenues become known. Provisions for estimated losses on uncompleted construction contracts are made in the period in which they become known. Large changes in cost estimates on larger, more complex construction projects can have a material impact on the consolidated financial statements and are reflected in the results of operations when they become known,known; smaller contracts or smaller changes in estimates usually do not have a material impact on the consolidated financial statements. The nature of accounting for contracts is such that refinements of the estimating process for changing conditions and new developments are continuous and characteristic of the process. Prior to the execution of a contract, any related costs are expensed during the period incurred. Generally during the early stages of a contract, cost estimates relating to purchases of materials and subcontractors can be subject to revisions. As a contract moves into the most productive phase of execution, change orders, project cost estimate revisions and claims are frequently the sources for changes in estimates. During the contract’s final phase, remaining estimated costs to complete or provisions for claims will be closed out and adjusted based on actual costs incurred. The impact on operating margin in a reporting period and future periods from a change in estimate will depend on the stage of contract completion. Generally, if the contract is at an early stage of completion, the current period impact is smaller than if the same change in estimate is made to the contract at a later stage of completion. During FY 2014, Layne’s income from continuing operations increased due to the estimated recovery projected for a contract in Geoconstruction due to negotiated change orders agreed to by a customer in the amount of $8.4 million. There were no other material change orders during FY 2015, FY 2014 or FY 2013. There were no material contract penalties, claims, settlements or changes in contract estimates during FY 2015, FY 2014, or FY 2013. No amounts were netted in revenue during FY 2015, FY 2014, or FY 2013.
Layne has provided for all estimated costs to complete on all of the ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variances from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when such losses become known. During FY 2015, FY 2014 and FY 2013, approximately $25.2 million, $17.8 million and $28.6 million in contract losses were recorded, respectively. The current provision for loss contracts is $3.3 million and $1.5 million as of FY 2015 and FY 2014, respectively. As of January 31, 2015, there were no individual material loss contracts. Further, as of January 31, 2015, there were no contracts, individually, that could be reasonably estimated to be in a material loss position in the future.
Management focuses on evaluating the performance of contracts individually. In the ordinary course of business, and at a minimum on a quarterly basis, based on changes in facts, such as an approved scope change or a change in estimate, projected total contract revenue, cost and profit or loss for each of Layne’s contracts is updated. Normal recurring changes in estimates include, but are not limited to:
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| Changes in estimated scope as a result of unapproved or unpriced customer change orders
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| Changes in estimated productivity assumptions based on experience to date
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| Changes in estimated materials costs based on experience to date
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| Changes in estimated subcontractor costs based on subcontractor experience
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| Changes in the timing of scheduled work that may impact future costs
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When determining the likelihood of recovering unapproved change orders and claims, Layne considers the history and experience of similar projects and applies judgment to estimate the amount of eventual recovery. Settlement of events such as these can take several years depending on how easily the claim is able to be resolved with the customer or whether arbitration or litigation is necessary to reach settlement. As new facts become known, an adjustment to the estimated recovery is made and reflected in the period in which it becomes known.
The cumulative effect of revisions in estimates of the total revenues and costs, including unapproved change orders and claims, during the course of the work is reflected in the accounting period in which the facts that caused the revision become known. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract.
Revenues are recognized on large, long-term construction contracts meeting the criteria of ASC Topic 605-35 using the percentage-of-completion method based upon the ratio of costcosts incurred to total estimated costs at completion. Most of Layne’sour contracts which utilize the percentage of completionpercentage-of-completion method of revenue recognition have terms of six months to four years. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completionpercentage-of-completion are reflected in contract revenues in the reporting period when such estimate revisions become known. When the estimate on a contract indicates a loss, the entire loss is recorded during the accounting period in which it becomes known. In the ordinary course of business, management prepares updated estimates of the total forecasted revenue, cost and profit or loss for each contract. The cumulative effects of these updated estimates are reflected in the period in which they become known. The financial impact of any revisions to an individual contract is a function of the amount of the revision and the percentage of completion of the contract itself. An amount up to the costs that have been incurred involving unapproved change orders and claims areis included in the total estimated revenue when the realization is probable. The amount of unapproved change orders and claim revenues areis included in our Consolidated Balance Sheets as part of costs and estimated earnings in excess of billings. Any profit as a result of change orders or claims is recorded in the period in which the change order or claim is resolved. Management focuses on evaluating the performance of contracts individually. In the ordinary course of business, and at a minimum on a quarterly basis, based on changes in facts, such as an approved scope change or a change in estimate, projected total contract revenue, cost and profit or loss for each of our contracts is updated. Normal recurring changes in estimates include, but are not limited to: changes in estimated scope as a result of unapproved or unpriced customer change orders; changes in estimated productivity assumptions based on experience to date; changes in estimated materials costs based on experience to date; changes in estimated subcontractor costs based on subcontractor experience; and changes in the timing of scheduled work that may impact future costs.
When determining the likelihood of recovering unapproved change orders and claims, we consider the history and experience of similar projects and apply judgment to estimate the amount of eventual recovery. Settlement of events such as these can take several years depending on how easily the claim is able to be resolved with the customer or whether arbitration or litigation is necessary to reach settlement. As new facts become known, an adjustment to the estimated recovery is made and reflected in the period in which it becomes known. The cumulative effect of revisions in estimates of the total revenues and costs, including unapproved change orders and claims, during the course of the work is reflected in the accounting period in which the facts that caused the revisions become known. The financial impact of these revisions to any one contract is a function of both the amount of the revision and the percentage of completion of the contract. There were no material change orders during the fiscal years ended January 31, 2017, 2016 and 2015. There were no material contract penalties, claims, settlements or changes in contract estimates during the fiscal years ended January 31, 2017, 2016 and 2015. No amounts were netted in revenue during the fiscal years ended January 31, 2017, 2016 and 2015. We have provided for all estimated costs to complete on all of the ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. Variances from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year. For all contracts, if a current estimate of total contract cost indicates a loss, the projected loss is recognized in full when such losses become known. During the fiscal years ended January 31, 2017, 2016 and 2015, approximately $12.9 million, $22.2 million and $25.2 million in losses on open contracts were recorded, respectively. The current provision for loss contracts was $2.2 million and $1.5 million as of January 31, 2017 and 2016, respectively. Further, as of January 31, 2017, there were no contracts, individually, that could be reasonably estimated to be in a material loss position in the future. Costs and estimated earnings in excess of billings represents the excess of contract costs and contract revenue recognized to date on the percentage of completion accounting method over contract billings to date. Costs and estimated earnings in excess of billings occur when: ·
| costs related to unapproved change orders or claims are incurred, or
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costs related to unapproved change orders or claims are incurred, or ·
| a portion of the revenue recorded cannot be billed currently due to the billing terms in the contract.
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a portion of the revenue recorded cannot be billed currently due to the billing terms in the contract. As allowed by ASC Topic 605-35, revenue is recognized on smaller, short-term construction contracts using the completed contract method. Layne’sOur contracts which utilize the completed contract method of revenue recognition have contract terms of twelve months or less. Layne considersWe consider contracts such as these completed upon acceptance by the customer. Contracts for mineral drilling services within Mineral Services are billable based on the quantity of drilling performed. Revenues are recognized in terms of the value of total work performed to date on the basis of actual footage or meterage drilled. Revenues for direct sales of equipment and other ancillary products not provided in conjunction with the performance of construction contracts are recognized at the date of delivery to, and acceptance by, the customer. Provisions for estimated warranty obligations are made in the period in which the sales occur.
The percentage of Layne’sour revenues recognized by percentage of completion, mineral drilling services and completed contract and direct sales to total revenues for each of the fiscal years as presented in the Consolidated Statements of Operations are: | | January 31, | | | January 31, | | | January 31, | | | January 31, | | | January 31, | | | January 31, | | Approximate Percentage of Total Revenue | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Percentage of Completion | | | 79 | % | | | 77 | % | | | 72 | % | | 74 | % | | 78 | % | | 77 | % | Mineral Drilling Services | | | 9 | % | | | 12 | % | | | 17 | % | | 11 | | | 8 | | | 10 | | Completed Contract | | | 12 | % | | | 11 | % | | | 10 | % | | 15 | | | 14 | | | 13 | | Direct Sales | | | — | | | | — | | | | 1 | % | | Total Revenue | | | 100 | % | | | 100 | % | | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | |
Impairment of Goodwill, Other Long-lived Assets and Equity Method Investments – Layne reviewsWe review the carrying value of goodwill, other long-lived assets and equity method investments whenever events or changes in circumstances indicate that such carrying values may not be recoverable, and at least annually for goodwill.recoverable. The evaluation for goodwill impairment is conducted at the reporting unit level. Layne’s reporting units are the same as its operating segments. Layne has the option of performing a qualitative or quantitative assessment to determine if an impairment has occurred. If a qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would be required to perform a quantitative impairment test for goodwill. As of December 31, 2014, our annual impairment date, we performed a qualitative assessment for our annual goodwill impairment test of Layne’s Inliner segment which is the only reporting unit that has a remaining goodwill balance of $8.9 million. This assessment indicated Layne had not experienced triggering events or other indicators which would require further analysis.
As of December 31, 2013 and 2012, a quantitative assessment for the determination of impairment was made by comparing the carrying amount of each reporting unit with its fair value. The evaluation is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference. Inliner is the only reporting unit with remaining goodwill and as of January 31, 2014, the fair value of this reporting unit significantly exceeded the carrying value of $8.9 million.
Layne considers both a market approach and an income approach in estimating the fair value of each reporting unit in our analysis. The market approach may include use of the guideline transaction method, the guideline company method, or both. Layne considers the guideline company method by using market multiples of publically traded companies with operating characteristics similar to the respective reporting unit. The income approach uses projections of each reporting unit’s estimated cash flows discounted using a weighted average cost of capital that reflects current market conditions. Management also compares the aggregate fair value of our reporting units to our market capitalization plus a control premium.
Management uses judgment to determine the more significant assumptions used in the income approach, which are subject to change as a result of changing economic and competitive conditions, are as follows:
·
| Anticipated future cash flows and long-term growth rates for each reporting unit. The income approach to determining fair value relies on the timing and estimates of future cash flows, including an estimate of long-term growth rates. The projections use management’s estimates of economic and market conditions over the projected period including growth rates in sales and estimates of expected changes in operating margins. Layne’s projections of future expected cash flows are subject to change as actual results are achieved that differ from those anticipated. Actual results could vary significantly from estimates. To develop cash flows from future operating margins and new contract awards, Layne tracks prospective work for each of our reporting units on a contract by contract basis as well as estimating time of when the work would be bid, awarded, started and completed.
|
·
| Selection of an appropriate discount rate. The income approach requires the selection of an appropriate discount rate, which is based on a weighted-average cost of capital analysis. The discount rate is subject to changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants in our industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants was used in the weighted-average cost of capital analysis. Given the current volatile economic conditions, it is possible that the discount rate could change.
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On a quarterly basis Layne considers whether events or changes in circumstances indicate that assets, including goodwill, might be impaired. In conjunction with this analysis, it evaluates whether the current market capitalization is less than equity and specifically consider (1) changes in macroeconomic conditions, (2) changes in general economic conditions in the industry including any declines in market-dependent multiples, (3) cost factors such as increases in materials, labor, or other costs that have a negative effect on earnings and cash flows analyses, and (4) the impact of current market conditions on its forecast of future cash flows including consideration of specific projects in backlog, pending awards, or large prospect opportunities. Layne also evaluates the most recent assessment of the fair value for each of the reporting units, considering whether the current forecast of future cash flows is in line with those used in the annual impairment assessment and whether there are any significant changes in trends or any other material assumptions used. As a result of this process, Layne determined the carrying value of Geoconstruction’s goodwill exceeded its fair value and recorded an impairment charge of $14.6 million during the second quarter of FY 2014. See Note 5 to the consolidated financial statements for a discussion of impairment charges recorded.Other Long-Lived Assets
Long-lived assets, including amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors management considers important which could trigger an impairment review include but are not limited to the following: ·
| significant underperformance of our assets;
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significant underperformance of our assets; ·
| significant changes in the use of the assets; and
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significant changes in the use of the assets; and ·
| significant negative industry or economic trends. |
An impairment loss is recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value, which is generally calculated using a combination of market, comparable transaction, third party quoted prices or asset appraisals, and discounted cash flow approaches. During the fiscal year ended January 31, 2016, as a result of our decision to exit our operations in Africa and Australia, we performed an assessment of property and equipment located in these locations. Based on our assessment, property and equipment in Africa and Australia with carrying value of $10.4 million was adjusted to reflect its estimated fair value of $6.5 million, resulting in a charge of approximately $3.9 million recorded as part of restructuring costs in the declinesConsolidated Statement of Operations during the fiscal year ended January 31, 2016. Additionally, during the fiscal year ended January 31, 2017, we reviewed the recoverability of our assets still held for sale in Australia, and recorded an additional charge of $12.9 million as part of restructuring costs in the Consolidated Statement of Operations to adjust the carrying values of the assets held for sale to estimated fair values less costs to sell. In calculating the impairment, the carrying amount of the assets included the cumulative currency translation adjustment related to our Australian and African entities. The fair value of the assets was determined based on available third-party quoted prices and appraisals of assets. During the fiscal year ended January 31, 2017, we performed the following long-lived assets reviews - Due to the significant negative operating performance during FY 2015 in Heavy Civil, Mineral Services and Energy Services, Layneresults, we reviewed the recoverability of the asset values of its equipmentour long-lived assets in those segments. Equipment atour Water Resources segment. We reviewed the recoverability of the asset values of our long-lived assets in our Heavy Civil andsegment, due to the expected loss on the subsequent sale of our Heavy Civil business in the first quarter of fiscal year 2018. Due to the ongoing softness in commodity prices, we reviewed the recoverability of the asset values of our long-lived assets in our Mineral Services was determined to be recoverable basedsegment. Based on our analysis, the sum of the undiscounted cash flows.flows expected from the use and eventual disposal of the assets at the end of their useful life exceeded the carrying value of the assets in the respective segments, and no indication of impairment was identified. Prior to the segment realignment in the third quarter of the fiscal year ended January 31, 2016, we reviewed the recoverability of the asset values of our long-lived assets in the Energy Services segment as of July 31, 2015. Using anthe undiscounted cash flow model, indicatedwe concluded that the carrying value of property and equipmentthe assets in the Energy Services maywas not be fully recoverable. Further analysis based onrecoverable as of July 31, 2015. We performed an assessment of the fair value of the property and equipment determined that no impairment charges were necessary for FY 2015. The fair valueassets of the property and equipment wasEnergy Services based on the orderly liquidation value of the property and equipment,equipment. This assessment resulted in the recording of an impairment charge of approximately $4.6 million, which we consider a Level 2 fair value measurement. Property and equipmentis shown as impairment charges in Energy Services with a carrying valuethe Consolidated Statements of $18.5 million was considered to have a fair value of $19.1 million as ofOperations for the fiscal year ended January 31, 20152016.
Equity Method Investments. During FY 2014 and FY 2013 no impairments were indicated by this analysis. A loss in value of an equity method investment is recognized when the decline is deemed to be other than temporary. Unforeseen events and changes in market conditions could have a material effect on the value of equity method investments due to changes in estimated sales growth rates and estimates of expected changes in operating margins, and could result in an impairment charge. NoDuring the fiscal year ended January 31, 2017, with the extended downturn in the minerals market due to lower commodity prices for the past few years, we reviewed our equity method investments for impairment. Based on weighted approach of the discounted cash flow method and market approach, we concluded that the fair value exceeds the carrying amount of our equity investments. Accordingly, no impairment charges were indicated by this analysis, nor have there been impairment chargescharge was recorded during the fiscal year ended January 31, 2017. Additionally, we considered the sensitivity of our fair value estimates to changes in certain valuation assumptions. Key assumptions used in our valuation include the discount rate and revenue growth rate, including the estimated timing of the minerals market recovery. The effect of a variation in a particular assumption on the fair value of our equity investments is calculated without changing any of FY 2015, FY 2014other assumption; in reality, changes in one factor may be associated with changes in another, which may magnify or FY 2013.counteract the sensitivities. The investment in affiliates balance as of January 31, 20152017 was $63.7$55.3 million. Income Taxes – Income taxes are provided using the asset and liability method, in which deferred taxes are recognized on the difference between the financial statement carrying amounts and tax basis of existing assets and liabilities. In assessing the need for a valuation allowance, Layne considerswe consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. Critical estimates and assumptions related to deferred taxes include items such as uncertainty of future taxable income and ongoing prudent and feasible tax planning strategies, the high number of tax jurisdictions in which Layne operateswe operate and the related complexities and uncertain outcome of audits and reviews by foreign tax officials. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accounting guidance states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. For FY 2015the fiscal years ended January 31, 2017 and FY 2014, Layne2016, we had a cumulative three year loss in the U.S. and certain foreign jurisdictions, and therefore gave little consideration to forecasted book income in future years as a source of positive evidence. LayneWe considered the periods in which future reversals of existing taxable and deductible temporary differences are likely to occur, taxable income available in prior carryback years, and the availability of tax-planning strategies when determining realization of recorded deferred tax assets. No tax benefit was recorded on U. S. tax losses and certain foreign tax losses generated during the year because valuation allowances were provided on current year losses. A tax benefit of $3.9 million was recorded during FY 2015 as a result of a carryback of a prior year tax loss upon which no tax benefit had been previously recorded because of the valuation allowance that was recorded during FY 2014. Tax expense of $54.4 million was recorded during FY 2014 for valuation allowances on deferred tax assets established in prior years.
As of January 31, 2015, Layne maintains a $1.0 million foreign deferred tax asset relating to certain foreign subsidiaries. In order to realize the remaining deferred tax assets, Layne’s foreign subsidiaries will need to generate taxable income of approximately $3.4 million in their respective jurisdictions where the deferred tax assets are recorded. Layne will continue to monitor results of those foreign subsidiaries, and if those subsidiaries are unable to generate sufficient taxable income there may be additional valuation allowances recorded in future periods.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The principal market risks to which Layne is exposed are interest rate risk on variable rate debt and foreign exchange rate risk that could give rise to translation and transaction gains and losses.
Interest Rate Risk LayneWe centrally manages itsmanage our debt portfolio considering overall financing strategies and tax consequences. A description of the debt is included in Note 78 to the consolidated financial statementsConsolidated Financial Statements in this Form 10-K. As of January 31, 20152017 an instantaneous change in interest rates of one percentage point would impact the annual interest expense by approximately $1.3$1.6 million.
Foreign Currency Risk Operating in international markets involves exposure to possible volatile movements in currency exchange rates. Currently, Layne’sOur primary international operations are in Australia, Africa, Mexico, Canada and South America. The operations are described in Notes 1 and 35 to the consolidated financial statements. Layne’sConsolidated Financial Statements. Our affiliates also operate in Latin America (see Note 35 to the consolidated financial statements)Consolidated Financial Statements). The majority of the contracts in Africa and Mexico are U.S. dollar-based, providing a natural reduction in exposure to currency fluctuations. As currency exchange rates change, translation of the income statements of the international operations into U.S. dollars may affect year-to-year comparability of operating results. Layne estimatesWe estimate that a 10% change in foreign exchange rates would impact income (loss) before income taxes by approximately $0.3 million, $0.9 million and $0.7 million $0.2 millionfor the fiscal years ended January 31, 2017, 2016 and $0.1 million for FY 2015, FY 2014, FY 2013, respectively. This represents approximately 10% of the income before income taxes of international businesses after adjusting for primarily U.S. dollar-based operations. This quantitative measure has inherent limitations, as it does not take into account any governmental actions, changes in customer purchasing patterns or changes in Layne’sour financing and operating strategies.
Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Financial Statement Schedule Layne Christensen Company and Subsidiaries | | Page | | Report of Independent Registered Public Accounting Firm | | | 6150
| | Financial Statements: | | | | | Consolidated Balance Sheets as of January 31, 20152017 and 20142016 | | | 6251
| | Consolidated Statements of Operations for the Years Ended January 31, 2015, 20142017, 2016 and 20132015 | | | 6452
| | Consolidated Statements of Comprehensive Loss for the Years Ended January 31, 2015, 20142017, 2016 and 20132015 | | | 6553
| | Consolidated Statements of Equity for the Years Ended January 31, 2015, 20142017, 2016 and 20132015 | | | 6654
| | Consolidated Statements of Cash Flows for the Years Ended January 31, 2015, 20142017, 2016 and 20132015 | | | 6755
| | Notes to Consolidated Financial Statements | | | 68
| | Supplemental Information on Oil and Gas Producing Activities
| | | 10256
| | Financial Statement Schedule II: Valuation and Qualifying Accounts | | | 10390
| |
All other schedules have been omitted because they are not applicable or not required as the required information is included in the Consolidated Financial Statements or the notes thereto.
ReportReport of Independent Registered Public Accounting Firm
Board of Directors and Stockholders Layne Christensen Company The Woodlands, Texas We have audited the accompanying consolidated balance sheets of Layne Christensen Company and subsidiaries (the “Company”) as of January 31, 20152017 and 2014,2016, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the three years in the period ended January 31, 2015.2017. Our audits also included the financial statement schedule listed in the Index at Item 8. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Layne Christensen Company and subsidiaries as of January 31, 20152017 and 2014,2016, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 31, 20152017 based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 13, 201510, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting. /s/DELOITTE & TOUCHE LLP Houston, Texas April 13, 201510, 2017
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS | | January 31, | | | January 31, | | (in thousands) | | 2015 | | | 2014 | | ASSETS | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 21,661 | | | $ | 30,909 | | Customer receivables, less allowance of $4,199 and $7,481, respectively | | | 110,779 | | | | 88,217 | | Costs and estimated earnings in excess of billings on uncompleted contracts | | | 93,014 | | | | 88,744 | | Inventories | | | 30,144 | | | | 31,481 | | Deferred income taxes | | | 376 | | | | 4,100 | | Income taxes receivable | | | 12,416 | | | | 9,068 | | Restricted deposits-current | | | 4,145 | | | | 2,881 | | Cash surrender value of life insurance policies | | | — | | | | 10,651 | | Other | | | 10,170 | | | | 14,166 | | Assets held for sale | | | 1,823 | | | | — | | Discontinued operations-current assets | | | — | | | | 36,640 | | Total current assets | | | 284,528 | | | | 316,857 | | Property and equipment: | | | | | | | | | Land | | | 14,683 | | | | 16,474 | | Buildings | | | 38,717 | | | | 37,600 | | Machinery and equipment | | | 451,597 | | | | 478,651 | | | | | 504,997 | | | | 532,725 | | Less - Accumulated depreciation | | | (351,813 | ) | | | (341,332 | ) | Net property and equipment | | | 153,184 | | | | 191,393 | | Other assets: | | | | | | | | | Investment in affiliates | | | 63,675 | | | | 67,293 | | Goodwill | | | 8,915 | | | | 8,915 | | Other intangible assets, net | | | 3,845 | | | | 5,150 | | Restricted deposits-long term | | | 4,231 | | | | 4,964 | | Deferred income taxes | | | 704 | | | | 546 | | Deferred financing fees | | | 7,134 | | | | 5,313 | | Long-term retainage | | | 8,919 | | | | 6,713 | | Other | | | 10,378 | | | | 722 | | Discontinued operations-other assets | | | — | | | | 38,752 | | Total other assets | | | 107,801 | | | | 138,368 | | Total assets | | $ | 545,513 | | | $ | 646,618 | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
- Continued -
| | January 31, | | | January 31, | | (in thousands, except per share data) | | 2015 | | | 2014 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 82,556 | | | $ | 60,922 | | Current maturities of long term debt | | | 142 | | | | 128 | | Accrued compensation | | | 13,642 | | | | 15,169 | | Accrued insurance expense | | | 10,191 | | | | 10,710 | | Accrued FCPA liability | | | — | | | | 10,352 | | Other accrued expenses | | | 29,764 | | | | 24,544 | | Acquisition escrow obligation-current | | | — | | | | 2,858 | | Income taxes payable | | | 8,112 | | | | 7,736 | | Deferred income taxes | | | 1,180 | | | | — | | Billings in excess of costs and estimated earnings on uncompleted contracts | | | 34,109 | | | | 31,255 | | Discontinued operations-current liabilities | | | — | | | | 31,853 | | Total current liabilities | | | 179,696 | | | | 195,527 | | Noncurrent liabilities: | | | | | | | | | Convertible notes | | | 110,055 | | | | 106,782 | | Long-term debt | | | 22,082 | | | | 336 | | Accrued insurance expense | | | 15,553 | | | | 16,883 | | Deferred income taxes | | | 4,945 | | | | 10,945 | | Other | | | 31,523 | | | | 24,256 | | Discontinued operations - noncurrent liabilities | | | — | | | | 1,186 | | Total noncurrent liabilities | | | 184,158 | | | | 160,388 | | Stockholders' equity: | | | | | | | | | Common stock, par value $.01 per share, 60,000 and 30,000 shares authorized, 20,121 and 19,915 shares issued and outstanding, respectively | | | 201 | | | | 199 | | Capital in excess of par value | | | 370,048 | | | | 367,461 | | (Accumulated deficit) retained earnings | | | (171,807 | ) | | | (61,656 | ) | Accumulated other comprehensive loss | | | (17,227 | ) | | | (16,540 | ) | Total Layne Christensen Company stockholders' equity | | | 181,215 | | | | 289,464 | | Noncontrolling interest | | | 444 | | | | 1,239 | | Total equity | | | 181,659 | | | | 290,703 | | Total liabilities and stockholders' equity | | $ | 545,513 | | | $ | 646,618 | | | | | | | | | | |
| | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | ASSETS | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 69,000 | | | $ | 65,569 | | Customer receivables, less allowance of $3,502 and $3,494, respectively | | | 70,983 | | | | 91,810 | | Costs and estimated earnings in excess of billings on uncompleted contracts | | | 71,593 | | | | 88,989 | | Inventories | | | 21,123 | | | | 19,540 | | Other | | | 17,784 | | | | 20,386 | | Total current assets | | | 250,483 | | | | 286,294 | | Property and equipment, net | | | 102,220 | | | | 113,497 | | Other assets: | | | | | | | | | Investment in affiliates | | | 55,290 | | | | 57,364 | | Goodwill | | | 8,915 | | | | 8,915 | | Other intangible assets, net | | | 1,779 | | | | 2,219 | | Other | | | 17,464 | | | | 20,368 | | Total other assets | | | 83,448 | | | | 88,866 | | Total assets | | $ | 436,151 | | | $ | 488,657 | | | | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 58,109 | | | $ | 68,548 | | Billings in excess of costs and estimated earnings on uncompleted contracts | | | 22,690 | | | | 24,158 | | Other current liabilities | | | 64,139 | | | | 62,308 | | Total current liabilities | | | 144,938 | | | | 155,014 | | Noncurrent liabilities: | | | | | | | | | Long-term debt | | | 162,346 | | | | 158,986 | | Accrued insurance | | | 15,647 | | | | 15,431 | | Deferred income taxes | | | 4,199 | | | | 5,483 | | Other | | | 26,753 | | | | 25,037 | | Total noncurrent liabilities | | | 208,945 | | | | 204,937 | | Commitments and contingencies | | | | | | | | | Equity: | | | | | | | | | Common stock, par value $.01 per share, 60,000 shares authorized, 19,805 and 19,789 shares issued and outstanding, respectively | | | 198 | | | | 198 | | Capital in excess of par value | | | 369,160 | | | | 365,619 | | Accumulated deficit | | | (268,820 | ) | | | (216,584 | ) | Accumulated other comprehensive loss | | | (18,318 | ) | | | (20,575 | ) | Total Layne Christensen equity | | | 82,220 | | | | 128,658 | | Noncontrolling interests | | | 48 | | | | 48 | | Total equity | | | 82,268 | | | | 128,706 | | Total liabilities and equity | | $ | 436,151 | | | $ | 488,657 | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands, except per share data) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Revenues | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | | $ | 601,972 | | | $ | 683,010 | | | $ | 720,568 | | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below) | | | (682,559 | ) | | | (666,295 | ) | | | (836,394 | ) | | | (502,050 | ) | | | (570,078 | ) | | | (610,844 | ) | Selling, general and administrative expenses | | | (122,240 | ) | | | (134,314 | ) | | | (152,108 | ) | | Selling, general and administrative expenses (exclusive of depreciation, amortization and impairment charges shown below) | | | | (97,202 | ) | | | (108,159 | ) | | | (117,085 | ) | Depreciation and amortization | | | (49,283 | ) | | | (56,302 | ) | | | (57,571 | ) | | | (26,911 | ) | | | (32,685 | ) | | | (41,978 | ) | Impairment charges | | | — | | | | (14,646 | ) | | | (8,431 | ) | | | — | | | | (4,598 | ) | | | — | | Loss on remeasurement of equity method investment | | | — | | | | — | | | | (7,705 | ) | | Equity in earnings (losses) of affiliates | | | 1,388 | | | | (2,974 | ) | | | 20,572 | | | | 2,655 | | | | (612 | ) | | | (2,002 | ) | Restructuring costs | | | (2,698 | ) | | | — | | | | — | | | | (17,348 | ) | | | (9,954 | ) | | | (2,698 | ) | Gain on extinguishment of debt | | | | — | | | | 4,236 | | | | — | | Interest expense | | | (13,707 | ) | | | (7,132 | ) | | | (3,301 | ) | | | (16,883 | ) | | | (18,011 | ) | | | (13,707 | ) | Other income, net | | | 659 | | | | 6,751 | | | | 6,003 | | | | 4,951 | | | | 2,354 | | | | 1,352 | | Loss from continuing operations before income taxes | | | (70,839 | ) | | | (76,567 | ) | | | (25,011 | ) | | | (50,816 | ) | | | (54,497 | ) | | | (66,394 | ) | Income tax benefit (expense) | | | 3,945 | | | | (53,177 | ) | | | 10,029 | | | Income tax (expense) benefit | | | | (1,420 | ) | | | 1,635 | | | | 3,945 | | Net loss from continuing operations | | | (66,894 | ) | | | (129,744 | ) | | | (14,982 | ) | | | (52,236 | ) | | | (52,862 | ) | | | (62,449 | ) | Net (loss) income from discontinued operations | | | (42,433 | ) | | | 1,693 | | | | (21,041 | ) | | Net income (loss) from discontinued operations | | | | — | | | | 8,057 | | | | (46,878 | ) | Net loss | | | (109,327 | ) | | | (128,051 | ) | | | (36,023 | ) | | | (52,236 | ) | | | (44,805 | ) | | | (109,327 | ) | Net income attributable to noncontrolling interests | | | (824 | ) | | | (588 | ) | | | (628 | ) | | Net loss (income) attributable to noncontrolling interests | | | | — | | | | 28 | | | | (824 | ) | Net loss attributable to Layne Christensen Company | | $ | (110,151 | ) | | $ | (128,639 | ) | | $ | (36,651 | ) | | $ | (52,236 | ) | | $ | (44,777 | ) | | $ | (110,151 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss) income per share information attributable to | | | | | | | | | | | | | | | | | | | | | | | | | Layne Christensen Company shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | Basic loss per share - continuing operations | | $ | (3.45 | ) | | $ | (6.65 | ) | | $ | (0.80 | ) | | Basic (loss) income per share - discontinued operations | | | (2.16 | ) | | | 0.09 | | | | (1.08 | ) | | Basic loss per share | | $ | (5.61 | ) | | $ | (6.56 | ) | | $ | (1.88 | ) | | | | | | | | | | | | | | | | Diluted loss per share - continuing operations | | $ | (3.45 | ) | | $ | (6.65 | ) | | $ | (0.80 | ) | | Diluted (loss) income per share - discontinued operations | | | (2.16 | ) | | | 0.09 | | | | (1.08 | ) | | Diluted loss per share | | $ | (5.61 | ) | | $ | (6.56 | ) | | $ | (1.88 | ) | | Loss per share from continuing operations - basic and diluted | | | $ | (2.64 | ) | | $ | (2.68 | ) | | $ | (3.22 | ) | Income (loss) per share from discontinued operations - basic and diluted | | | | — | | | | 0.41 | | | | (2.39 | ) | Loss per share - basic and diluted | | | $ | (2.64 | ) | | $ | (2.27 | ) | | $ | (5.61 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding - basic and dilutive | | | 19,630 | | | | 19,598 | | | | 19,485 | | | | 19,786 | | | | 19,730 | | | | 19,630 | | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | Net loss | | $ | (109,327 | ) | | $ | (128,051 | ) | | $ | (36,023 | ) | Other comprehensive loss: | | | | | | | | | | | | | Foreign currency translation adjustments (net of tax expense of $0, $0 and $479, respectively) | | | (687 | ) | | | (10,048 | ) | | | (269 | ) | Other comprehensive loss | | | (687 | ) | | | (10,048 | ) | | | (269 | ) | Comprehensive loss | | | (110,014 | ) | | | (138,099 | ) | | | (36,292 | ) | Comprehensive income attributable to noncontrolling interests (all attributable to net income) | | | (824 | ) | | | (588 | ) | | | (628 | ) | Comprehensive loss attributable to Layne Christensen Company | | $ | (110,838 | ) | | $ | (138,687 | ) | | $ | (36,920 | ) | | | | | | | | | | | | | |
| | Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | | 2015 | | Net loss | | $ | (52,236 | ) | | $ | (44,805 | ) | | $ | (109,327 | ) | Other comprehensive income (loss): | | | | | | | | | | | | | Change in cumulative foreign currency translation adjustment (net of taxes of $0 for all years presented) | | | 2,257 | | | | (3,348 | ) | | | (687 | ) | Other comprehensive income (loss): | | | 2,257 | | | | (3,348 | ) | | | (687 | ) | Comprehensive loss | | | (49,979 | ) | | | (48,153 | ) | | | (110,014 | ) | Comprehensive loss (income) attributable to noncontrolling interests (all attributable to net income) | | | — | | | | 28 | | | | (824 | ) | Comprehensive loss attributable to Layne Christensen Company | | $ | (49,979 | ) | | $ | (48,125 | ) | | $ | (110,838 | ) | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY | | | | | | | | | | | | | | Retained | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | Capital In | | | Earnings | | | Other | | | Total Layne | | | | | | | | | | | | Common Stock | | | Excess of | | | (Accumulated | | | Comprehensive | | | Stockholders' | | | Noncontrolling | | | | | | (in thousands, except share data) | | Shares | | | Amount | | | Par Value | | | Deficit) | | | (Loss) | | | Equity | | | Interests | | | Total | | Balance February 1, 2012 | | | 19,699,272 | | | $ | 197 | | | $ | 351,057 | | | $ | 103,634 | | | $ | (6,223 | ) | | $ | 448,665 | | | $ | 3,216 | | | $ | 451,881 | | Net (loss) income | | | — | | | | — | | | | — | | | | (36,651 | ) | | | — | | | | (36,651 | ) | | | 628 | | | | (36,023 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (269 | ) | | | (269 | ) | | | — | | | | (269 | ) | Issuance of nonvested shares | | | 110,958 | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Expiration of performance contingent nonvested shares | | | (46,491 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Issuance of stock upon exercise of options | | | 54,637 | | | | — | | | | 1,004 | | | | — | | | | — | | | | 1,004 | | | | — | | | | 1,004 | | Income tax benefit on exercise of options | | | — | | | | — | | | | (280 | ) | | | — | | | | — | | | | (280 | ) | | | — | | | | (280 | ) | Acquisition of noncontrolling interest | | | — | | | | — | | | | (2,656 | ) | | | — | | | | — | | | | (2,656 | ) | | | (87 | ) | | | (2,743 | ) | Distributions to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,423 | ) | | | (1,423 | ) | Share-based compensation | | | — | | | | — | | | | 2,924 | | | | — | | | | — | | | | 2,924 | | | | — | | | | 2,924 | | Balance, January 31, 2013 | | | 19,818,376 | | | | 198 | | | | 352,048 | | | | 66,983 | | | | (6,492 | ) | | | 412,737 | | | | 2,334 | | | | 415,071 | | Net (loss) income | | | — | | | | — | | | | — | | | | (128,639 | ) | | | — | | | | (128,639 | ) | | | 588 | | | | (128,051 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (10,048 | ) | | | (10,048 | ) | | | — | | | | (10,048 | ) | Issuance of nonvested shares | | | 107,646 | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Treasury stock purchased and subsequently cancelled | | | (2,833 | ) | | | — | | | | (56 | ) | | | — | | | | — | | | | (56 | ) | | | — | | | | (56 | ) | Expirations of performance contingent nonvested shares | | | (8,099 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Issuance of stock upon exercise of options | | | 72,611 | | | | — | | | | 1,105 | | | | — | | | | — | | | | 1,105 | | | | — | | | | 1,105 | | Forfeiture of nonvested shares | | | (72,725 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Embedded conversion option on convertible notes | | | — | | | | — | | | | 11,128 | | | | — | | | | — | | | | 11,128 | | | | — | | | | 11,128 | | Distributions to noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,683 | ) | | | (1,683 | ) | Share-based compensation | | | — | | | | — | | | | 3,237 | | | | — | | | | — | | | | 3,237 | | | | — | | | | 3,237 | | Balance January 31, 2014 | | | 19,914,976 | | | | 199 | | | | 367,461 | | | | (61,656 | ) | | | (16,540 | ) | | | 289,464 | | | | 1,239 | | | | 290,703 | | Net (loss) income | | | — | | | | — | | | | — | | | | (110,151 | ) | | | — | | | | (110,151 | ) | | | 824 | | | | (109,327 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (687 | ) | | | (687 | ) | | | — | | | | (687 | ) | Issuance of nonvested shares | | | 652,258 | | | | 6 | | | | (6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Treasury stock purchased and subsequently cancelled | | | (2,265 | ) | | | — | | | | (28 | ) | | | — | | | | — | | | | (28 | ) | | | — | | | | (28 | ) | Forfeiture of nonvested shares | | | (444,362 | ) | | | (4 | ) | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | Distribution to noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,619 | ) | | | (1,619 | ) | Share-based compensation | | | — | | | | — | | | | 2,617 | | | | — | | | | — | | | | 2,617 | | | | — | | | | 2,617 | | Balance January 31, 2015 | | | 20,120,607 | | | $ | 201 | | | | 370,048 | | | $ | (171,807 | ) | | $ | (17,227 | ) | | $ | 181,215 | | | $ | 444 | | | $ | 181,659 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Retained | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | Capital In | | | Earnings | | | Other | | | Total Layne | | | | | | | | | | | | Common Stock | | | Excess of | | | (Accumulated | | | Comprehensive | | | Stockholders' | | | Noncontrolling | | | | | | (in thousands, except share data) | | Shares | | | Amount | | | Par Value | | | Deficit) | | | Income (Loss) | | | Equity | | | Interests | | | Total | | Balance February 1, 2014 | | | 19,821,158 | | | $ | 198 | | | $ | 367,462 | | | $ | (61,656 | ) | | $ | (16,540 | ) | | $ | 289,464 | | | $ | 1,239 | | | $ | 290,703 | | Net (loss) income | | | — | | | | — | | | | — | | | | (110,151 | ) | | | — | | | | (110,151 | ) | | | 824 | | | | (109,327 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (687 | ) | | | (687 | ) | | | — | | | | (687 | ) | Issuance of common stock for vested restricted stock units | | | 783 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Forfeiture of nonvested restricted shares | | | (186,361 | ) | | | (2 | ) | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | Shares purchased and subsequently cancelled | | | (2,265 | ) | | | — | | | | (28 | ) | | | — | | | | — | | | | (28 | ) | | | — | | | | (28 | ) | Distributions to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,619 | ) | | | (1,619 | ) | Share-based compensation expense | | | — | | | | — | | | | 2,617 | | | | — | | | | — | | | | 2,617 | | | | — | | | | 2,617 | | Balance, January 31, 2015 | | | 19,633,315 | | | | 196 | | | | 370,053 | | | | (171,807 | ) | | | (17,227 | ) | | | 181,215 | | | | 444 | | | | 181,659 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | — | | | | — | | | | — | | | | (44,777 | ) | | | — | | | | (44,777 | ) | | | (28 | ) | | | (44,805 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (3,348 | ) | | | (3,348 | ) | | | — | | | | (3,348 | ) | Issuance of nonvested restricted shares | | | 24,085 | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Issuance of common stock for vested restricted stock units | | | 182,563 | | | | 2 | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | Shares purchased and subsequently cancelled | | | (50,862 | ) | | | (1 | ) | | | (344 | ) | | | — | | | | — | | | | (345 | ) | | | — | | | | (345 | ) | Extinguishment of convertible notes | | | — | | | | — | | | | (8,006 | ) | | | — | | | | — | | | | (8,006 | ) | | | — | | | | (8,006 | ) | Sale of noncontrolling interest | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (368 | ) | | | (368 | ) | Share-based compensation expense | | | — | | | | — | | | | 3,919 | | | | — | | | | — | | | | 3,919 | | | | — | | | | 3,919 | | Balance January 31, 2016 | | | 19,789,101 | | | | 198 | | | | 365,619 | | | | (216,584 | ) | | | (20,575 | ) | | | 128,658 | | | | 48 | | | | 128,706 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | — | | | | — | | | | — | | | | (52,236 | ) | | | — | | | | (52,236 | ) | | | — | | | | (52,236 | ) | Other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 2,257 | | | | 2,257 | | | | — | | | | 2,257 | | Issuance of nonvested restricted shares | | | 13,495 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Issuance of common stock for vested restricted stock units | | | 2,264 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Shares purchased and subsequently cancelled | | | (334 | ) | | | — | | | | (3 | ) | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) | Share-based compensation expense | | | — | | | | — | | | | 3,544 | | | | — | | | | — | | | | 3,544 | | | | — | | | | 3,544 | | Balance January 31, 2017 | | | 19,804,526 | | | $ | 198 | | | $ | 369,160 | | | $ | (268,820 | ) | | $ | (18,318 | ) | | $ | 82,220 | | | $ | 48 | | | $ | 82,268 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWFLOWS | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | Cash flow from operating activities: | | | | | | | | | | | | | Net loss | | $ | (109,327 | ) | | $ | (128,051 | ) | | $ | (36,023 | ) | Adjustments to reconcile net loss to cash flow from operations: | | | | | | | | | | | | | Depreciation and amortization | | | 51,841 | | | | 61,091 | | | | 65,883 | | Impairment charges | | | — | | | | 14,646 | | | | 8,431 | | Bad debt | | | 2,539 | | | | — | | | | — | | Loss (gain) on disposal of discontinued operations | | | 39,131 | | | | (8,333 | ) | | | 32,589 | | Loss on remeasurement of equity method investment | | | — | | | | — | | | | 7,705 | | Deferred income taxes | | | (1,018 | ) | | | 46,417 | | | | (37,898 | ) | Share-based compensation | | | 2,617 | | | | 3,237 | | | | 2,924 | | Amortization of discount and deferred financing fees | | | 5,767 | | | | 2,147 | | | | — | | Equity in losses (earnings) of affiliates | | | (1,388 | ) | | | 2,974 | | | | (20,572 | ) | Dividends received from affiliates | | | 5,005 | | | | 8,023 | | | | 7,080 | | Restructuring activities | | | 987 | | | | — | | | | — | | Gain from disposal of property and equipment | | | (1,689 | ) | | | (6,110 | ) | | | (3,364 | ) | Changes in assets and liabilities, (exclusive of effects of acquisitions): | | | | | | | | | | | | | (Increase) decrease in customer receivables | | | (25,530 | ) | | | 46,889 | | | | 26,658 | | (Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts | | | (4,902 | ) | | | 7,561 | | | | 4,342 | | Decrease (increase) in inventories | | | 1,513 | | | | 2,516 | | | | (12,394 | ) | Decrease (increase) in other current assets | | | 5,271 | | | | (14,319 | ) | | | 1,306 | | Increase (decrease) in accounts payable and accrued expenses | | | 7,947 | | | | (53,044 | ) | | | (13,947 | ) | Increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts | | | 2,852 | | | | (996 | ) | | | (4,798 | ) | Other, net | | | (4,718 | ) | | | 14,221 | | | | (3,171 | ) | Cash (used in) provided by operating activities | | | (23,102 | ) | | | (1,131 | ) | | | 24,751 | | Cash flow from investing activities: | | | | | | | | | | | | | Additions to property and equipment | | | (16,211 | ) | | | (34,409 | ) | | | (75,831 | ) | Additions to gas transportation facilities and equipment | | | — | | | | — | | | | (58 | ) | Additions to oil and gas properties | | | — | | | | — | | | | (1,512 | ) | Additions to mineral interests in oil and gas properties | | | — | | | | — | | | | (102 | ) | Acquisition of businesses, net of cash acquired | | | — | | | | — | | | | (18,397 | ) | Proceeds from disposal of property and equipment | | | 5,897 | | | | 8,733 | | | | 6,158 | | Proceeds from sale of business, net of cash divested | | | (3,367 | ) | | | 12,064 | | | | 13,500 | | Deposit of cash into restricted accounts | | | (32,842 | ) | | | (4,964 | ) | | | — | | Release of cash from restricted accounts | | | 31,344 | | | | — | | | | 3,144 | | Distribution of restricted cash for prior year acquisitions | | | — | | | | — | | | | (3,144 | ) | Proceeds from redemption of preferred units | | | 500 | | | | — | | | | — | | Proceeds from redemption of insurance contracts | | | 11,094 | | | | 3,565 | | | | — | | Cash used in investing activities | | | (3,585 | ) | | | (15,011 | ) | | | (76,242 | ) | Cash flow from financing activities: | | | | | | | | | | | | | Borrowing under revolving facilities | | | 46,444 | | | | 310,744 | | | | 469,200 | | Repayments under revolving loan facilities | | | (27,312 | ) | | | (402,354 | ) | | | (426,700 | ) | Net increase (decrease) in notes payable | | | 2,454 | | | | (1,329 | ) | | | 1,110 | | Repayments of long term debt | | | — | | | | — | | | | (2,590 | ) | Proceeds from long term 4.25% convertible notes | | | — | | | | 125,000 | | | | — | | Payment of debt issuance costs | | | (4,332 | ) | | | (5,022 | ) | | | — | | Principal payments under capital lease obligation | | | (661 | ) | | | (1,296 | ) | | | (93 | ) | Acquisition of noncontrolling interest | | | — | | | | — | | | | (2,743 | ) | Issuance of common stock upon exercise of stock options | | | — | | | | 1,105 | | | | 1,004 | | Purchases and retirement of treasury stock | | | (28 | ) | | | (56 | ) | | | — | | Distribution to noncontrolling interest | | | (1,619 | ) | | | (1,683 | ) | | | (1,423 | ) | Cash provided by financing activities | | | 14,946 | | | | 25,109 | | | | 37,765 | | Effects of exchange rate changes on cash | | | (1,611 | ) | | | (1,196 | ) | | | (948 | ) | Net (decrease) increase in cash and cash equivalents | | | (13,352 | ) | | | 7,771 | | | | (14,674 | ) | Cash and cash equivalents at beginning of year | | | 35,013 | | | | 27,242 | | | | 41,916 | | Cash and cash equivalents at end of year | | $ | 21,661 | | | $ | 35,013 | | | $ | 27,242 | | | | | | | | | | | | | | |
| | Years Ended January 31, | | (in thousands) | | 2017 | | | 2016 | | | 2015 | | Cash flows from operating activities: | | | | | | | | | | | | | Net loss | | $ | (52,236 | ) | | $ | (44,805 | ) | | $ | (109,327 | ) | Adjustments to reconcile net loss to cash flows from operations: | | | | | | | | | | | | | Depreciation and amortization | | | 26,911 | | | | 35,925 | | | | 51,841 | | Impairment charges | | | — | | | | 4,598 | | | | — | | Bad debt expense | | | 1,900 | | | | 5,090 | | | | 2,539 | | Write-off of note receivable relating to discontinued operations | | | — | | | | 3,180 | | | | — | | (Gain) loss on disposal of discontinued operations | | | — | | | | (7,803 | ) | | | 39,131 | | Deferred income taxes | | | (646 | ) | | | (7,237 | ) | | | (1,018 | ) | Share-based compensation expense | | | 3,544 | | | | 3,919 | | | | 2,617 | | Amortization of discount and deferred financing fees | | | 4,217 | | | | 5,143 | | | | 5,767 | | Gain on extinguishment of debt | | | — | | | | (4,236 | ) | | | — | | Equity in earnings of affiliates | | | (2,655 | ) | | | (492 | ) | | | (1,388 | ) | Dividends received from affiliates | | | 4,941 | | | | 4,568 | | | | 5,005 | | Restructuring activities | | | 12,878 | | | | 5,115 | | | | 987 | | Write-down of inventory | | | — | | | | 7,905 | | | | — | | Gain from disposal of property and equipment | | | (4,151 | ) | | | (996 | ) | | | (1,689 | ) | Changes in current assets and liabilities: | | | | | | | | | | | | | Customer receivables | | | 19,113 | | | | 2,071 | | | | (25,530 | ) | Costs and estimated earnings in excess | | | | | | | | | | | | | of billings on uncompleted contracts | | | 17,382 | | | | (1,348 | ) | | | (4,902 | ) | Inventories | | | 1,306 | | | | 382 | | | | 1,513 | | Other current assets | | | (1,585 | ) | | | 8,879 | | | | 5,271 | | Accounts payable and accrued expenses | | | (16,507 | ) | | | (10,305 | ) | | | 7,947 | | Billings in excess of costs and | | | | | | | | | | | | | estimated earnings on uncompleted contracts | | | (1,468 | ) | | | (9,952 | ) | | | 2,852 | | Other, net | | | 28 | | | | 92 | | | | (4,718 | ) | Cash provided by (used in) operating activities | | | 12,972 | | | | (307 | ) | | | (23,102 | ) | Cash flows from investing activities: | | | | | | | | | | | | | Additions to property and equipment | | | (21,818 | ) | | | (25,668 | ) | | | (16,211 | ) | Proceeds from disposal of property and equipment | | | 9,962 | | | | 6,505 | | | | 5,897 | | Proceeds from sale of business, net of cash divested | | | — | | | | 42,348 | | | | (3,367 | ) | Deposit of cash into restricted accounts | | | — | | | | (2,678 | ) | | | (32,842 | ) | Release of cash from restricted accounts | | | 3,466 | | | | 1,857 | | | | 31,344 | | Proceeds from redemption of preferred units | | | — | | | | — | | | | 500 | | Proceeds from redemption of insurance contracts | | | — | | | | — | | | | 11,094 | | Cash (used in) provided by investing activities | | | (8,390 | ) | | | 22,364 | | | | (3,585 | ) | Cash flows from financing activities: | | | | | | | | | | | | | Borrowing under revolving facilities | | | — | | | | — | | | | 46,444 | | Repayments under revolving loan facilities | | | — | | | | (22,039 | ) | | | (27,312 | ) | Net increase in notes payable | | | — | | | | — | | | | 2,454 | | Proceeds from issuance of long term convertible notes | | | — | | | | 49,950 | | | | — | | Payment of debt issuance costs | | | (9 | ) | | | (5,486 | ) | | | (4,332 | ) | Principal payments under capital lease obligation | | | (65 | ) | | | (154 | ) | | | (661 | ) | Purchases and retirement of Company shares | | | (3 | ) | | | (345 | ) | | | (28 | ) | Distribution to noncontrolling interest | | | — | | | | — | | | | (1,619 | ) | Cash (used in) provided by financing activities | | | (77 | ) | | | 21,926 | | | | 14,946 | | Effects of exchange rate changes on cash | | | (1,074 | ) | | | (75 | ) | | | (1,611 | ) | Net increase (decrease) in cash and cash equivalents | | | 3,431 | | | | 43,908 | | | | (13,352 | ) | Cash and cash equivalents at beginning of year | | | 65,569 | | | | 21,661 | | | | 35,013 | | Cash and cash equivalents at end of year | | $ | 69,000 | | | $ | 65,569 | | | $ | 21,661 | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
NotesNotes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies Description of Business – Layne Christensen Company and subsidiaries (together, “Layne” and “our”“Layne,” the “Company,” “we,” “our,” or “us”) is a global water management, construction and drilling company. Layne operates throughoutWe primarily operate in North America as well as in parts of Africa, Australia and South America. ItsOur customers include government agencies, investor-owned water utilities, industrial companies, global mining companies, consulting and engineering firms, heavy civil construction contractors, oil and gas companies, power companies and agribusinesses. Layne hasWe have ownership interestinterests in certain foreign affiliates operating in Latin America (see Note 35 to the consolidated financial statements)Consolidated Financial Statements). Fiscal Year – Layne’s fiscal year end is January 31. References to fiscal years, or “FY,” are to the twelve months then ended. Investment in Affiliated Companies – Investments in affiliates (20% to 50% owned) in which Layne haswe have the ability to exercise significant influence, but doesdo not hold a controlling interest over operating and financial policies, are accounted for by the equity method. Layne evaluates itsWe evaluate our equity method investments for impairment at least annually or when events or changes in circumstances indicate there is a loss in value of the investment that is other than a temporary decline. During the fiscal year ended January 31, 2017, due to the extended downturn in the minerals market due to lower commodity prices for the past few years, we reviewed our equity method investments for impairment. Based on weighted approach of the discounted cash flow method and market approach, we concluded that the fair value exceeds the carrying amount of our equity investments. Accordingly, no impairment charge was recorded during the fiscal year ended January 31, 2017. Principles of Consolidation – The consolidated financial statementsConsolidated Financial Statements include the accounts of Layne and all of our subsidiaries where it exerciseswe exercise control. For investments in subsidiaries that are not wholly-owned, but where Layne exerciseswe exercise control, the equity held by the minority owners and their portions of net income (loss) are reflected as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated. Presentation – Beginning with the first quarter of fiscal year ended January 31, 2017, we are excluding nonvested restricted stock units (“RSU”) from the total shares issued and outstanding in our Consolidated Balance Sheets, since no shares are actually issued until the shares have vested and are no longer restricted. Once the restriction lapses on RSUs, the units are converted to unrestricted shares of our common stock and the par value of the stock is reclassified from additional paid-in-capital to common stock. RSU shares in prior periods have been reclassified to conform to this presentation. As discussed further in Note 1516 to the consolidated financial statements, LayneConsolidated Financial Statements, during the third quarter of fiscal year ended January 31, 2016, we completed the sale of our Geoconstruction business segment. During the fiscal year ended January 31, 2015, we sold two of its components during FY 2015. Costa Fortuna (“Costa Fortuna”) was sold on July 31, 2014 and Tecniwell, was sold on October 31, 2014. Both wereboth previously reported in the GeonstructionGeoconstruction operating segment. Layne reclassified both componentsThe results of operations related to the Geoconstruction business segment have been classified as discontinued operations for FY 2015, FY 2014 and FY 2013.all periods presented through the date of sale. Unless noted otherwise, discussion in these Notes to Consolidated Financial Statements pertains to continuing operations. Amounts presented on the Consolidated Balance Sheets have also been reclassified. Business Segments – Layne reports itsWe report our financial results under sixfour reporting segments consisting of Water Resources, Inliner, Heavy Civil Geoconstruction,and Mineral ServicesServices. During the first quarter of fiscal year ended January 31, 2017, changes were made to simplify our business and Energy Services. Laynestreamline our operating and reporting structure. Our Collector Wells group was shifted from Heavy Civil to Water Resources to better align their operational expertise. We also reportsshifted certain other smaller operations asout of our “Other” segment and into our four reporting segments, and no longer report an “Other” segment. Information for prior periods has been recast to conform to our new presentation. We also report corporate activities under the title ”Unallocated Corporate”.“Unallocated Corporate.” Unallocated corporate expenses primarily consist of general and administrative functions performed on a company-wide basis and benefiting all segments. These costs include accounting, financial reporting, internal audit, treasury, corporate and securities law,legal, tax compliance, executive management and board of directors. Corporate assets are all assets not directly associated with a segment, and consist primarily of cash and deferred income taxestaxes. Use of and Changes in Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions about future events and their effects cannot be perceived with certainty, and accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as Layne’s operating environment changes. While Layne believeswe believe that the estimates and assumptions used in the preparation of the consolidated financial statementsConsolidated Financial Statements are appropriate, actual results could differ from those estimates.
Foreign Currency Transactions and Translation – In accordance with ASC Topic 830, “Foreign Currency Matters”,Matters,” gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations. Assets and liabilities of non-U.S. subsidiaries whose functional currency is the local currency are translated into U.S. dollars at exchange rates prevailing at the balance sheet date. Revenues and expenses are translated at average exchange rates during the year. The net foreign currency exchange differences resulting from these translations are reported in accumulated other comprehensive income (loss). Monetary assetsloss. Revenues and liabilitiesexpenses are remeasuredtranslated at period endaverage foreign currency exchange rates and nonmonetary items are measured at historical exchange rates.during the year. The cash flows and financing activities of Layne’s Mexican and most of its Africanour operations in Mexico are primarily denominated in the U.S. dollar.dollars. Accordingly, these operations use the U.S. dollar as their functional currency. Monetary assets and liabilities are remeasured at period end foreign currency exchange rates and nonmonetary items are measured at historical foreign currency exchange rates with exchange rate differences reported in the Consolidated Statement of Operations. Net foreign currency transaction losses for FY 2015, FY 2014 and FY 2013 were immaterial for FY 2015 and$0.2 million, $0.1 million, and $1.2$0.2 million for FY 2014the fiscal years ended January 31, 2017, 2016 and FY 2013,2015, respectively, and are recorded in other income, (expense), net in the accompanying Consolidated Statements of Operations.
Revenue Recognition – Revenues are recognized on large, long-term construction contracts meeting the criteria of ASC Topic 605-35 “Construction-Type and Production-Type Contracts” (“ASC Topic 605-35”), using the percentage-of-completion method based upon the ratio of costs incurred to total estimated costs at completion. Contract price and cost estimates are reviewed periodically as work progresses and adjustments proportionate to the percentage of completion are reflected in contract revenues in the reporting period when such estimates are revised. The nature of accounting for contracts is such that refinements of the estimating process for changing conditions and new developments are continuous and characteristic of the process. Many factors can and do change during a contract performance period which can result in a change to contract profitability from one financial reporting period to another. Some of the factors that can change the estimate of total contract revenue and cost includeincluding differing site conditions (to the extent that contract remedies are unavailable), the availability of skilled contract labor, the performance of major material suppliers, the performance of major subcontractors, unusual weather conditions and unexpected changes in material costs. These factors may result in revision to costs and income and are recognized in the period in which the revisions become known. Provisions for estimated losses on uncompleted construction contracts are made in the period in which such losses become known. When the estimate on a contract indicates a loss, the entire loss is recorded during the accounting period in which the facts that caused the revision become known. Management focuses on evaluatingevaluates the performance of contracts individually.on an individual basis. In the ordinary course of business, but at least quarterly, Layne prepareswe prepare updated estimates of cost and profit or loss for each contract. The cumulative effect of revisions in estimates of the total forecasted estimates of the total forecasted revenue and costs, including unapproved change orders and claims, during the course of the contract is reflected in the accounting period in which the facts that caused the revision become known. Large changes in cost estimates on larger, more complex construction projects can have a material impact on theour financial statements and are reflected in results of operations when they become known. During FYthe fiscal years ended January 31, 2017, 2016 and 2015, FY 2014approximately $12.9 million, $22.2 million and FY 2013, approximately $25.2 million $17.8 million and $28.6 million in contract losses on open contracts were recorded, respectively. Layne recordsWe record revenue on contracts relating to unapproved change orders and claims by including in revenue an amount less than or equal to the amount of the costs incurred by us to date for contract price adjustments that Layne seekswe seek to collect from customers for delays, errors in specifications or designs, change orders in dispute or unapproved as to scope or price, or other unanticipated additional costs, in each case when recovery of the costs is considered probable. The amount of unapproved change orders and claimclaims revenues are included in our Consolidated Balance Sheets as part of costs and estimated earnings in excess of billings.billings on uncompleted contracts. See Note 42 to the consolidated financial statements.Consolidated Financial Statements. When determining the likelihood of eventual recovery, Layne considerswe consider such factors as itsour experience on similar projects and our experience with the customer. As new facts become known, an adjustment to the estimated recovery is made and reflected in the current period.
As allowed by ASC Topic 605-35, revenue is recognized on smaller, short-term construction contracts using the completed contract method. Provisions for estimated losses on uncompleted construction contracts are made in the period in which such losses become known. Layne determinesWe determine when contracts such as these are completed based on acceptance by the customer. ContractsRevenues for mineral drilling servicescontracts within Mineral Services are billable based on the quantity of drilling performed. Revenues are recognized in terms of the value of total work performed to date on the basis of actual footage or meterage drilled.
Revenues for direct sales of equipment and other ancillary products not provided in conjunction with the performance of construction contracts are recognized at the date of delivery to, and acceptance by, the customer. Provisions for estimated warranty obligations are made in the period in which the sales occur. Revenues for the sale of oil and gas by Layne’s discontinued Energy segment were recognized on the basis of volumes sold at the time of delivery to an end user or an interstate pipeline, net of amounts attributable to royalty or working interest holders.
Layne’sOur revenues are presented net of taxes imposed on revenue-producing transactions with itsour customers, such as, but not limited to, sales, use, value-added and some excise taxes.
Inventories – Layne valuesWe value inventories at the lower of cost or market. Cost of U.S. inventories and the majority of foreign operations are determined using the average cost method, which approximates FIFO. Inventories consist primarily of supplies and raw materials. Supplies of $27.8$18.8 million and $29.3$16.8 million and raw materials of $2.3 million and $2.2$2.7 million were included in inventories, net of reserves of $0.9 million and $1.2 million, in the Consolidated Balance Sheets as of January 31, 20152017 and 2014,2016, respectively.
As discussed in Note 18 to the Consolidated Financial Statements, as part of our restructuring activities in Africa and Australia, we recorded a write-down of inventory during fiscal year ended January 31, 2016 amounting to $7.9 million, which is included as part of cost of revenues in the Consolidated Statement of Operations.
Property and Equipment and Related Depreciation– Property and equipment (including major renewals and improvements) are recorded at cost less accumulated depreciation. Depreciation is provided using the straight-line method. Depreciation expense was $48.0 million, $54.8 million and $55.1 million in FY 2015, FY 2014 and FY 2013, respectively. The useful lives used for the items within each property classification are as follows: | | | Classification | | Years | Buildings | | 15 - 35 | Machinery and equipment | | 3 - 10 |
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability is evaluated by comparing the carrying value of the assets to the undiscounted associated cash flows. When this comparison indicates that the carrying value of the asset is greater than the undiscounted cash flows, a loss is recognized for the difference between the carrying value and estimated fair value. Fair value is determined based either on market quotes or appropriate valuation techniques. See Note 4 to the Consolidated Financial Statements for a discussion of fixed asset impairments recognized during the fiscal year ended January 31, 2016. As discussed in Note 18 to the Consolidated Financial Statements, during the fiscal year ended January 31, 2016, we implemented a plan to exit our operations in Africa and Australia. As a result of the decision, we determined that it was more likely than not that certain fixed assets will be sold or otherwise disposed of before the end of their estimated useful lives. We recorded charges of approximately $12.9 million and $3.9 million during the fiscal years ended January 31, 2017 and 2016, respectively, to adjust the carrying values of property and equipment in Africa and Australia to estimated fair values, based upon valuation information that includes available third-party quoted prices and appraisals of assets. In calculating the impairment for fiscal year ended January 31, 2017, the carrying amount of the assets included the cumulative currency translation adjustment related to our African and Australian entities. The charges are shown as part of restructuring costs in the Consolidated Statement of Operations. We reflect property as assets held for sale when management, having the authority to approve the action, commits to a plan to sell the asset, the sale is probable within one year, and the asset is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the asset is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Upon designation as asset held for sale, we record the carrying value of each asset at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease recording depreciation. During the fourth quarter of the fiscal year ended January 31, 2017, we determined that our assets in Australia amounting to $2.5 million, which is part of Mineral Services segment, met all of the held for sale criteria, and as such were classified as held for sale in the Consolidated Balance Sheet as of January 31, 2017. We recorded a reserve for assets held for sale related to Australia of $12.4 million as of January 31, 2017, and the reserve is included as part of Other Current Liabilities in the Consolidated Balance Sheet. During the fourth quarter of the fiscal year ended January 31, 2016, we determined that assets in our Ethiopian location amounting to $0.8 million, which is part of Mineral Services segment, met all of the held for sale criteria, and as such were classified as held for sale in the Consolidated Balance Sheet as of January 31, 2017 and 2016. During the fourth quarter of the fiscal year ended January 31, 2015, assets in our Redlands, California location amounting to $1.4 million, which is part of the Water Resources segment, were classified as held for sale. Due to unforeseen circumstances, the foregoing sale was not completed during the past two fiscal years; however, the assets continue to meet the held for sale criteria as of January 31, 2017, and disposition is expected to be completed within the next twelve months.
Discontinued Operations –We adopted Accounting Standards Update 2014-08,"Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," on February 1, 2015. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. See Note 16 to the Consolidated Financial Statements for a discussion of our discontinued operations. Goodwill –In accordance with ASC Topic 350-20, “Intangibles-Goodwill and Other”, Layne iswe are required to test for the impairment of goodwill on at least an annual basis. Layne conductsWe conduct this evaluation annually as of December 31 or more frequently if events or changes in circumstances indicate that goodwill might be impaired. Our reporting units are based on our organizational and reporting structure and are the same as our sixfour reportable segments. Corporate and other assets and liabilities are allocated to the reporting units to the extent that they relate to the operations of those reporting units in determining their carrying amount. We have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, then we would be required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, no further assessments are required. As of December 31, 2014,2016 and 2015, we performed a qualitative assessment for our annual goodwill impairment test. Astest, and determined that it was more likely than not that the fair value of December 31, 2013 and 2012, a quantitative assessment forInliner, the determination of impairment was made by comparing the carrying amount of eachonly reporting unit with goodwill, would exceed its faircarrying value which is calculated using a combination of market-related valuation models and discounted cash flow.. See Note 5As of January 31, 2017 and 2016, we had $8.9 million of goodwill on the Consolidated Balance Sheets. The goodwill is all attributable to the consolidated financial statementsInliner reporting segment. Goodwill expected to be tax deductible was $0.9 million as of January 31, 2017 and 2016.
The cumulative goodwill impairment losses for a discussion ofWater Resources, Inliner, Heavy Civil and Mineral Services were $17.5 million, $23.1 million, $44.6 million and $20.2 million, respectively, which were recorded during the impairment charges recorded in FY 2014 and prior periods.fiscal year ended January 31, 2012. Intangible Assets – Other intangible assets with finite lives primarily consist of tradenames patents, software and software licenses.patents. Intangible assets are being amortized using the straight-line method over their estimated useful lives, which range from threeten to thirty-five years. Finite-lived intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 5 to the consolidated financial statements for a discussion of the impairments recorded in FY 2013. Cash and Cash Equivalents – Layne considersWe consider investments with an original maturity of three months or less when purchased to be cash equivalents. Layne’sOur cash equivalents are subject to potential credit risk. CashOur cash management and investment policies restrict investments to investment grade, highly liquid securities. The carrying value of cash and cash equivalents approximates fair value. Restricted Deposits – Restricted deposits consist of escrow funds associated primarily with acquisitionsrelated to a certain disposition, and those amountsjudicial deposits associated with certain letterstax related legal proceedings in Brazil. Restricted deposits – current of credit for on-going projects.$3.5 million as of January 31, 2016, are included in Other Current Assets in the Consolidated Balance Sheet. Restricted deposits – non-current of $5.0 million and $4.3 million as of January 31, 2017 and 2016, respectively, are included in Other Assets in the Consolidated Balance Sheets. Allowance for Uncollectible Accounts Receivable – Layne makesWe make ongoing estimates relating to the collectability of itsour accounts receivable and maintainsmaintain an allowance for estimated losses resulting from the inability of itsour customers to make required payments. In determining the amount of the allowance, Layne makeswe make judgments about the creditworthiness of significant customers based on ongoing credit evaluations, and also considersconsider a review of accounts receivable aging, industry trends, customer financial strength, credit standing and payment history to assess the probability of collection. Bad debt expense, which is expensedrecorded as part of Selling, General and Administrative Expenses in selling, generalthe Consolidated Statement of Operations, amounted to $1.9 million, ($0.6) million, and administrative costs.$0.8 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. Layne doesWe do not establish an allowance for credit losses on long-term contract unbilled receivables. Adjustments to unbilled receivables related to credit quality, if they occur, are accounted for as a reduction of revenue.
Concentration of Credit Risk – Layne grantsWe grant credit to itsour customers, which may include concentrations in state and local governments. Although this concentration could affect itsour overall exposure to credit risk, management believeswe believe that itsour portfolio of accounts receivable is sufficiently diversified, thus spreading the credit risk. To manage this risk, management performswe perform periodic credit evaluations of Layne’sour customers’ financial condition, including monitoring itsour customers’ payment history and current credit worthiness. Layne doesWe do not generally require collateral in support of itsour trade receivables, but may require payment in advance or security in the form of a letter of credit or bank guarantee. During FYthe fiscal years ended January 31, 2017, 2016 and 2015, FY 2014 and FY 2013, no individual customer accounted for more than 10% of Layne’sour consolidated revenues. Accrued Insurance Expense – Layne maintainsWe maintain insurance programs where it iswe are responsible for the amount of each claim up to a self-insured limit. Estimates are recorded for health and welfare, workers’ compensation, property and casualty insurance costs that are associated with these programs. These costs are estimated based in part on actuarially determined projections of future payments under these programs and include amounts incurred but not reported. Should a greater amount of claims occur compared to what was estimated or costs of the medical profession increase beyond what was anticipated, reservesaccruals recorded may not be sufficient and additional costs to the consolidated financial statements could be required. Costs estimated to be incurred in the future for employee health and welfare benefits, workers’ compensation, property and casualty insurance programs resulting from claims which have been incurred are accrued currently. Under the terms of the agreement with the various insurance carriers administering these claims, Layne iswe are not required to remit the total premium until the claims are actually paid by the insurance companies. Fair Value of Financial Instruments – The carrying amounts of financial instruments, including cash and cash equivalents, customer receivables and accounts payable, approximateapproximated fair value at January 31, 20152017 and 2014, due to2016, because of the relatively short maturity of those instruments. See Note 1314 to the consolidated financial statementsConsolidated Financial Statements for fair value disclosures. Litigation and Other Contingencies – Layne isWe are involved in litigation incidental to itsour business, the disposition of which is not expected to have a material effect on theour business, financial position, results of operations or cash flows. In addition, some of Layne’sour contracts contain provisions that require payment of liquidated damages if Layne iswe are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under these provisions. These contracts define the conditions under which our customers may make claims against Layne for liquidated damages. In many cases in which Layne haswe have historically had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. It is possible, however, that future results of operations for any particular quarterquarterly or annual period could be materially affected by changes in Layne’sour assumptions related to these proceedings or other contingencies.proceedings. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability is accrued in Layne’s consolidated financial statements.our Consolidated Financial Statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, is disclosed. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Supplemental Cash Flow Information –The amounts paid or refunded for income taxes, interest and non-cash investing and financing activities were as follows:follows: | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Income taxes | | $ | 3,882 | | | $ | 8,546 | | | $ | 20,234 | | | Interest | | | 6,737 | | | | 3,591 | | | | 3,972 | | | Income taxes paid | | | $ | 1,555 | | | $ | 1,947 | | | $ | 3,882 | | Income tax refunds | | | | (596 | ) | | | (4,251 | ) | | | (394 | ) | Interest paid | | | | 12,331 | | | | 11,065 | | | | 6,737 | | Noncash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Exchange of 4.25% Convertible Notes for 8.0% Convertible Notes | | | | — | | | | 55,500 | | | | — | | Contingent consideration on sale of discontinued operations | | | | — | | | | 4,244 | | | | — | | Receivable on sale of discontinued operations | | | 2,638 | | | | — | | | | — | | | | — | | | | — | | | | 2,638 | | Preferred units received in SolmeteX, LLC | | | — | | | | 466 | | | | — | | | Accrued capital additions | | | 774 | | | | 1,096 | | | | 1,896 | | | | 1,427 | | | | 1,186 | | | | 774 | | Capital lease obligations | | | — | | | | 1,440 | | | | — | | |
Income Taxes – Income taxes are provided using the asset and liability method, in which deferred taxes are recognized on the difference between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets are reviewed for recoverability and valuation allowances are provided as necessary. Provision for U.S. income taxes on undistributed earnings of foreign subsidiaries and affiliates is made only on those amounts in excess of funds considered to be invested indefinitely. In general, Layne recordswe record income tax expense during interim periods based on itsour best estimate of the full year’s effective tax rate. However, income tax expense relating to adjustments to Layne’s liabilities for uncertainty in income tax positions for prior reporting periods are accounted for discretely in the interim period in which it occurs. Income tax expense relating to adjustments for current year uncertain tax positions is accounted for as a component of the adjusted annualized effective tax rate. In assessing the need for a valuation allowance, Layne considerswe consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accounting guidance states that a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. In preparing future taxable income projections, Layne considerswe consider the periods in which future reversals of existing taxable and deductible temporary differences are likely to occur, future taxable income, taxable income available in prior carryback years and the availability of tax-planning strategies when determining the ability to realize recorded deferred tax assets. Layne’sOur estimate of uncertainty in income taxes is based on the framework established in the accounting for income taxes guidance. Layne recognizesWe recognize the 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. For tax positions that meet this recognition threshold, Layne applieswe apply judgment, taking into account applicable tax laws and experience in managing tax audits, to determine the amount of tax benefits to recognize in the financial statements. For each position, the difference between the benefit realized on Layne’sour tax return and the benefit reflected in the financial statements is recorded as a liability in the Consolidated Balance Sheets. This liability is updated at each financial statement date to reflect the impacts of audit settlements and other resolution of audit issues, expiration of statutes of limitation, developments in tax law and ongoing discussions with taxing authorities.
Income (Loss) Per Share – Income (loss) per share is computed by dividing net earnings available to common stockholdersshareholders by the weighted average number of common shares outstanding during the period. For periods in which Layne recognizeswe recognize losses, the calculation of diluted loss per share is the same as the calculation of basic loss per share. For periods in which Layne recognizeswe recognize net income, diluted earnings per common share is computed in the same way as basic earnings per common share except that the denominator is increased to include the number of additional common shares that would be outstanding if all potential common shares had been issued that were dilutive. Options to purchase common stock and nonvested shares are included based on the treasury stock method for dilutive earnings (losses) per share except when their effect is antidilutive. The 4.25% Convertible Notes (definedand the 8.0% Convertible Notes (as defined in Note 78 to the consolidated financial statements)Consolidated Financial Statements) are included in the calculation of diluted earnings (loss)loss per share if their inclusion is dilutive under the if-converted method. Options to purchase 1,015,514, 1,105,812750,044, 839,715 and 1,285,3031,015,514 shares have been excluded from weighted average shares in FYfor the fiscal years ended January 31, 2017, 2016 and 2015, FY 2014 and FY 2013, respectively, as their effect was antidilutive. A total of 487,292, 292,4231,871,640, 1,407,170 and 275,666487,292 non-vested shares have been excluded from weighted average shares in FYfor the fiscal years ended January 31, 2017, 2016 and 2015, FY 2014 and FY 2013, respectively, as their effect was antidilutive. Share-Based Compensation – Layne recognizesWe recognize the cost of all share-based instruments in the financial statements using a fair-value measurementbased on the calculated fair value of the associated costs.award. The fair value of share-based compensation granted in the form of stock options is determined using a lattice valuation model. In addition, Laynewe granted certain market basedmarket-based awards during FYthe years ended January 31, 2017, 2016 and 2015, and FY 2014, which were valued using the Monte Carlo simulation model. See Note 1213 to the consolidated financial statements.Consolidated Financial Statements. Unearned compensation expense associated with the issuance of non-vested sharesawards is amortized on a straight-line basis as the restrictions on the stock expire, subject to achievement of certain contingencies. Research and Development Costs – Research and development costs charged to expense during FYthe fiscal years ended January 31, 2017, 2016 and 2015 FY 2014 and FY 2013 were $0.1 million $0.2 million and $0.3 million, respectively,in each of the three fiscal years and are recorded in selling, general and administrative expenses. New Accounting Pronouncements – See Note 19 to the consolidated financial statements for a discussion of new accounting pronouncements and their impact.
(2) AcquisitionsCosts and Estimated Earnings on Uncompleted Contracts Fiscal Year 2013
On October 4, 2012, Layne acquired 100%Costs and estimated earnings on uncompleted contracts consisted of the stockfollowing:
| | As of January 31, | | (in thousands) | | 2017 | | | 2016 | | Cost incurred on uncompleted contracts | | $ | 965,373 | | | $ | 1,073,275 | | Estimated earnings | | | 230,452 | | | | 277,190 | | | | | 1,195,825 | | | | 1,350,465 | | Less: Billing to date | | | 1,146,162 | | | | 1,284,155 | | Total | | $ | 49,663 | | | $ | 66,310 | | Included in accompanying balance sheets under the following captions: | | | | | | | | | Costs and estimated earnings in excess of billing on uncompleted contracts | | $ | 71,593 | | | $ | 88,989 | | Long-term retainage | | | 760 | | | | 1,479 | | Billings in excess of costs and estimated earnings on uncompleted contracts | | | (22,690 | ) | | | (24,158 | ) | Total | | $ | 49,663 | | | $ | 66,310 | | | | | | | | | | |
We bill our customers based on specific contract terms. Substantially all billed amounts are collectible within one year. As of Fursol Informatica S.r.l., (“Fursol”) an Italian company. FursolJanuary 31, 2017 and 2016, our costs and estimated earnings in excess of billings on uncompleted contracts included unbilled contract retainage amounts of $33.1 million and $38.4 million, respectively. (3) Property and Equipment Property and equipment consisted of the following: | | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | Land | | $ | 10,922 | | | $ | 13,474 | | Buildings | | | 32,763 | | | | 36,175 | | Machinery and equipment | | | 355,955 | | | | 375,698 | | Property and equipment, at cost | | | 399,640 | | | | 425,347 | | Less - Accumulated depreciation | | | (297,420 | ) | | | (311,850 | ) | Property and equipment, net | | $ | 102,220 | | | $ | 113,497 | |
Depreciation expense was active$26.5 million, $32.2 million and $41.4 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. (4) Impairment Charges Prior to the segment realignment in the businessthird quarter of production, marketing, installation and maintenancethe fiscal year ended January 31, 2016, we reviewed the recoverability of software and electronic devices. Layne viewed the acquisition as an opportunity to benefit from Fursol’s technology to improve the performance and efficiencyasset values of its Geoconstruction operations. The aggregate purchase price was $1.0 million, of which $0.8 million was paid at the acquisition date, with the remainder of $0.2 million paid on October 4, 2013. The purchase price was allocated to an identifiable intangible asset associated with computer software valued at $1.5 million (with a weighted-average life of three years) and to a noncurrent liability of $0.5 million. The results of operations of Fursol have been includedour long-lived assets in the Consolidated Statements of Operations commencing on the closing date and are not significant. Pro forma amounts related to Fursol for periods prior to the acquisition have not been presented since the acquisition would not have had a significant effect on the consolidated revenues or net loss.
On July 15, 2010, Layne acquired a 50% interest in Diberil Sociedad Anónima (“Costa Fortuna”), a Uruguayan company and parent company to Costa Fortuna (Brazil and Uruguay) and accounted for the investment in affiliate using the equity method. On May 30, 2012, Layne acquired the remaining 50% interest in Costa Fortuna. Layne expected Costa Fortuna to expand its geoconstruction capabilities into the Brazil market as well as serve as a platform for further expansion into South America. The aggregate purchase price for the remaining 50% of Costa Fortuna of $16.2 million was comprised of cash ($2.4 million of which was placed in escrow to secure certain representations, warranties and indemnifications). In accordance with accounting guidance in moving Costa Fortuna to a fully consolidated basis, Layne remeasured the previously held equity investment to fair value and recognized a loss of $7.7 millionEnergy Services segment during the second quarter of FY 2013. The fairthe fiscal year ended January 31, 2016. Using the undiscounted cash flow model, we concluded that the carrying value of the 50% noncontrolling interestassets in Energy Services was estimated to be $15.8 million at the timenot fully recoverable as of the adjustment. The fair value assessment was determined based on the value of the current year transaction, discounted to reflect that the initial interest was noncontrolling, and that there was no ready public market for the interest. The discounts for lack of control and marketability were 5% and 10%, respectively, determined based on control premiums seen on recent transactions in the construction contractor and engineering services market and an estimate of the value of a put option on restricted stock using the Black-Scholes valuation method.
Acquisition related costs of $0.2 million were recorded as an expense in the periods in which the costs were incurred. The purchase price allocation was based onJuly 31, 2015. We performed an assessment of the fair value of the assets acquiredof Energy Services based on orderly liquidation value of the property and liabilities assumed using the internal operational assessments and other analysesequipment, which arewas considered as Level 3 measurements. The preliminary purchase allocation recorded2 fair value measurement. This assessment resulted in the second quarter was adjusted as the valuation analysis progressed. As a resultrecording of the adjustment, goodwill was decreased $0.5an impairment charge of approximately $4.6 million from the initial amount. The adjustments made were retrospectively applied to the acquisition date, and did not have a significant effect on the consolidated financial statements.
Based on the allocation of the purchase price, the acquisition had the following effect on Layne’s consolidated financial position as of the closing date:
(in thousands) | | Costa Fortuna | | Working capital | | $ | 3,592 | | Property and equipment | | | 33,500 | | Goodwill | | | 4,025 | | Other intangible assets | | | 1,000 | | Other assets | | | 9,131 | | Other noncurrent liabilities | | | (16,981 | ) | Total purchase price | | $ | 34,267 | |
The $4.0 million of goodwill was assigned to Geoconstruction. The purchase price in excess of the value of Costa Fortuna’s net assets reflects the strategic value Layne placed on the business. At the time of acquisition, Layne believed it would benefit from synergies as these acquired operations were integrated with the existing operations. Layne had hoped the presence in Brazil would assist in obtaining contracts in that country as well as in South America. Duringduring the second quarter of FY 2014, based on the continued declinefiscal year ended January 31, 2016, which is shown as impairment charges in revenues and forecasted results experienced due to a sluggish economy in Brazil during calendar year 2013, Layne reassessed its estimatesthe Consolidated Statements of the fair value of the goodwill associated with Costa Fortuna. As a result of that reassessment, a $4.0 million impairment charge was recorded.
The Costa Fortuna purchase agreement provided for a purchase price adjustment based on the levels of working capital and debt at closing. The adjustment resulted in an additional purchase price of $2.3 million, which was paid during the third quarter of FY 2013.
The total purchase price above consisted of the $16.2 million cash purchase price, the $2.3 million purchase price adjustment, and the $15.8 million adjusted basis of Layne’s existing investment in Costa Fortuna.
On July 31, 2014, Layne sold Costa Fortuna as described in Note 15 to the consolidated financial statements. Layne determined it was a discontinued operation and has reported it as such in this Form 10-K.Operations.
(3)(5) Investments in Affiliates
Layne’sWe have investments in affiliates generallythat are engaged in mineral drilling services, and the manufacture and supply of drilling equipment, parts and supplies. Investment in affiliates may include other construction joint ventures from time to time.
On July 15, 2010, Layne acquired a 50% interest in Costa Fortuna. The interest was acquired for total cash consideration of $14.9 million, of which $10.1 million was paid to Costa Fortuna shareholders and $4.8 million was paid to Costa Fortuna to purchase newly issued Costa Fortuna stock. Concurrent with the investment, Costa Fortuna purchased Layne GeoBrazil, an equipment leasing company in Brazil wholly owned by Layne, for a cash payment of $4.8 million. Subsequent to the acquisition, Layne invested an additional $1.3 million in Costa Fortuna as its proportionate share of a capital contribution. See Note 2 to the consolidated financial statements for a further discussion of Layne’s acquisition of the remaining 50% interest in Costa Fortuna during May 2012. Layne sold Costa Fortuna on July 31, 2014.
A summary of material, jointly-owned affiliates, as well as their primary operating subsidiaries if applicable, and the percentages directly or indirectly owned by Layne are as follows as of January 31, 2015:2017: | | Percentage Owned Directly | | | Percentage Owned Indirectly | | Boyles Bros Servicios Tecnicos Geologicos S.A. (Panama) | | | 50.00 | % | | | | | Boytec, S.A. (Panama) | | | | | | | 50.00 | % | Boytec Sondajes de Mexico, S.A. de C.V. (Mexico) | | | | | | | 50.00 | | Sondajes Colombia, S.A. (Colombia) | | | | | | | 50.00 | | Mining Drilling Fluids (Panama) | | | | | | | 25.00 | | Plantel Industrial S.A. (Chile) | | | | | | | 50.00 | | Christensen Chile, S.A. (Chile) | | | 50.00 | | | | | | Christensen Commercial, S.A. (Chile) | | | 50.00 | | | | | | Geotec Boyles Bros., S.A. (Chile) | | | 50.00 | | | | | | Centro Internacional de Formacion S.A. (Chile) | | | | | | | 50.00 | | Geoestrella S.A. (Chile) | | | | | | | 25.00 | | Diamantina Christensen Trading (Panama) | | | 42.69 | | | | | | Christensen Commercial, S.A. (Peru) | | | 35.38 | | | | | | Geotec, S.A. (Peru) | | | 35.38 | | | | | | Boyles Bros., Diamantina, S.A. (Peru) | | | 29.49 | | | | | | Case-Bencor Joint Venture (Washington)
| | | 65.00
| | | | | | Case-Bencor Joint Venture (Iowa)
| | | 50.00
| | | | | | | | | | | | | | |
Financial information of the affiliates is reported with a one-month lag in the reporting period. The impacts of the lag on our investment and results of operations are not significant. Summarized financial information of the affiliates including Costa Fortuna and its subsidiaries up to May 30, 2012(date of the acquisition of the remaining 50% interest in Costa Fortuna):was as follows: | | As of and Years Ended January 31, | | | As of and Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Balance sheet data: | | | | | | | | | | | | | | | | | | | | | | | | | Current assets | | $ | 106,461 | | | $ | 131,533 | | | $ | 168,770 | | | $ | 87,116 | | | $ | 89,943 | | | $ | 97,655 | | Noncurrent assets | | | 67,166 | | | | 82,807 | | | | 74,572 | | | | 77,624 | | | | 83,132 | | | | 67,166 | | Current liabilities | | | 27,869 | | | | 39,347 | | | | 57,998 | | | | 27,270 | | | | 27,538 | | | | 22,114 | | Noncurrent liabilities | | | 17,438 | | | | 17,477 | | | | 21,203 | | | | 11,288 | | | | 13,393 | | | | 17,438 | | Income statement data: | | | | | | | | | | | | | | | | | | | | | | | | | Revenues | | | 171,813 | | | | 220,778 | | | | 444,871 | | | | 123,846 | | | | 135,602 | | | | 146,934 | | Gross profit | | | 23,173 | | | | 25,411 | | | | 98,418 | | | | 21,259 | | | | 17,944 | | | | 17,677 | | Operating income (loss) | | | 3,827 | | | | (2,999 | ) | | | 57,934 | | | | 6,621 | | | | 3,424 | | | | (1,669 | ) | Net (loss) income | | | 849 | | | | (5,960 | ) | | | 43,990 | | | Net income (loss) | | | | 5,697 | | | | (989 | ) | | | (4,647 | ) |
LayneWe had no significant transactions or balances with itsour affiliates as of January 31, 2015, 20142017, 2016 and 2013,2015, and for the fiscal years then ended.
Layne’sOur equity in undistributed earnings of the affiliates totaled $59.1$50.7 million, $62.7$52.8 million and $73.7$57.2 million as of January 31, 2015, 20142017, 2016 and 2013,2015, respectively, and an additional $4.6 million of investment in affiliates was recorded as equity method goodwill for certain of the investments at the time of acquisition.
(4) Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted contracts consisted of the following:
| | As of January 31, | | (in thousands) | | 2015 | | | 2014 | | Cost incurred on uncompleted contracts | | $ | 1,151,940 | | | $ | 1,245,693 | | Estimated earnings | | | 370,683 | | | | 348,501 | | | | | 1,522,623 | | | | 1,594,194 | | Less: Billing to date | | | 1,454,799 | | | | 1,529,992 | | Total | | $ | 67,824 | | | $ | 64,202 | | Included in accompanying balance sheets under the following captions: | | | | | | | | | Costs and estimated earnings in excess of billing on uncompleted contracts | | $ | 93,014 | | | $ | 88,744 | | Long-term retainage | | | 8,919 | | | | 6,713 | | Billings in excess of costs and estimated earnings on uncompleted contracts | | | (34,109 | ) | | | (31,255 | ) | Total | | $ | 67,824 | | | $ | 64,202 | | | | | | | | | | |
Layne bills its customers based on specific contract terms. Substantially all billed amounts are collectible within one year. As of January 31, 2015 and 2014, Layne’s costs and estimated earnings in excess of billings on uncompleted contracts included unbilled contract retainage amounts of $49.6 million and $45.8 million, respectively.
(5) Impairment Charges
During the second quarter of FY 2014, based on the continued decline in revenues and forecasted results, Layne reassessed its estimates of the fair value of its reporting units. These circumstances indicated a potential impairment of goodwill in Geoconstruction and, as such, Layne assessed the fair value of its goodwill to determine if the carrying value exceeded its fair value.
As a result of its analysis, Layne determined the carrying value of the Geoconstruction goodwill in the amount of $14.6 million exceeded its fair value and an impairment charge equal to that amount was recorded in the second quarter of FY 2014. The total assessed fair value of zero was determined based on Level 3 inputs.
During FY 2013, due to the underperformance of certain product lines within Water Resources and Energy Services, Layne assessed the value of certain of its long-lived assets within those businesses. Layne also assessed the value of certain of its tradenames in light of strategic decisions for those product lines. As a result of its assessments, Layne concluded that impairments of value had occurred, and Layne recorded impairment charges. The impaired assets included specific patents, tradenames, property and equipment. The carrying value of the assets before impairment was $15.8 million and the impairments totaled $8.4 million, of which $4.4 million was associated with Water Resources and $4.0 million was associated with Energy Services. The charges consisted of $2.9 million associated with intangible assets, with the remainder consisting of adjustments to record tangible assets at an expected sales value. None of these operations had any associated goodwill recorded. Of the total assessed fair value of $7.4 million, the amount determined based on the income and market approach was $3.6 million, with the remainder based on Level 3 inputs (See Note 13 to the consolidated financial statements for discussion of Level 1, 2 and 3 inputs).
(6) Goodwill and Other Intangible Assets Goodwill
The carrying amount of goodwill attributed to each reporting segment was as follows:
(in thousands) | | Water Resources | | | Inliner | | | Heavy Civil | | | Geo-construction | | | Mineral Services | | | Energy Services | | | Other | | | Total | | Balance February 1, 2013 | | $ | — | | | $ | 8,915 | | | $ | — | | | $ | 14,646 | | | $ | — | | | $ | — | | | $ | — | | | $ | 23,561 | | Additions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Impairment of goodwill | | | | | | | | | | | | | | | (14,646 | ) | | | | | | | | | | | | | | | (14,646 | ) | Balance January 31, 2014 | | | — | | | | 8,915 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,915 | | Additions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | - | | Balance January 31, 2015 | | $ | — | | | $ | 8,915 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 8,915 | | Accumulated goodwill impairment losses | | $ | (17,084 | ) | | $ | (23,130 | ) | | $ | (44,551 | ) | | $ | (14,646 | ) | | $ | (20,225 | ) | | $ | (445 | ) | | $ | — | | | $ | (120,081 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill expected to be tax deductible was $0.9 million and $0.9 million as of January 31, 2015 and 2014.
Other Intangible Assets
Other intangible assets consisted of the following as of January 31: | | 2015 | | 2014 | (in thousands) | | Gross Carrying Amount | | | Accumulated Amortization | | | Weighted Average Amortization Period in Years | | Gross Carrying Amount | | | Accumulated Amortization | | | Weighted Average Amortization Period in Years | Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | Tradenames | | $ | 6,260 | | | $ | (3,670 | ) | | 14 | | $ | 6,260 | | | $ | (3,215 | ) | | 14 | Patents | | | 905 | | | | (548 | ) | | 12 | | | 905 | | | | (503 | ) | | 12 | Software and licenses | | | 1,458 | | | | (1,134 | ) | | 3 | | | 2,747 | | | | (1,794 | ) | | 3 | Non-competition agreements | | | 680 | | | | (482 | ) | | 6 | | | 680 | | | | (368 | ) | | 6 | Other | | | 966 | | | | (590 | ) | | 22 | | | 966 | | | | (528 | ) | | 22 | Total intangible assets | | $ | 10,269 | | | $ | (6,424 | ) | | | | $ | 11,558 | | | $ | (6,408 | ) | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | (in thousands) | | Gross Carrying Amount | | | Accumulated Amortization | | | Weighted Average Amortization Period in Years | | Gross Carrying Amount | | | Accumulated Amortization | | | Weighted Average Amortization Period in Years | Amortizable intangible assets: | | | | | | | | | | | | | | | | | | | | | Tradenames | | $ | 5,120 | | | $ | (3,869 | ) | | 15 | | $ | 5,120 | | | $ | (3,527 | ) | | 15 | Patents | | | 905 | | | | (635 | ) | | 12 | | | 905 | | | | (592 | ) | | 12 | Other | | | 500 | | | | (242 | ) | | 10 | | | 966 | | | | (653 | ) | | 22 | Total intangible assets | | $ | 6,525 | | | $ | (4,746 | ) | | | | $ | 6,991 | | | $ | (4,772 | ) | | | | | | | | | | | | | | | | | | | | | | | |
Total amortization expense for other intangible assets was $1.3$0.4 million, $1.5$0.5 million and $2.5$0.6 million in FYfor the fiscal years ended January 31, 2017, 2016 and 2015, FY 2014 and FY 2013, respectively. Amortization expense for the subsequent five fiscal years is estimated as follows: | | | | | (in thousands) | | Amount | | 2016 | | $ | 1,000 | | 2017 | | | 639 | | 2018 | | | 549 | | 2019 | | | 549 | | 2020 | | | 549 | | Thereafter | | | 559 | | Total | | $ | 3,845 | | | | | | |
Estimated amortization for the next 5 years | | | | | (in thousands) | | Amount | | Fiscal Year 2018 | | $ | 435 | | Fiscal Year 2019 | | | 435 | | Fiscal Year 2020 | | | 435 | | Fiscal Year 2021 | | | 322 | | Fiscal Year 2022 | | | 94 | | Thereafter | | | 58 | | Total | | $ | 1,779 | | | | | | |
(7) Other Balance Sheet Information The table below presents comparative detailed information about other current assets at January 31, 2017 and 2016: | | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | Other current assets: | | | | | | | | | Income taxes receivable | | $ | 5,524 | | | $ | 6,411 | | Assets held for sale | | | 4,735 | | | | 2,135 | | Prepaid insurance | | | 1,801 | | | | 1,600 | | Restricted deposits | | | — | | | | 3,466 | | Other | | | 5,724 | | | | 6,774 | | Total | | $ | 17,784 | | | $ | 20,386 | |
The table below presents comparative detailed information about other non-current assets at January 31, 2017 and 2016: | | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | Other non-current assets: | | | | | | | | | Restricted deposits | | $ | 5,055 | | | $ | 4,252 | | Contingent consideration receivable | | | 4,244 | | | | 4,244 | | Deferred income taxes | | | 242 | | | | 880 | | Deferred financing fees, net | | | 1,833 | | | | 2,675 | | Long-term retainage | | | 760 | | | | 1,479 | | Other | | | 5,330 | | | | 6,838 | | Total | | $ | 17,464 | | | $ | 20,368 | |
The table below presents comparative detailed information about other current liabilities at January 31, 2017 and 2016: | | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | Other current liabilities: | | | | | | | | | Current maturities of long-term debt | | $ | 9 | | | $ | 88 | | Reserve for assets held for sale(1) | | | 12,431 | | | | — | | Accrued compensation | | | 13,442 | | | | 15,066 | | Accrued insurance | | | 12,206 | | | | 12,093 | | Income taxes payable | | | 9,088 | | | | 8,584 | | Other accrued expenses | | | 16,963 | | | | 26,477 | | Total | | $ | 64,139 | | | $ | 62,308 | |
| (1) | Reserve for assets held for sale represents the impairment of assets held for sale in Australia and Africa. In calculating the impairment, the carrying amount of the assets included the cumulative currency translation adjustment related to our Australian and African entities. |
(8) Indebtedness Debt outstanding as of January 31, 20152017 and 20142016 was as follows: | | January 31, | | | January 31, | | | January 31, | | | January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2017 | | | 2016 | | 4.25% Convertible Notes | | $ | 110,055 | | | $ | 106,782 | | | $ | 64,387 | | | $ | 61,766 | | 8.0% Convertible Notes | | | | 97,952 | | | | 97,205 | | Asset-based facility | | | 21,964 | | | | — | | | | — | | | | — | | Capitalized lease obligations | | | 270 | | | | 480 | | | | 17 | | | | 106 | | Less amounts representing interest | | | (10 | ) | | | (16 | ) | | | (1 | ) | | | (3 | ) | Notes payable | | | — | | | | — | | | Total debt | | | 132,279 | | | | 107,246 | | | | 162,355 | | | | 159,074 | | Less current maturities of long-term debt | | | (142 | ) | | | (128 | ) | | | (9 | ) | | | (88 | ) | Total long-term debt | | $ | 132,137 | | | $ | 107,118 | | | $ | 162,346 | | | $ | 158,986 | | | | | | | | | | | | | | | | | | |
As of January 31, 2015,2017, debt outstanding will mature as follows: (in thousands) | | 4.25% Convertible Notes | | | Asset-based facility | | | Capitalized lease obligations | | | Total | | 2016 | | $ | — | | | $ | — | | | $ | 142 | | | $ | 142 | | 2017 | | | — | | | | — | | | | 102 | | | | 102 | | 2018 | | | — | | | | — | | | | 9 | | | | 9 | | 2019 | | | 110,055 | | | | — | | | | 7 | | | | 110,062 | | 2020 | | | — | | | | 21,964 | | | | — | | | | 21,964 | | Total | | $ | 110,055 | | | $ | 21,964 | | | $ | 260 | | | $ | 132,279 | | | | | | | | | | | | | | | | | | |
(in thousands) | | 4.25% Convertible Notes | | | 8.0% Convertible Notes | | | Asset-based facility | | | Capitalized lease obligations | | | Total | | Fiscal Year 2018 | | $ | — | | | $ | — | | | $ | — | | | $ | 9 | | | $ | 9 | | Fiscal Year 2019 | | | 64,387 | | | | — | | | | — | | | | 7 | | | | 64,394 | | Fiscal Year 2020 | | | — | | | | 97,952 | | | | — | | | | — | | | | 97,952 | | Total | | $ | 64,387 | | | $ | 97,952 | | | $ | — | | | $ | 16 | | | $ | 162,355 | | | | | | | | | | | | | | | | | | | | | | |
Asset-based Revolving Credit Facility On April 15, 2014, Layne entered intoWe have a five-year $135.0$100.0 million senior secured asset-based facility, that expires on April 14, 2019, of which up to an aggregate principal amount of $75.0 million will beis available in the form of letters of credit and up to an aggregate principal amount of $15.0 million is available for short-term swingline borrowings.
The asset-based facility was amended on July 29, 2014, September 15, 2014, October 28, 2014 and January 23, 2015, to (1) permit the dispositions of Costa Fortuna and Tecniwell, businesses within the Geoconstruction segment, (2) restrict prepayment of indebtedness subordinate to the asset-based facility to certain permitted refinancings of such indebtedness, (3) change the thresholds and any applicable grace period for when a Covenant Compliance Period will commence, as described below, (4) impose certain other additional monthly reporting requirements, and (5) to provide additional security interests in certain assets to surety providers through equipment utilization agreements, which also provides for use of the specified assets by the surety provider under certain circumstances. An additional reserve was established based on the value of the assets subject to the equipment utilization agreement (which is listed as the “equipment reserve” in the definition of borrowing based below). The amendments fixed the applicable margin at 3.25% for LIBOR rate loans and 2.25% for alternate base rate loans until the fixed charge coverage ratio (measured on a trailing four fiscal quarter period) is at least 1.0 to 1.0 for two consecutive fiscal quarters, at which time the applicable margin will revert to being determined based on usage of the asset-based facility.
Availability under the asset-based facility will be the lesser of (i) $135.0 million and (ii) the borrowing base (as defined in the asset-based facility agreement). The borrowing base is defined as:
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| 85% of book value of eligible accounts receivable (other than unbilled receivables), plus
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| 60% of eligible unbilled receivables, plus
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| real property availability, plus
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| equipment availability, minus
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| the supplemental reserve, minus
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| the equipment reserve, minus
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| any additional reserves established from time to time by the co-collateral agents.
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As of January 31, 2015, the borrowing base was approximately $ 108.3 million with $21.9 million borrowed under the asset-based facility and $31.3 million of outstanding letters of credit, leaving Excess Availability (described below) of $55.1 million.
The balance sheet classification of the borrowings under the asset-based facility has been determined in accordance with ASC Topic 470-10-45, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement”. Accordingly, the borrowings have been classified as a long-term liability in the accompanying Consolidated Balance Sheet.
Layne has the right to request the lenders to further increase the asset-based facility up to an additional $65.0 million if it is not in default under the agreement; however, there are no commitments from the lenders for any such increase.
The asset-based facility is guaranteed by assets of Layne’sour direct and indirect wholly owned domestic subsidiaries, subject to certain exceptions described in the asset-based facility. The obligations under the asset-based facility are secured by a lien on substantially all of our assets and the assets of Layne and the subsidiary guarantors, subject to certain exceptions described in the asset-based facility, including a pledge of up to 65% of the equity interestinterests of Layne’sour first tier foreign subsidiaries.
Availability under the asset-based facility is currently the lesser of (i) $100.0 million or (ii) the borrowing base (as defined in the asset-based facility agreement). Availability under the asset-based facility as of January 31, 2017, was approximately $100.0 million, as the borrowing base exceeded total commitments. Approximately $27.7 million of letters of credit were issued under the asset-based facility as of January 31, 2017, resulting in Excess Availability (described below) of $72.3 million. Advances under the asset-based facility are subject to certain conditions precedent, including the accuracy of certain representations and warranties and the absence of any default or event of default. Future advances may be used for general corporate and working capital purposes, and to pay fees and expenses associated with the asset-based facility. Pursuant to the asset-based facility agreement, the revolving loans will bear interest at either: | the alternate base rate plus the applicable margin. The alternate base rate is equal to the highest of (a) the base rate, (b) the sum of the Federal Funds Open rate plus 0.5%, and (c) the sum of the Daily LIBOR rate plus 1%. Or
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| the LIBOR rate (as defined in the asset-based facility agreement) for the interest period in effect for such borrowing plus the applicable margin.
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Swingline loans will bear interest at the alternate base rate plus the applicable margin. In connection with letters of credit issued under the asset-based facility, Layne will pay (i) a participation fee to the lendersThe alternate base rate is equal to the applicable margin from time to time used to determinehighest of (a) the interestbase rate, on Eurodollar loans(b) the sum of the Federal Funds Open rate plus 0.5%, and (c) the sum of the Daily LIBOR rate plus 1%, or
the LIBOR rate (as defined in the asset-based facility agreement) onfor the average daily amount ofinterest period in effect for such lender’s letter of credit exposure, as well asborrowing plus the issuing bank’s customary fees and charges. applicable margin. The asset-based facility contains various restrictions and covenants, including restrictions on dispositions of certain assets, incurrence of indebtedness, investments, distributions, capital expenditures, acquisitions and prepayment of certain indebtedness. In general, provided that Layne maintainswe maintain a certain level of Excess Availability, Laynewe will not be restricted from incurring additional unsecured indebtedness or making investments, distributions, capital expenditures or acquisitions.
Layne must maintain a cumulative minimum cash flow as definedIn compliance with the terms of our asset-based facility, we obtained an asset sale consent from our lenders on January 25, 2017 in connection with the agreementsale of not less than negative $45.0 million and during any twelve consecutive month period (or until March 31, 2015, the cumulative period from May 1, 2014), a minimum cash flow of not less than negative $25.0 million, until:our Heavy Civil business segment.
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| for a period for 30 consecutive days, Excess Availability is greater than the greater of 17.5% of the Total Availability or $25.0 million, and
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| for two consecutive fiscal quarters after the closing date, the fixed charge coverage ratio (tested on a trailing four fiscal quarter basis) has been in excess of 1.0 to 1.0.
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Minimum cash flow is defined as consolidated EBITDA minus the sum of:
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| any regularly scheduled amortized principal payments on indebtedness
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| any amount in excess of $10.0 million paid with respect to the FCPA investigation
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After giving effect to the amendments, ifIf Excess Availability is less than the greater of 17.5% of Total Availability or $25.0$17.5 million for more than one business day, then a “Covenant Compliance Period” (as defined in the asset-based facility agreement) will exist until Excess Availability has been equal to or greater than the greater of 17.5% of the Total Availability or $25.0$17.5 million for a period of 30 consecutive days. LayneWe must maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 and a maximum first lien leverage ratio of not greater than 5.0 to 1.0 for the four fiscal quarters ended immediately preceding any Covenant Compliance Period and for any four fiscal quarter period ending during a Covenant Compliance Period. If Layne had been in a Covenant Compliance Period during FY 2015 itWe would not have been in compliance with the minimum fixed charge coverage ratio. Layne also would not haveratio had we been in compliance with the maximum first lien leverage ratio during the fiscal quarters ending July 31, 2014 and January 31, 2015 had a Covenant Compliance Period beenas of the fiscal years ended January 31, 2017 and 2016.
During the fiscal year ended January 31, 2016, we had two consecutive four-quarter periods with a fixed charge coverage ratio of not less than 1.0 to 1.0 and therefore, we are no longer required to maintain a cumulative minimum cash flow (as defined in effectthe asset-based facility agreement) of not less than negative $45.0 million and a minimum cash flow of not less than negative $25.0 million during those quarters.any twelve consecutive month period. The asset-based facility also contains a subjective acceleration clause that can be triggered if the lenders determine that Layne haswe have experienced a material adverse change. If triggered by the lenders, this clause would create an Event of Default (as defined in the asset-based facility)facility agreement), which in turn would permit the lenders to accelerate repayment of outstanding obligations. The balance sheet classification of the borrowings under the asset-based facility has been determined in accordance with ASC Topic 470-10-45, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.” Accordingly, the borrowings have been classified as a long-term liability in the accompanying Consolidated Balance Sheet. In general, during a Covenant Compliance Period or if an Event of Default has occurred and is continuing, all of Layne’s funds received on a daily basis will be applied to reduce amounts owing under the asset-based facility. Based on current projections Layne does not anticipate being in a Covenant Compliance Period during the next twelve months. If an Event of Default (as defined in the asset-based facility agreement) occurs and is continuing, the interest rate under the asset-based facility will increase by 2% per annum and the lenders may accelerate all amounts owing under the asset-based facility. Defaults under the asset-based facility include (but are not limited to) the following:
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| non-payment of principal, interest, fees and other amounts under the asset-based facility
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| failure to comply with any of the negative covenants, certain of the specified affirmative covenants or other covenants under the asset-based facility
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| failure to pay certain indebtedness when due
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| specified events of bankruptcy and insolvency
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| one or more judgments of $5.0 million not covered by insurance and not paid within a specified period.
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| a change in control as defined in the asset-based facility.
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Because Also, because Excess Availability currently is, and is expected to be for the next twelve months, sufficient not to trigger a Covenant Compliance Period, Layne iswe are and anticipatesanticipate being in compliance with the applicateapplicable debt covenants associated with the asset-based facility for the next twelve months.
Defaults under the asset-based facility include (but are not limited to) the following: non-payment of principal, interest, fees and other amounts under the asset-based facility
| • | failure to comply with any of the negative covenants, certain of the specified affirmative covenants or other covenants under the asset-based facility |
failure to pay certain indebtedness when due specified events of bankruptcy and insolvency one or more judgments of $5.0 million not covered by insurance and not paid within a specified period. a change in control as defined in the asset-based facility. The asset-basedmaturity date for the asset based facility was subsequently amendedis April 15, 2019. However, the maturity date will accelerate to May 15, 2018 if each of the following has not yet occurred on March 2, 2015 to permit the issuanceor before such date: (i) either (a) all of the 8.0% Senior Secured Second Lien Convertible Notes (8.0% Convertible Notes)(or Permitted Refinancing Indebtedness (as defined in the offering described below,asset-based facility agreement) in respect thereof) are converted or (b) the exchangematurity date of the 8.0% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a portiondate which is after October 15, 2019, and (ii) either (a) all of the 4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) are converted, (b) the related Exchange andmaturity date for the grant4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a date which is after October 15, 2019, or (c) the 4.25% Convertible Notes are effectively discharged. The 4.25% Convertible Notes will be effectively discharged after, among other things, we have irrevocably deposited with the trustee of the subordinated liens securing the 8.0%4.25% Convertible Notes issued in the offering. In addition, the amendment, among other things: · reduced the maximum amount that may be borrowed under the asset-based facility from $135.0 million to $120.0 million until Layne has delivered to the agent under the asset-based facility financial statements and a compliance certificate for any fiscal quarter commencing after the date of the amendment demonstrating, for such fiscal quarter and for the immediately preceding fiscal quarter, a Consolidated Fixed Charge Coverage Ratio (as defined in the asset-based facility agreement) of at least 1.00 to 1.00 for four consecutive quarters ending with such fiscal quarters;
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· increased the applicable interest rate margin under the asset-based facility agreement by 0.5%;
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· increased the quarterly commitment fee on unused commitments from 0.375% to 0.5% if the daily average Total Revolving Exposure (as defined in the asset-based credit agreement) during the quarter exceeds 50% of the Total Revolving Commitments (as defined in the asset-based facility agreement);
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· eliminated any of Layne’s owned real estate from the borrowing base which accounted for approximately $4.2 million of Layne’s borrowing base at the time of such amendment;
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· requires the delivery of a monthly forecast of cash flows for the following 13-weeks;
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· if at the end of any business day, Layne or any of the co-borrowers under the asset-based facility have cash or cash equivalents (less any outstanding checks and electronic funds transfers) in excess of $15.0 million (excluding any amounts in bank accounts used solely for payroll, employee benefits or withholding taxes), require Layne to use such excess amounts to prepay any revolving loans then outstanding by the end of the following business day; and
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· will accelerate the maturity date to May 15, 2018 if each of the following has not yet occurred on or before such date: (i) either (a) all of the 8.0% Convertible Notes (or Permitted Refinancing Indebtedness (as defined in the asset-based facility agreement) in respect thereof) are converted or (b) the maturity date of the 8.0% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a date which is after October 15, 2019, and (ii) either (a) all of the 4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) are converted, (b) the maturity date for the 4.25% Convertible Notes (or Permitted Refinancing Indebtedness in respect thereof) is extended to a date which is after October 15, 2019, or (c) the 4.25% Convertible Notes are effectively discharged. The 4.25% Convertible Notes will be effectively discharged after, among other things, Layne has irrevocably deposited with the trustee of the 4.25% Convertible Notes cash in an amount sufficient to pay any remaining interest and principal payments due on any then remaining unconverted 4.25% Convertible Notes, with irrevocable instructions to the trustee to make such payments to the holders of the 4.25% Convertible Notes as they become due.
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The asset-based facility, as amended in March 2015, will permit Layne to make certain voluntary prepayments,such payments repurchases or redemptions, retirements, defeasances or acquisitions for valueto the holders of the 8.0%4.25% Convertible Notes if the following payment conditions are satisfied:as they become due.
· there is no default before or after such action;
| · the Supplemental Reserve (as defined in the asset-based facility agreement) is zero;
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· thirty-Day Excess Availability and Excess Availability (each as defined in the asset-based facility) on a pro forma basis is equal to or exceeds the greater of (A) 22.5% of the Total Availability and (B) $30.0 million; and
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· Layne has on a pro forma basis a Consolidated Fixed Charge Coverage Ratio of not less than 1.1:1.0.
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4.25% Convertible Senior Notes On November 5,12, 2013, Layne entered into a purchase agreement (the “Purchase Agreement”) with Jefferies LLC (the “Initial Purchaser”) relating towe completed the issuance and sale by Layne of $110.0 million aggregate principal amount of 4.25% Convertible Notes due 2018 (the “4.25% Convertible Notes”), in a private placement to “qualified institutional buyers” in the U.S., as defined in Rule 144A under the Securities Act. The Purchase Agreement contained customary representations, warranties and covenants by Layne together with customary closing conditions. Under the terms of the Purchase Agreement, Layne agreed to indemnify the Initial Purchaser against certain liabilities. The offering of the 4.25% Convertible Notes was completed on November 12, 2013, in accordance with the terms of the Purchase Agreement. The sale of the 4.25% Convertible Notes generated net proceeds of approximately $105.4 million after deducting the Initial Purchaser’s discount and commission and the estimated offering expenses payable by Layne. These proceeds were used to pay down the existing balance on the then existing revolving credit agreement. The Purchase Agreement also providedpurchase agreement (the “Purchase Agreement”) entered into with Jefferies LLC (the “Initial Purchaser”). On December 5, 2013, the Initial Purchaser anexercised its option to purchase up to an additional $15.0 million aggregate principal amount of 4.25% Convertible Notes. On December 5, 2013, the Initial Purchaser exercised this option, which generated proceeds netNotes as part of the Initial Purchaser’s discount and commission in the amount of $14.6 million. Layne used these proceeds primarily as an increase in cash on hand.Purchase Agreement. The 4.25% Convertible Notes were issued pursuant to an Indenture, dated November 12, 2013 (the “4.25% Convertible Notes Indenture”), between Layne and U.S. Bank National Association, as trustee. The 4.25% Convertible Notes are senior, unsecured obligations of Layne. The 4.25% Convertible Notes are convertible, at the option of the holders, into consideration consisting of, at Layne’sour election, cash, shares of Layne’sour common stock, or a combination of cash and shares of Layne’sour common stock (and cash in lieu of fractional shares) until the close of business on the scheduled trading day immediately preceding May 15, 2018. However, before May 15, 2018, the 4.25% Convertible Notes will not be convertible except in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of Layne’s common stock for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than 130% of the conversion price on such trading day; (2) during the consecutive five business day period immediately after any five consecutive trading day period (the five consecutive trading day period being referred to as the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the 4.25% Convertible Notes, as determined following a request by a holder of the 4.25% Convertible Notes in the manner required by the 4.25% Convertible Notes Indenture, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Layne’s common stock and the conversion rate on such trading day; (3) upon the occurrence of specified corporate events describedcertain circumstances provided in the 4.25% Convertible Notes Indenture; and (4) if Layne has called the 4.25% Convertible Notes for redemption. Layne will be required to settle conversions in shares of Layne’s common stock, together with cash in lieu of any fractional shares, until it has obtained stockholder approval to settle the 4.25% Convertible Notes in cash or a combination of cash and shares of Layne’s common stock. As of January 31, 2015, the if-converted value did not exceed its principal amount.Indenture. The 4.25% Convertible Notes bear interest at a rate of 4.25% per year, payable semi-annually in arrears in cash on May 15 and November 15 of each year, beginning on May 15, 2014. The 4.25% Convertible Notes will mature on November 15, 2018, unless earlier repurchased, redeemed or converted. The initial conversion rate was 43.6072 shares of Layne’sour common stock per $1,000 principal amount of 4.25% Convertible Notes (which is equivalent to an initial conversion price of approximately $22.93 per share of Layne’sour common stock). The conversion rate will be subject to adjustment upon the occurrence of certain events. In addition, Laynewe may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including Layne’s callingour call of the 4.25% Convertible Notes for redemption. On and after November 15, 2016, and prior to the maturity date, Laynepursuant to the 4.25% Convertible Note Indenture, we may redeem all, but not less than all, of the 4.25% Convertible Notes for cash if the sale price of Layne’sour common stock equals or exceeds 130% of the applicable conversion price for a specified time period ending on the trading day immediately prior to the date Layne deliverswe deliver notice of the redemption. The redemption price will equal 100% of the principal amount of the 4.25% Convertible Notes to be redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, upon the occurrence of a fundamental change (as defined in the 4.25% Convertible Notes Indenture), holders of the 4.25% Convertible Notes will have the right, at their option, to require Layneus to repurchase their 4.25% Convertible Notes in cash at a price equal to 100% of the principal amount of the 4.25% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
If any amount payable on a 4.25% Convertible Note (including principal, interest, a fundamental change repurchase or a redemption) is not paid by us when it is due and payable, such amount will accrue interest at a rate equal to 5.25% per annum from such payment date until paid. In accordance with ASC Topic 470-20, “Debt with Conversion and Other Options,” Laynewe separately accountsaccount for the liability and equity conversion components of the 4.25% Convertible Notes. The principal amount of the liability component of the 4.25% Convertible Notes was $106.0 million as of the date of issuance based on the present value of itsour cash flows using a discount rate of 8.0%, Layne’sour approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $19.0 million. A portion of the Initial Purchaser’s discount and commission and the offering costs totaling $0.8 million and deferred taxes totaling $7.1 million were allocated to the equity conversion component. The liability component will be accreted to the principal amount of the 4.25% Convertible Notes using the effective interest method over five years. In accordance with guidance in ASC Topic 470-20 and ASC Topic 815-15, “Embedded Derivatives,” Laynewe determined that the embedded conversion components and other embedded derivatives of the 4.25% Convertible Notes do not require bifurcation and separate accounting. On March 2, 2015, we exchanged approximately $55.5 million aggregate principal amount of our 4.25% Convertible Notes for approximately $49.9 million aggregate principal amount of our 8.0% Convertible Notes (described further below). In accordance with the derecognition guidance for convertible instruments in an exchange transaction under ASC Topic 470-20, the fair value of the 8.0% Convertible Notes (“the exchange consideration”) and the transaction costs incurred were allocated between the liability and equity components of the 4.25% Convertible Notes. Of the $49.9 million exchange consideration, $42.1 million, which represents the fair value of the 4.25% Convertible Notes immediately prior to its derecognition, was allocated to the extinguishment of the liability component. Transaction costs of $0.9 million were also allocated to the liability component. As a result, we recognized a gain on extinguishment of debt of $4.2 million during the first quarter of the fiscal year ended January 31, 2016. The remaining $7.8 million of the exchange consideration and $0.2 million of transaction costs were allocated to the reacquisition of the equity component and recognized as a reduction of stockholders’ equity. The following table presents the carrying value of the 4.25% Convertible Notes: | | January 31, | | | January 31, | | | January 31, | | | January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2017 | | | 2016 | | Carrying amount of the equity conversion component | | $ | 11,128 | | | $ | 11,128 | | | $ | 3,106 | | | $ | 3,106 | | Principal amount of the 4.25% Convertible Notes | | $ | 125,000 | | | $ | 125,000 | | | $ | 69,500 | | | $ | 69,500 | | Unamortized deferred financing fees | | | | (1,033 | ) | | | (1,523 | ) | Unamortized debt discount (1) | | | (14,945 | ) | | | (18,218 | ) | | | (4,080 | ) | | | (6,211 | ) | Net carrying amount | | $ | 110,055 | | | $ | 106,782 | | | $ | 64,387 | | | $ | 61,766 | | | | | | | | | | | | | | | | | | |
(1) | As of January 31, 2015,2017, the remaining period over which the unamortized debt discount will be amortized is 4521 months using an effective interest rate of 9%. |
8.0 % Senior Secured Second Lien Convertible Notes On March 2, 2015, Laynewe completed itsthe offering of approximately $100.0 million aggregate principal amount of 8.0% Senior Secured Second Lien Convertible Notes (“8.0% Convertible Notes”). The 8.0% Convertible Notes were offered at par to certain investors that held approximately $55.5 million of Layne’sour 4.25% Convertible Notes due 2018 pursuant to terms in which the investors agreed to (i) exchange the 4.25% Convertible Notes owned by them for approximately $49.9 million of the 8.0% Convertible Notes and (ii) purchase approximately $49.9 million aggregate principal amount of 8.0% Convertible Notes at a cash price equal to the principal amount thereof. The amount of accrued interest on the 4.25% Convertible Notes delivered by the investors in the exchange was credited to the cash purchase price payable by the investors in the purchase. The sale of the 8.0% Convertible Notes generated net cash proceeds of approximately $45.0 million after deducting discounts and commissions, estimated offering expenses and accrued interest on the 4.25% Convertible Notes being exchanged. LayneWe used the net cash proceeds to repay the then outstanding balance on the asset-based facility of $18.2 million with the remainder of the proceeds held for general working capital purposes.
The 8.0% Convertible Notes were issued pursuant to an Indenture, dated as of March 2, 2015 (the “8.0% Convertible Notes Indenture”), among Layne, the guarantor parties thereto and U.S. Bank National Association, as trustee and collateral agent. The 8.0% Convertible Notes are senior, secured obligations of Layne, with interest payable on May 1 and November 1 of each year, beginning May 1, 2015, at a rate of 8.0% per annum. The 8.0% Convertible Notes will mature on May 1, 2019; provided, however, that, unless all of the 4.25% Convertible Notes (or any permitted refinancing indebtedness in respect thereof) have been redeemed, repurchased, otherwise retired, discharged in accordance with their terms or converted into Layne’sour common stock, or have been effectively discharged, in each case on or prior to August 15, 2018 or the scheduled maturity date of the 4.25% Convertible Notes (or any permitted refinancing indebtedness incurred in respect thereof) is extended to a date that is after October 15, 2019, the 8.0% Convertible Notes will mature on August 15, 2018. The 8.0% Convertible Notes are Layne’s senior, secured obligations and: ·
| rank senior in right of payment to all of Layne’s existing or future indebtedness that is specifically subordinated to the 8.0% Convertible Notes;
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| effectively rank senior in right of payment to all of Layne’s existing and future senior, unsecured indebtedness to the extent of the assets securing the 8.0% Convertible Notes, subject to the rights of the holders of the First Priority Liens (as defined below);
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| are effectively subordinated to any debt of Layne’s foreign subsidiaries; and
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| are effectively subordinated to any of Layne’s First Priority Debt (as defined below) to the extent of the assets securing such debt.
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The 8.0% Convertible Notes are guaranteed by Layne’sour subsidiaries that currently are co-borrowers or guarantors under Layne’sour asset-based facility, as well as all of Layne’sour future wholly-owned U.S. restricted subsidiaries and, in certain cases, certain of our other subsidiaries of Layne. Each guarantee of the 8.0% Convertible Notes is the senior, secured obligation of the applicable subsidiary guarantor and:subsidiaries.
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| ranks senior in right of payment to all existing or future indebtedness of that subsidiary guarantor that is specifically subordinated to such guarantee;
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| effectively ranks senior in right of payment to all existing and future senior, unsecured indebtedness of that subsidiary guarantor to the extent of the assets securing such guarantee, subject to the rights of the holders of the First Priority Liens; and
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| is effectively subordinated to any First Priority Debt of that subsidiary guarantor to the extent of the assets securing such debt.
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The 8.0% Convertible Notes are secured by a lien on substantially all of our assets and the assets of Layne and the subsidiary guarantors, subject to certain exceptions. The liens on the assets securing the 8.0% Convertible Notes are junior in priority to the liens (the “First Priority Liens”) on such assets securing our debt (the “First Priority Debt”) or that of Layne or the subsidiary guarantors under Layne’sour asset-based facility and certain other specified existing or future obligations. At any time prior to the maturity date, Laynewe may redeem for cash all, but not less than all, of the 8.0% Convertible Notes; provided, however, that Laynewe may not redeem the 8.0% Convertible Notes on a redemption date that is outside an Open Redemption Period (as defined below)in the 8.0% Convertible Notes Indenture) unless the last reported sale price of Layne’sour common stock equals or exceeds 140% of the conversion price of the 8.0% Convertible Notes in effect on each of at least 20 trading days during the 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which Layne deliverswe deliver the redemption notice. For these purposes, an “Open Redemption Period” means each of the periods (i) commencing on February 15, 2018 and ending on, and including, August 14, 2018 and (ii) commencing on November 1, 2018 and ending on April 30, 2019. The redemption price will equal 100% of the principal amount of the 8.0% Convertible Notes to be redeemed, plus (i) accrued and unpaid interest, if any, to, but excluding, the applicable redemption date and (ii) if such redemption date is during an Open Redemption Period, an additional payment equal to the present value, as of the redemption date, of the following:
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| in the case of the Open Redemption Period ending on August 14, 2018, all regularly scheduled interest payments due on the 8.0% Convertible Notes to be redeemed on each interest payment date occurring after the redemption date and on or before August 15, 2018 (assuming, solely for these purposes, that August 15, 2018 were an interest payment date); or
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| in the case of the Open Redemption Period ending on April 30, 2019, all regularly scheduled interest payments due on the 8.0% Convertible Notes to be redeemed on each interest payment date occurring after the redemption date and on or before May 1, 2019.
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In addition, upon the occurrence of a “fundamental change” (as defined in the 8.0% Convertible Notes Indenture), holders of the 8.0% Convertible Notes will have the right, at their option, to require Layneus to repurchase their 8.0% Convertible Notes in cash at a price equal to 100% of the principal amount of the 8.0% Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The 8.0% Convertible Notes Indenture permits us to reinvest the net proceeds from certain “asset sales” (as defined in the 8.0% Convertible Notes Indenture). Any such reinvestments are subject to the criteria and time periods in the 8.0% Convertible Notes Indenture. Any net proceeds from “asset sales” that are not reinvested within the applicable time period constitute “excess proceeds” (as defined in the 8.0% Convertible Notes Indenture). When the aggregate amount of “excess proceeds” exceeds $10.0 million, we must, within 30 days, make an offer to all holders of the 8.0% Convertible Notes and holders of certain other pari passu debt obligations of the Company (together, the “Qualifying Indebtedness”) to repurchase the Qualifying Indebtedness up to the maximum amount of the available “excess proceeds.” The Qualifying Indebtedness repurchase price will equal 100% of the principal amount plus any accrued and unpaid interest to, but excluding the repurchase date. The holders of the Qualifying Indebtedness may, at their option, elect to accept the repurchase offer. If the aggregate amount of Qualifying Indebtedness tendered for repurchase exceeds the amount of “excess proceeds”, the Qualifying Indebtedness tendered will be repurchased on a pro rata basis. We may use any “excess proceeds” remaining as a result of an insufficient amount of Qualifying Indebtedness being tendered for repurchase for any purpose not otherwise prohibited by the 8.0% Convertible Notes Indenture. The 8.0% Convertible Notes are convertible, at the option of the holders, into consideration consisting of shares of Layne’sour common stock (and cash in lieu of fractional shares) until the close of business on the scheduled trading day immediately preceding the maturity date. No holder will have the right to convert any 8.0% Convertible Notes into shares of common stock to the extent that the conversion would cause that holder to beneficially own more than 9.9% of the shares of Layne’sour common stock then outstanding after giving effect to the proposed conversion.
The initial conversion rate was 85.4701 shares of Layne’sour common stock per $1,000 principal amount of 8.0% Convertible Notes (equivalent to an initial conversion price of approximately $11.70 per share of Layne’sour common stock), representing a 40.0% conversion premium over the last reported sale price per share of Layne’s common stock on The NASDAQ Global Select Market on February 4, 2015, the date on which the 8.0% Convertible Notes were priced.. The conversion rate is subject to adjustment upon the occurrence of certain events. In addition, Laynewe may be obligated to increase the conversion rate for any conversion that occurs in connection with certain corporate events, including Layne’s callingour call of the 8.0% Convertible Notes for redemption.
The 8.0% Convertible Notes Indenture contains covenants that, among other things, restrict theour ability and that of Layne and itsour restricted subsidiaries, subject to certain exceptions, to: (1) incur additional indebtedness; (2) create liens; (3) declare or pay dividends on, make distributions with respect to, or purchase or redeem, Layne’sour equity interests or itsthe equity interests of our restricted subsidiaries, equity interests, or make certain payments on subordinated or unsecured indebtedness or make certain investments; (4) enter into certain transactions with affiliates; (5) engage in certain asset sales unless specified conditions are satisfied; and (6) designate certain subsidiaries as unrestricted subsidiaries. The 8.0% Convertible Notes Indenture also contains events of default after the occurrence of which the 8.0% Convertible Notes may be accelerated and become immediately due and payable. If any amount payable on a 8.0% Convertible Note (including principal, interest, a fundamental change repurchase or a redemption) is not paid by us when it is due and payable, such amount will accrue interest at a rate equal to 9.0% per annum from such payment date until paid. In accordance with guidance in ASC Topic 815-15, we determined that the embedded conversion components and other embedded derivatives of the 8.0% Convertible Notes do not require bifurcation and separate accounting. We accounted for the 8.0% Convertible Notes as debt with conversion features that are not beneficial under ASC Topic 470-20. Accordingly, all the proceeds from the issuance of the 8.0% Convertible Notes are recorded as a liability in our Consolidated Balance Sheets. The following table presents the carrying value of the 8.0% Convertible Notes: | | January 31, | | | January 31, | | (in thousands) | | 2017 | | | 2016 | | Principal amount of the 8.0% Convertible Notes | | $ | 99,898 | | | $ | 99,898 | | Unamortized deferred financing fees | | | (1,946 | ) | | | (2,693 | ) | Net carrying amount | | $ | 97,952 | | | $ | 97,205 | |
Surety Bonds As of January 31, 2017 and 2016, surety bonds issued to secure performance of our projects amounted to $223.8 million and $259.7 million, respectively. The amount of our surety bonds is based on the expected amount of revenues remaining to be recognized on the projects. (8)(9) Other Income, Netnet
Other income, net consisted of the following: | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Gain from disposal of property and equipment | | $ | 1,790 | | | $ | 6,315 | | | $ | 3,509 | | | $ | 4,151 | | | $ | 1,064 | | | $ | 2,320 | | Interest income | | | 73 | | | | 8 | | | | 52 | | | | 87 | | | | 732 | | | | 73 | | Currency exchange loss | | | (15 | ) | | | (53 | ) | | | (1,238 | ) | | | (205 | ) | | | (73 | ) | | | (241 | ) | Other | | | (1,189 | ) | | | 481 | | | | 3,680 | | | | 918 | | | | 631 | | | | (800 | ) | Total | | $ | 659 | | | $ | 6,751 | | | $ | 6,003 | | | $ | 4,951 | | | $ | 2,354 | | | $ | 1,352 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gain from disposal of property and equipment of $4.2 million for the fiscal year ended January 31, 2017 primarily relates to the sale of assets in Africa and Australia. For FYthe fiscal year ended January 31, 2016, gain from the disposal of property and equipment of $1.1 million relates to the sale of non-core assets. For the fiscal year ended January 31, 2015, the gain from the disposal of property and equipment of $1.8$2.3 million includes the gain on sale of real estate of $1.0 million and the sale of other non-core assets. Included in the gain from disposal of property and equipment for FY 2014 are surplus assets which were sold throughout FY 2014, including items from the former corporate headquarters in Mission Woods, Kansas. Also included in the gain from disposal of property and equipment is the gain on the sale of a building in Massachusetts for $0.7 million which was being used by Geoconstruction until operations were consolidated in Dallas, Texas, and insurance proceeds were received totaling $0.7 million as payment for equipment lost in a fire.
During July 2013, Layne determined an investment in a joint venture was no longer viable. The related investment of $0.6 million was determined to be unrecoverable and was written off and is included in other in the table above.
(9)(10) Income Taxes
(Loss) incomeLoss from continuing operations before income taxes consisted of the following:
| | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Domestic | | $ | (57,747 | ) | | $ | (73,009 | ) | | $ | (60,745 | ) | | $ | (42,271 | ) | | $ | (24,660 | ) | | $ | (54,539 | ) | Foreign | | | (13,092 | ) | | | (3,558 | ) | | | 35,734 | | | | (8,545 | ) | | | (29,837 | ) | | | (11,855 | ) | Total | | $ | (70,839 | ) | | $ | (76,567 | ) | | $ | (25,011 | ) | | $ | (50,816 | ) | | $ | (54,497 | ) | | $ | (66,394 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of income tax (benefit) expense from continuing operations were as follows: | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Currently due: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. federal | | $ | (4,668 | ) | | $ | (5,926 | ) | | $ | (1,049 | ) | | $ | 63 | �� | | $ | (374 | ) | | $ | (4,352 | ) | State and local | | | 162 | | | | (460 | ) | | | (278 | ) | | | 583 | | | | (685 | ) | | | 129 | | Foreign | | | 2,182 | | | | 10,899 | | | | 12,446 | | | | 1,480 | | | | 2,182 | | | | 2,182 | | | | | (2,324 | ) | | | 4,513 | | | | 11,119 | | | | 2,126 | | | | 1,123 | | | | (2,041 | ) | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. federal | | | (1,148 | ) | | | 44,352 | | | | (19,582 | ) | | | 274 | | | | (3,202 | ) | | | (1,559 | ) | State and local | | | 233 | | | | 4,247 | | | | (1,430 | ) | | | (197 | ) | | | 573 | | | | 361 | | Foreign | | | (706 | ) | | | 65 | | | | (136 | ) | | | (783 | ) | | | (129 | ) | | | (706 | ) | | | | (1,621 | ) | | | 48,664 | | | | (21,148 | ) | | | (706 | ) | | | (2,758 | ) | | | (1,904 | ) | Total | | $ | (3,945 | ) | | $ | 53,177 | | | $ | (10,029 | ) | | $ | 1,420 | | | $ | (1,635 | ) | | $ | (3,945 | ) | | | | | | | | | | | | | | | | | | | | | | | | | |
A reconciliation of the total income tax (benefit) expense from continuing operations to the statutory federal rate is as follows for the fiscal years ended January 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | 2014 | | | 2013 | | | | 2017 | | | | 2016 | | | | 2015 | | | | (in thousands) | | Amount | | | Effective Rate | | | Amount | | | Effective Rate | | | Amount | | | Effective Rate | | | | Amount | | | Effective Rate | | | | Amount | | | Effective Rate | | | | Amount | | | Effective Rate | | | | Income tax at statutory rate | | $ | (24,793 | ) | | | 35.0 | | % | $ | (26,798 | ) | | | 35.0 | | % | $ | (8,753 | ) | | | 35.0 | | % | | $ | (17,787 | ) | | | 35.0 | | % | | $ | (19,073 | ) | | | 35.0 | | % | | $ | (23,237 | ) | | | 35.0 | | % | | State income tax, net | | | (1,622 | ) | | | 2.3 | | | | (2,834 | ) | | | 3.7 | | | | (1,156 | ) | | | 4.6 | | | | | (3,655 | ) | | | 7.2 | | | | | 537 | | | | (1.0 | ) | | | | (1,456 | ) | | | 2.2 | | | | Difference in tax expense resulting from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nondeductible goodwill impairment | | | — | | | | — | | | | 4,781 | | | | (6.2 | ) | | | — | | | | — | | | | Nondeductible expenses | | | (477 | ) | | | 0.7 | | | | 4,956 | | | | (6.5 | ) | | | 1,004 | | | | (4.0 | ) | | | | 1,123 | | | | (2.2 | ) | | | | 863 | | | | (1.6 | ) | | | | (603 | ) | | | 0.9 | | | | Loss on remeasurement of equity method investment | | | — | | | | — | | | | — | | | | — | | | | 2,697 | | | | (10.8 | ) | | | Taxes on foreign affiliates | | | 1,798 | | | | (2.5 | ) | | | 12,178 | | | | (15.9 | ) | | | (4,707 | ) | | | 18.8 | | | | | 558 | | | | (1.1 | ) | | | | 2,213 | | | | (4.1 | ) | | | | 1,798 | | | | (2.7 | ) | | | Taxes on foreign operations | | | (5,915 | ) | | | 8.3 | | | | (13,385 | ) | | | 17.5 | | | | 4,698 | | | | (18.8 | ) | | | | 478 | | | | (0.9 | ) | | | | (13,594 | ) | | | 25.0 | | | | | (6,001 | ) | | | 9.0 | | | | Valuation allowance | | | 27,901 | | | | (39.4 | ) | | | 78,288 | | | | (102.3 | ) | | | (1,731 | ) | | | 6.9 | | | | | 19,351 | | | | (38.1 | ) | | | | 35,114 | | | | (64.4 | ) | | | | 26,035 | | | | (39.2 | ) | | | Tax benefit related to tax expenses recorded on discontinued operations and equity | | | — | | | | — | | | | (10,821 | ) | | | 14.1 | | | | — | | | | — | | | | | — | | | | — | | | | | (3,597 | ) | | | 6.6 | | | | | — | | | | — | | | | Changes in uncertain tax provisions | | | (1,010 | ) | | | 1.4 | | | | 5,330 | | | | (7.0 | ) | | | (1,166 | ) | | | 4.7 | | | | | (471 | ) | | | 0.9 | | | | | (1,200 | ) | | | 2.2 | | | | | (1,010 | ) | | | 1.5 | | | | Other | | | 173 | | | | (0.2 | ) | | | 1,482 | | | | (1.9 | ) | | | (915 | ) | | | 3.7 | | | | | 1,823 | | | | (3.6 | ) | | | | (2,898 | ) | | | 5.3 | | | | | 529 | | | | (0.8 | ) | | | Total | | $ | (3,945 | ) | | | 5.6 | | % | $ | 53,177 | | | | (69.5 | ) | % | $ | (10,029 | ) | | | 40.1 | | % | | $ | 1,420 | | | | (2.8 | ) | % | | $ | (1,635 | ) | | | 3.0 | | % | | $ | (3,945 | ) | | | 5.9 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The FY 2015 benefit for nondeductible expenses for the fiscal year ended January 31, 2015 resulted from the reversal of a prior year penalty accrual related to the FCPA investigation. See Note 1415 to the consolidated financial statements.Consolidated Financial Statements. The tax effect ofon pretax income or loss from continuing operations generally is determined by a computation that does not consider the tax effect ofon other categories of income or loss (for example, other comprehensive income,loss, discontinued operations, additional paid in capital, etc.). An exception to that general rule is provided when there is a pretax loss from continuing operations and pretax income from other categories of income. Pursuant to this exception, in FY 2014, Laynewe recorded an incomea tax benefit on continuing operations during the fiscal year ended January 31, 2016. During the fiscal year ended January 31, 2016, a tax benefit of $3.6 million was recorded on continuing operations which offsets an incomeoffset tax provision forexpense recorded on discontinued operations and the additional paid in capital impact of the 4.25% Convertible Notes.operations. LayneWe recorded $27.9$19.4 million, $35.1 million and $78.3$26.0 million of valuation allowances from continuing operations on itsour net domestic and certain foreign deferred tax assets during FYthe fiscal years ended January 31, 2017, 2016 and 2015, and FY 2014, respectively. The $27.9 million valuation allowance recorded in FY 2015for the fiscal year ended January 31, 2017 was recorded on deferred tax assets generated during the year. The deferred tax assets wereyear, and was primarily related to tax losslosses and tax credit carryforwards generated in the current year. Of the $78.3 million valuation allowance recorded in FY 2014, $54.4 million related to deferred tax assets established during a prior year, and $23.9 million related to deferred tax assets established in the current year.carryforwards. The total valuation allowance at January 31, 20152017 of $157.7 million was $115.0 million comprised of a domestic valuation allowance of $103.6$140.3 million and a foreign valuation allowance of $11.4$17.4 million.
In assessing the need for a valuation allowance, Laynewe concluded that itwe had a cumulative loss on domestic operations after adjusting for significant non-recurring charges for each ofbeginning in the threefiscal year periods ended January 31, 20152014 and continuing through the fiscal year ended January 31, 2014. Layne considered the periods in which future reversals of existing taxable and deductible temporary differences are likely to occur, taxable income available in prior carry back years, and the availability of tax-planning strategies when determining the ability to realize recorded deferred tax assets.2017. Based on this assessment, Laynewe concluded that it was not more likely than not that realization of itsour domestic deferred tax assets would occur in future periods, and accordingly a valuation allowance has beenwas provided. Similar consideration was given to foreign deferred tax assets, and Laynewe concluded that certain foreign deferred tax assets were also not more likely than not to be realized and a valuation allowance was recorded. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude Layneus from using itsour loss carryforwards or utilizing other deferred tax assets in the future. Layne was not in a cumulative three year loss position as of January 31, 2013, based on an analysis of income over the current and prior two fiscal years, after adjusting for significant non-recurring charges. Layne determined that it was more likely than not the deferred tax asset was realizable at January 31, 2013, and no valuation allowance was needed at that time, other than for a portion of the foreign tax credit carryforwards, for which Layne has and continues to conclude that such carryforward benefits may not be used before they expire. Layne maintains $1.0 million of deferred tax assets in various foreign jurisdictions as of January 31, 2015, where management believes that realization is more likely than not. Layne’s foreign subsidiaries will need to generate taxable income of approximately $3.4 million in their respective jurisdictions where the deferred tax assets are recorded in order to fully realize the deferred tax asset. Management will continue to evaluate all of the evidence in future periods and will make a determination as to whether it is more likely than not that deferred tax assets will be realized in future periods.
The net income (loss) income from discontinued operations for FYthe fiscal years ended January 31, 2016 and 2015 FY 2014 and FY 2013 was ($42.4 million), $1.7$8.1 million and ($21.0 million),46.9) million, respectively. These amounts are net of income tax (expense) benefitsbenefit of ($0.7 million),3.6) million, and ($3.5 million) and $14.40.7) million, respectively. The effective tax rates for discontinued operations were 1.6%, 67.4%(31.1%) and 40.7%1.5% for FYthe fiscal years ended January 31, 2016 and 2015, FY 2014 and FY 2013, respectively. The credit recognized as additional paid in capital relating to the 4.25% Convertible Notes issued during FY 2014 was $11.1 million net of income tax expense of $7.1 million recorded at an effective rate of 39%. Deferred income taxes result from temporary differences between the financial statement and tax bases of Layne’sour assets and liabilities. The sources of these differences and their cumulative tax effects were as follows: | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2017 | | | 2016 | | Accruals and reserves | | $ | 25,130 | | | $ | 30,540 | | | Accruals | | | $ | 24,719 | | | $ | 29,734 | | Share based compensation | | | 3,327 | | | | 5,106 | | | | 2,525 | | | | 2,415 | | Tax deductible goodwill | | | 2,361 | | | | 3,141 | | | Intangibles | | | | 3,429 | | | | 4,039 | | Foreign tax credit carryforwards | | | 42,515 | | | | 24,174 | | | | 47,827 | | | | 45,809 | | Tax loss carryforwards | | | 42,817 | | | | 35,301 | | | | 70,966 | | | | 49,154 | | Cumulative translation adjustment | | | 6,593 | | | | 4,718 | | | Cumulative currency translation adjustment | | | | 5,068 | | | | 6,588 | | Capital loss carryforwards | | | 12,011 | | | | — | | | | 12,861 | | | | 13,398 | | Other assets | | | 1,712 | | | | 1,865 | | | | 1,418 | | | | 2,330 | | Total deferred tax asset | | | 136,466 | | | | 104,845 | | | | 168,813 | | | | 153,467 | | Valuation allowance | | | (114,990 | ) | | | (72,487 | ) | | | (157,664 | ) | | | (140,124 | ) | Buildings, machinery and equipment | | | (11,687 | ) | | | (16,488 | ) | | | (6,687 | ) | | | (6,519 | ) | 4.25% Convertible Notes | | | (5,829 | ) | | | (7,105 | ) | | Convertible Notes | | | | (1,530 | ) | | | (2,422 | ) | Unremitted foreign earnings | | | (7,071 | ) | | | (11,188 | ) | | | (4,782 | ) | | | (6,593 | ) | Other liabilities | | | (1,934 | ) | | | (3,876 | ) | | | (2,107 | ) | | | (2,412 | ) | Total deferred tax liability | | | (26,521 | ) | | | (38,657 | ) | | | (15,106 | ) | | | (17,946 | ) | Net deferred tax liability | | $ | (5,045 | ) | | $ | (6,299 | ) | | $ | (3,957 | ) | | $ | (4,603 | ) | | | | | | | | | | | | | | | | | |
LayneWe had the following tax losses and tax credit carryforwards at January 31, 2015:2017:
| | | | | Gross | | | Expected Tax | | | | | | | | | | | | | | Valuation | | | | | Carryforward | | | Benefit | | | Valuation | | (dollars in millions) | | Expiration | | Amount | | | Amount | | | Expiration | | Amount | | | Amount | | | Allowance | | Federal net operating losses | | 2034-2035 | | $ | 26.8 | | | $ | (26.8 | ) | | State net operating losses | | 2024-2035 | | | 5.9 | | | | (5.9 | ) | | Federal net operating loss carryforwards | | | 2034-2037 | | $ | 131.8 | | | $ | 45.4 | | | $ | (45.4 | ) | State net operating loss carryforwards | | | 2024-2037 | | | 205.0 | | | | 10.5 | | | | (10.5 | ) | Federal capital loss carryforwards | | 2020 | | | 12.0 | | | | (12.0 | ) | | 2020 | | | 33.3 | | | | 12.9 | | | | (12.9 | ) | State capital loss carryforwards | | | 2020 | | | 33.3 | | | | 1.3 | | | | (1.3 | ) | Foreign tax loss carryforwards | | 2019-2030 | | | 10.2 | | | | (9.5 | ) | | 2019-2032 | | | 50.2 | | | | 15.0 | | | | (15.0 | ) | Federal foreign tax credit carryforwards | | 2018-2022 | | | 20.0 | | | | (20.0 | ) | | 2018-2022 | | n/a | | | | 20.0 | | | | (20.0 | ) | Federal foreign tax loss carryforwards | | 2023-2025 | | | 22.4 | | | | (22.4 | ) | | Federal foreign tax credit carryforwards | | | 2023-2027 | | n/a | | | | 27.8 | | | | (27.8 | ) | Total | | | | $ | 97.3 | | | $ | (96.6 | ) | | | | | | | | $ | 132.9 | | | $ | (132.9 | ) |
As of January 31, 2015,2017, undistributed earnings of foreign subsidiaries and certain foreign affiliates included $53.1$44.4 million for which no federal income or foreign withholding taxes have been provided. These earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends or if Laynewe were to sell itsour stock in the affiliates or subsidiaries. It is not practicable to determine the amount of income or withholding tax that would be payable upon remittance of these earnings.
Deferred income taxes were provided on undistributed earnings of certain foreign subsidiaries and foreign affiliates where the earnings are not considered to be invested indefinitely. On September 13, 2013, the U.S. Treasury and the Internal Revenue Service issued final Tangible Property Regulations (“TPR”) under Internal Revenue Code (“IRC”) Section 162 and IRC Section 263(a). The regulations are not effective until tax years beginning on or after January 1, 2014; however, certain portions may require an accounting method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to buildings, machinery and equipment and deferred taxes. Layne has analyzed the expected impact of the TPR and concluded that the expected impact is minimal.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding penalties and interest is as follows: | | Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Balance, beginning of year | | $ | 15,312 | | | $ | 11,996 | | | $ | 13,322 | | | $ | 10,809 | | | $ | 13,018 | | | $ | 15,312 | | Additions based on tax positions related to current year | | | 187 | | | | 766 | | | | 2,501 | | | | 7,354 | | | | 81 | | | | 187 | | Additions for tax positions of prior years | | | 28 | | | | 4,450 | | | | 34 | | | | 1,669 | | | | 1,326 | | | | 28 | | Settlement with tax authorities | | | (707 | ) | | | (1 | ) | | | (1,087 | ) | | | (1,168 | ) | | | — | | | | (707 | ) | Reductions for tax positions of prior years | | | (308 | ) | | | (341 | ) | | | — | | | | (55 | ) | | | (3,392 | ) | | | (308 | ) | Reductions due to the lapse of statutes of limitation | | | (1,494 | ) | | | (1,558 | ) | | | (2,774 | ) | | | (160 | ) | | | (224 | ) | | | (1,494 | ) | Balance, end of year | | $ | 13,018 | | | $ | 15,312 | | | $ | 11,996 | | | $ | 18,449 | | | $ | 10,809 | | | $ | 13,018 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Substantially all of the unrecognized tax benefits recorded at January 31, 2015, 20142017, 2016 and 20132015 would affect the effective rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits will decrease during the next year by approximately $5.9$7.2 million due to settlements of audit issues and expiration of statutes of limitation. Layne classifiesWe classify interest and penalties related to income taxes as a component of income tax expense. As of January 31, 2017, 2016 and 2015, 2014 and 2013, the Companywe had $8.5$8.7 million, $8.4$7.8 million and $7.1$8.5 million, respectively, of interest and penalties accrued associated with unrecognized tax benefits. The liability for interest and penalties increased (decreased) $0.9 million, ($0.7) million and $0.1 million ($1.3 million)during the fiscal years ended January 31, 2017, 2016 and $0.3 million during FY 2015, FY 2014 and FY 2013, respectively.
Layne filesWe file income tax returns in the U.S., various state jurisdictions and certain foreign jurisdictions. During the tax year ended January 31, 2015, the U.S. statute of limitations expired for the tax year ended January 31, 2011. The statute of limitations remains open for tax years ended January 31, 20122013 through 2015. Layne is2017. We are currently under examination for federal purposes for the tax year ended January 31, 2013, and there are several state examinations currently in progress.
Layne filesWe file income tax returns in the foreign jurisdictions where it operates.we operate. The returns are subject to examination which may be ongoing at any point in time. Tax liabilities are recorded based on estimates of additional taxes which will be due upon settlement of those examinations. The tax years subject to examination by foreign tax authorities vary by jurisdiction, but generally the tax years 20122014 through 20152017 remain open to examination.
(10)(11) Operating Lease Obligations
Our operating leases are primarily for buildings, light and medium duty trucks, and other equipment. We sublease certain portion of our facilities under non-cancelable sublease agreements. Rent expense under operating leases (including insignificant amounts of contingent rental payments and sublease rental income) was $4.9 million, $7.3 million and $9.6 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms and related subleases in excess of one year from January 31, 2015,2017, are as follows: | | | | | (in thousands) | | Operating Leases | | 2016 | | $ | 6,547 | | 2017 | | | 5,681 | | 2018 | | | 5,479 | | 2019 | | | 5,497 | | 2020 | | | 5,714 | | Minimum lease payments | | $ | 28,918 | | | | | | |
| | Minimum Rental | | (in thousands) | | Commitments | | Fiscal Year 2018 | | $ | 3,734 | | Fiscal Year 2019 | | | 2,728 | | Fiscal Year 2020 | | | 2,231 | | Fiscal Year 2021 | | | 1,691 | | Fiscal Year 2022 | | | 1,085 | | Minimum lease payments | | $ | 11,469 | | | | | | |
Layne’s operating leases are primarily for light and medium duty trucks, buildings and other equipment. Rent expense under operating leases (including insignificant amounts of contingent rental payments) was $19.7 million, $22.1 million and $22.9 million in FY 2015, FY 2014 and FY 2013, respectively.
(11)(12) Employee Benefit Plans
Layne’sOur salaried and certain hourly employees are eligible to participate in Layne’sour sponsored, defined contribution plans. Total expense recorded in selling, general and administrative costs for Layne’sour portion of these plans was $3.1 million, $3.0 million and $3.2 million $3.4 millionfor the fiscal years ended January 31, 2017, 2016 and $4.0 million in FY 2015, FY 2014 and FY 2013, respectively.
Layne hasWe have a deferred compensation plan for certain management employees.employees, however the plan was suspended during the fiscal year ended January 31, 2015. Participants maycould elect to defer up to 25% of their salaries and up to 50% of their bonuses to the plan. Matching contributions, and the vesting period of those contributions, arewere established at the discretion of Layne.our discretion. Employee deferrals are vested at all times. The total amount deferred, including matching, in FYfor the fiscal year ended January 31, 2015 FY 2014 and FY 2013 was $0.2 million, $0.8 million and $1.3 million, respectively.million. The total liability for deferred compensation was $8.6$5.1 million and $9.7$6.3 million as of January 31, 20152017 and 20142016, respectively. These liabilities are primarily included in other long-termnon-current liabilities, except for those amounts due in the next twelve months. Those liabilitiesmonths, which are recorded in other current liabilities.accrued compensation in the Consolidated Balance Sheet.
Layne contributesWe contribute to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover itsour union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
·
| assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;
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assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; ·
| if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and
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if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and ·
| if Layne chooses to stop participating in some of its multiemployer plans, Layne may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
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if we choose to stop participating in some of our multiemployer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. In accordance with accounting guidance, Laynewe evaluated each of itsour multiemployer plans to determine if any were individually significant. The evaluation was based on the following criteria: ·
| the total employees participating in the multiemployer plan compared to the total employees covered by the plan;
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the total employees participating in the multiemployer plan compared to the total employees covered by the plan; ·
| the total contributions to the multiemployer plan as a percentage of the total contributions to the plan by all participating employers; and
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the total contributions to the multiemployer plan as a percentage of the total contributions to the plan by all participating employers; and ·
| the amount of potential liability that could be incurred due to Layne’s
the amount of potential liability that could be incurred due to our withdrawal from the multiemployer plan, underfunded status of the plan or other participating employers’ withdrawal from the plan. |
As of January 31, 20152017 and 2014, Layne2016, we did not participate in multiemployer plans that would be considered individually significant. Layne makesWe make contributions to these multiemployer plans equal to the amounts accrued for pension expense. Total contributions and union pension expense for these plans was $2.9$1.9 million, $2.3$2.1 million and $3.2$1.9 million in FYfor the fiscal years ended January 31, 2017, 2016 and 2015, FY 2014 and FY 2013, respectively. Information regarding assets and accumulated benefits of these plans has not been made available to Layne.us.
LayneWe also providesprovide supplemental retirement benefits to a former chief executive officer. Benefits are computed based on the compensation earned during the highest five consecutive years of employment reduced for a portion of Social Security benefits and an annuity equivalent of his defined contribution plan balance. Layne doesWe do not contribute to the plan or maintain any investment assets related to the expected benefit obligation. Layne hasWe have recognized the full amount of itsour actuarially determined pension liability. The current portion recognized in Layne’sour Consolidated Balance Sheets as other accrued expenses was $0.3 million as of January 31, 20152017 and 2014.2016. The long-term portion recognized in Layne’sour Consolidated Balance Sheets as of January 31, 20152017 and 2014 were $5.92016 was $5.1 million and $5.0$5.2 million, respectively, as other non-current liabilities. Net periodic pension cost (benefit) of the supplemental retirement benefits for FYthe fiscal years ended January 31, 2017, 2016 and 2015 FY 2014 and FY 2013 was $1.3$0.2 million, $0.0($0.4) million and $1.4$1.3 million, respectively.
(12)(13) Equity-Based Compensation
Layne has an equity-based compensation plan that provides for the granting of options to purchase or the issuance of shares of common stock at a price fixed by the Board of Directors or a committee. As of January 31, 2015,2017, there were 1,539,950348,949 shares which remain available to be granted under the plan as stock options or restricted stock awards. Layne hasWe have the ability to issue shares under the plans either from new issuances or from treasury, although it haswe have previously always issued new shares and expectsexpect to continue to issue new shares in the future.
We granted 13,495 shares of restricted stock, 199,352 restricted stock units and 447,903 performance vesting restricted stock units under the Layne recognized $2.6 million, $3.2 millionChristensen Company 2006 Equity Incentive Plan during the fiscal year ended January 31, 2017. The grants consist of both service-based awards and $2.9 millionmarket-based awards. We also granted a total of compensation cost for share-based plans for FY 2015, FY 2014 and FY 2013, respectively. Of these amounts, $1.2 million, $1.5 million and $0.9 million, respectively, related to non-vested stock. The total income tax benefit recognized for share-based compensation arrangements was $1.0 million, $1.3 million and $1.1 million for FY 2015, FY 2014 and FY 2013, respectively.134,333 stock options during the fiscal year ended January 31, 2017 under the Layne Christensen Company 2006 Equity Incentive Plan. All options were granted at an exercise price equal to the fair market value of Layne’sour common stock at the date of grant. The options have terms of ten years from the date of grant and generally vest ratably over periods of one month to five years. We recognized $3.5 million, $3.9 million and $2.6 million of compensation cost for share-based plans for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. Of these amounts, $3.0 million, $3.0 million and $1.2 million, respectively, related to non-vested stock. The total income tax benefit recognized for share-based compensation arrangements was $1.4 million, $1.5 million and $1.0 million for the fiscal years ended January 31, 2017, 2016 and 2015, respectively. As of January 31, 2017, no tax benefit is expected to be realized for equity-based compensation arrangements due to a full valuation allowance of our domestic deferred tax assets. As of January 31, 2017, total unrecognized compensation cost related to unvested stock options was approximately $0.2 million, which is expected to be recognized over a weighted-average period of 0.9 years. As of January 31, 2017, there was approximately $3.6 million of total unrecognized compensation cost related to nonvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted-average period of 1.7 years. The fair value of share-based compensation granted in the form of stock options is determined using a lattice or Black-Scholes valuation model. The valuations in each respective year were made using the assumptions noted in the following table. Expected volatilities are based on historical volatility of the stock price. Layne usesWe use historical data to estimate early exercise and post-vesting forfeiture rates to be applied within the valuation model. The risk-free interest rate for the periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair value per share at the date of grant for options granted during FYthe fiscal years ended January 31, 2017, 2016 and 2015 FY 2014was $1.59, $1.60 and FY 2013 was $5.59, $8.11 and $10.93, respectively. | | | | Years Ended January 31, | | | Years Ended January 31, | | Assumptions: | | | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Weighted-average expected volatility | | | | | 51.0% | | | | 49.2% | | | | 55.1% | | | | 56.1% | | | | 52.6% | | | | 51.0% | | Expected dividend yield | | | | | 0% | | | | 0% | | | | 0% | | | | 0% | | | | 0% | | | | 0% | | Risk-free interest rate | | | | | 1.46% | | | | 1.25% | | | | 1.32% | | | | 0.60% | | | | 0.70% | | | | 1.46% | | Expected term (in years) | | | | | 5.6 | | | | 7.0 | | | | 6.0 | | | | 1.9 | | | | 3.3 | | | | 5.6 | | Exercise multiple factor | | | | | 1.89 | | | | 2.1 | | | | 2.0 | | | | 1.39 | | | | 1.65 | | | | 1.9 | | Post-vesting forfeiture | | | | | 13.1% | | | | 2.4% | | | | 0% | | | | 20.3% | | | | 12.5% | | | | 13.1% | |
Stock option transactions for FYthe fiscal years ended January 31, 2017, 2016 and 2015 FY 2014 and FY 2013 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Intrinsic Value (in thousands) | | | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | | | Intrinsic Value (in thousands) | | Outstanding at February 1, 2012 | | | 1,133,211 | | | | 26.12 | | | | | | | | | | | Granted | | | 280,547 | | | | 23.32 | | | | | | | | | | | Exercised | | | (54,637 | ) | | | 17.44 | | | | | | | $ | 13 | | | Forfeited | | | (73,818 | ) | | | 24.50 | | | | | | | | | | | Outstanding at January 31, 2013 | | | 1,285,303 | | | | 25.97 | | | | | | | | | | | Granted | | | 227,869 | | | | 20.80 | | | | | | | | | | | Exercised | | | (72,611 | ) | | | 15.96 | | | | | | | | — | | | Expired | | | (208,952 | ) | | | 31.45 | | | | | | | | | | | Forfeited | | | (125,797 | ) | | | 28.67 | | | | | | | | | | | Outstanding at January 31, 2014 | | | 1,105,812 | | | | 24.22 | | | | | | | | | | | Outstanding at February 1, 2014 | | | | 1,105,812 | | | $ | 24.22 | | | | | | | | | | Granted | | | 360,586 | | | | 13.11 | | | | | | | | | | | | 360,586 | | | | 13.11 | | | | | | | | | | Exercised | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | | | | $ | — | | Expired | | | (55,126 | ) | | | 16.63 | | | | | | | | | | | | (55,126 | ) | | | 16.63 | | | | | | | | | | Forfeited | | | (395,758 | ) | | | 23.03 | | | | | | | | | | | | (395,758 | ) | | | 23.03 | | | | | | | | | | Outstanding at January 31, 2015 | | | 1,015,514 | | | | 21.15 | | | | 6.6 | | | | — | | | | 1,015,514 | | | | 21.15 | | | | | | | | | | Exercisable at January 31, 2013 | | | 965,750 | | | | 25.95 | | | | | | | | | | | Exercisable at January 31, 2014 | | | 790,905 | | | | 24.84 | | | | | | | | | | | Granted | | | | 106,168 | | | | 5.51 | | | | | | | | | | Exercised | | | | — | | | | — | | | | | | | | — | | Expired | | | | (77,707 | ) | | | 24.73 | | | | | | | | | | Forfeited | | | | (204,260 | ) | | | 26.20 | | | | | | | | | | Outstanding at January 31, 2016 | | | | 839,715 | | | | 17.61 | | | | | | | | | | Granted | | | | 134,433 | | | | 7.04 | | | | | | | | | | Exercised | | | | — | | | | — | | | | | | | | — | | Expired | | | | (10,000 | ) | | | 29.29 | | | | | | | | | | Forfeited | | | | (214,104 | ) | | | 21.19 | | | | | | | | | | Outstanding at January 31, 2017 | | | | 750,044 | | | | 14.54 | | | | 6.5 | | | | 1,107 | | | | | | | | | | | | | | | | | | | | Exercisable at January 31, 2015 | | | 653,978 | | | | 24.46 | | | | 5.2 | | | | — | | | | 653,978 | | | | 24.46 | | | | | | | | | | Exercisable at January 31, 2016 | | | | 576,871 | | | | 19.00 | | | | | | | | | | Exercisable at January 31, 2017 | | | | 611,453 | | | | 15.43 | | | | 6.2 | | | | 1,037 | | Options expected to vest at January 31, 2017 | | | | 138,591 | | | | 10.61 | | | | 7.9 | | | | 70 | |
The aggregate intrinsic value was calculated using the difference between the current market price and the exercise price for only those options that have an exercise price less than the current market price. Nonvested stock awards having service requirements only, are valued as of the grant date closing stock price and generally vest ratably over service periods of one to five years. Other nonvested stock awards vest based upon Layne meeting various performance goals. Certain nonvested stock awards provide for accelerated vesting if there is a change of control (as defined in the plans) or the disability or the death of the executive and for equitable adjustment in the event of changes in Layne’sour equity structure. LayneWe granted certain performance based nonvested stock awards during FYthe years ended January 31, 2017, 2016 and 2015, and FY 2014, which were valued using the Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model for FYthe fiscal years ended January 31, 2017, 2016 and 2015 and FY 2014 were as follows: | | | | Years Ended January 31, | | | Years Ended January 31, | | Assumptions: | | | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | Weighted-average fair value | | | | $ | 8.96 | | | $ | 14.61 | | | $ | 4.70 | | | $ | 3.04 | | | $ | 8.96 | | Weighted-average expected volatility | | | | | 37.0 | % | | | 36.6 | % | | | 58.3 | % | | | 44.2 | % | | | 37.0 | % | Expected dividend yield | | | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Weighted-average risk free rate | | | | | 0.9 | % | | | 0.4 | % | | | 0.9 | % | | | 0.9 | % | | | 0.9 | % |
Non-vested share transactions for FYthe fiscal years ended January 31, 2017, 2016 and 2015 FY 2014 and FY 2013 were as follows: | | Number of Shares | | | Average Grant Date Fair Value | | | Intrinsic Value (in thousands) | | | Number of Shares | | | Average Grant Date Fair Value | | | Intrinsic Value (in thousands) | | Nonvested stock at February 1, 2012 | | | 226,919 | | | $ | 29.94 | | | | | | | Granted | | | 110,958 | | | | 22.29 | | | | | | | Vested | | | (15,720 | ) | | | 26.70 | | | | | | | Canceled | | | (46,491 | ) | | | 27.79 | | | | | | | Nonvested stock at January 31, 2013 | | | 275,666 | | | | 27.41 | | | | | | | Granted - Directors | | | 4,744 | | | | 21.08 | | | | | | | Granted - Restricted stock units | | | 22,289 | | | | 20.96 | | | | | | | Granted - Performance vesting shares | | | 80,613 | | | | 14.61 | | | | | | | Vested | | | (10,065 | ) | | | 27.21 | | | | | | | Canceled | | | (8,099 | ) | | | 20.89 | | | | | | | Forfeited | | | (72,725 | ) | | | 16.97 | | | | | | | Nonvested stock at January 31, 2014 | | | 292,423 | | | | 23.42 | | | | | | | Nonvested stock at February 1, 2014 | | | | 292,423 | | | $ | 23.42 | | | | | | Granted - Directors | | | 13,090 | | | | 17.19 | | | | | | | | 13,090 | | | | 17.19 | | | | | | Granted - Restricted stock units | | | 394,489 | | | | 17.06 | | | | | | | | 394,489 | | | | 17.06 | | | | | | Granted - Performance vesting shares | | | 244,679 | | | | 8.96 | | | | | | | | 244,679 | | | | 8.96 | | | | | | Vested | | | (13,027 | ) | | | 25.82 | | | | | | | | (13,027 | ) | | | 25.82 | | | | | | Forfeited | | | (444,362 | ) | | | 18.95 | | | | | | | | (444,362 | ) | | | 18.95 | | | | | | Nonvested stock at January 31, 2015 | | | 487,292 | | | | 14.86 | | | $ | 3,942 | | | | 487,292 | | | | 14.86 | | | | | | Granted - Directors | | | | 24,085 | | | | 5.19 | | | | | | Granted - Restricted stock units | | | | 130,287 | | | | 5.25 | | | | | | Granted - Performance vesting shares | | | | 1,035,409 | | | | 3.03 | | | | | | Vested | | | | (182,563 | ) | | | 17.07 | | | | | | Forfeited | | | | (87,340 | ) | | | 8.57 | | | | | | Nonvested stock at January 31, 2016 | | | | 1,407,170 | | | | 5.20 | | | | | | Granted - Directors | | | | 13,495 | | | | 7.04 | | | | | | Granted - Restricted stock units | | | | 199,352 | | | | 7.04 | | | | | | Granted - Performance vesting shares | | | | 447,903 | | | | 4.70 | | | | | | Vested | | | | (26,349 | ) | | | 6.22 | | | | | | Forfeited | | | | (169,931 | ) | | | 8.29 | | | | | | Nonvested stock at January 31, 2017 | | | | 1,871,640 | | | | 5.00 | | | $ | 19,521 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(13)(14) Fair Value Measurements
Layne’sOur estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in the valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:
·
| Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
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Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. ·
| Level 2 – Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets.
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Level 2 – Observable inputs other than those included in Level 1, such as quoted market prices for similar assets and liabilities in active markets or quoted prices for identical assets in inactive markets. ·
| Level 3 – Unobservable inputs reflecting Layne’s own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.
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Level 3 – Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.
Layne’sOur assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability. Layne’sOur financial instruments held at fair value, are presented below as of January 31, 20152017 and 2014:2016:
| | | | | | Fair Value Measurements | | (in thousands) | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | January 31, 2015 | | | | | | | | | | | | | | | | | Financial Assets: | | | | | | | | | | | | | | | | | Current restricted deposits held at fair value | | $ | 4,145 | | | $ | 4,145 | | | $ | — | | | $ | — | | Long term restricted deposits held at fair value | | | 4,231 | | | | 4,231 | | | | — | | | | — | | Financial Liabilities: | | | | | | | | | | | | | | | | | Contingent earnout of acquired businesses(1) | | | — | | | | — | | | | — | | | | — | | January 31, 2014 | | | | | | | | | | | | | | | | | Financial Assets: | | | | | | | | | | | | | | | | | Current restricted deposits held at fair value | | $ | 2,881 | | | $ | 2,881 | | | $ | — | | | $ | — | | Long term restricted deposits held at fair value | | | 4,964 | | | | 4,964 | | | | — | | | | — | | Preferred units of SolmeteX, LLC | | | 466 | | | | — | | | | — | | | | 466 | | Cash surrender value of company-owned life insurance (2) | | | 10,651 | | | | — | | | | 10,651 | | | | — | | Financial Liabilities: | | | | | | | | | | | | | | | | | Contingent earnout of acquired businesses(1) | | | — | | | | — | | | | — | | | | — | |
| | | | | | Fair Value Measurements | | (in thousands) | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | January 31, 2017 | | | | | | | | | | | | | | | | | Financial Assets: | | | | | | | | | | | | | | | | | Long-term restricted deposits held at fair value | | $ | 5,055 | | | $ | 5,055 | | | $ | — | | | $ | — | | Contingent consideration receivable(1) | | | 4,244 | | | | — | | | | — | | | | 4,244 | | | | | | | | | | | | | | | | | | | January 31, 2016 | | | | | | | | | | | | | | | | | Financial Assets: | | | | | | | | | | | | | | | | | Current restricted deposits held at fair value | | $ | 3,466 | | | $ | 3,466 | | | $ | — | | | $ | — | | Long-term restricted deposits held at fair value | | | 4,252 | | | | 4,252 | | | | — | | | | — | | Contingent consideration receivable(1) | | | 4,244 | | | | — | | | | — | | | | 4,244 | |
| (1) | The fair valuecontingent consideration receivable represents our share in the profits of one of the contingent earnout of acquired businesses is determined using a mark-to-market modeling technique based on significant unobservable inputs calculated using a discounted future cash flows approach. Key assumptions include a discount rate of 41.2% and annual revenuescontracts assumed by the purchaser, as part of the acquired business, Intevras Technologies, LLC, ranging from $1.5 million to $6.1 million over the lifesale of the earnout.Geoconstruction business on August 17, 2015. The businessamount was acquired in July 2010. The contingent earnout period expires in July 2015. On July 31, 2012, the contingent earnout was reassessed and,estimated based on estimates of the likelihood of future revenues subject to the earnout provisions, assigned no value. The conclusions have not changed as of January 31, 2015. |
(2)
| | Thethe projected profits of the contract. There have been no changes in the estimated fair value since the closing date of the cash surrender value of company-owned life insurance was based on quoted prices for similar assets in actively traded markets.sale agreement.
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Other Financial Instruments Layne usesWe use the following methods and assumptions in estimating the fair value disclosures for itsour other financial instruments:
Cash equivalents – The carrying amounts reported in the accompanying Consolidated Balance Sheets approximates their fair values and are classified as Level 1 within the fair value hierarchy. Short-term and long-term debt, other than the 4.25% Convertible Notesconvertible notes – The fair value of debt instruments is classified as Level 2 within the fair value hierarchy and is valued using a market approach based on quoted prices for similar instruments traded in active markets. Where quoted prices are not available, the income approach is used to value these instruments based on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. Convertible notes – The following table summarizes the carrying values and estimated fair values of the long-term debt: | | January 31, 2015 | | | January 31, 2014 | | | | Carrying | | Fair | | | Carrying | | Fair | | (in thousands) | | Value | | Value | | | Value | | Value | | 4.25% Convertible Notes | | $ | 110,055 | | $ | 98,438 | | | $ | 106,782 | | $ | 106,782 | | Asset-based facility | | | 21,964 | | | 21,964 | | | | — | | | — | |
The 4.25% Convertible Notesconvertible notes are measured on a non-recurring basis using Level 1 inputs based upon observable quoted prices of the 4.25% Convertible Notes and the 8.0% Convertible Notes.
The following table summarizes the carrying values and estimated fair values of the long-term debt: | | January 31, 2017 | | | January 31, 2016 | | | | Carrying | | | Fair | | | Carrying | | | Fair | | (in thousands) | | Value | | | Value | | | Value | | | Value | | 4.25% Convertible Notes | | $ | 64,387 | | | $ | 64,705 | | | $ | 61,766 | | | $ | 49,873 | | 8.0% Convertible Notes | | | 97,952 | | | | 92,156 | | | | 97,205 | | | | 92,156 | |
In accordance with ASC Topic 360-10, “Accounting forDuring the Impairment or Disposal of Long-Lived Assets”,fiscal year ended January 31, 2016, we assess the fair value of certain non-financial assets on a non-recurring basis when there isperformed an indicator that the carrying value of the assets may not be recoverable. Using an undiscounted cash flow model in FY 2015 indicated that the carrying valueassessment of property and equipment located in the Energy Services segment may not be fully recoverable. Further analysis basedAfrica and Australia. Based on the fair valueour assessment, we recorded a charge of theapproximately $3.9 million to adjust certain property and equipment determined that no impairment charges were necessary for FY 2015. The fair value of the property and equipment was based on the orderly liquidation value of the property and equipment, which we consider a Level 2 fair value measurement. Property and equipment with a carrying value of $18.5$10.4 million was considered to have aits estimated fair value of $19.1 million as$6.5 million. The fair value of January 31, 2015.the assets was determined primarily using Level 2 inputs that include available third-party quoted prices and appraisals of assets.
(14)(15) Contingencies
Layne’sOur drilling activities involve certain operating hazards that can result in personal injury or loss of life, damage and destruction of property and equipment, damage to the surrounding areas, release of hazardous substances or wastes and other damage to the environment, interruption or suspension of drill site operations and loss of revenues and future business. The magnitude of these operating risks is amplified when, as is frequently the case, Layne conductswe conduct a project on a fixed-price, bundled basis where Layne delegateswe delegate certain functions to subcontractors but remainsremain responsible to the customer for the subcontracted work. In addition, Layne iswe are exposed to potential liability under foreign, federal, state and local laws and regulations, contractual indemnification agreements or otherwise in connection with itsour services and products. Litigation arising from any such occurrences may result in Layne being named as a defendant in lawsuits asserting large claims. Although Layne maintainswe maintain insurance protection which it considerswe consider economically prudent, there can be no assurance that any such insurance will be sufficient or effective under all circumstances or against all claims or hazards to which Laynewe may be subject or that Laynewe will be able to continue to obtain such insurance protection. A successful claim or damage resulting from a hazard for which Layne iswe are not fully insured could have a material adverse effect on Layne.us. In addition, Layne doeswe do not maintain political risk insurance with respect to itsour foreign operations.
Layne, through Geoconstruction, our discontinued segment, was a subcontractor on the foundation for an office building in California in 2013 and 2014. Geoconstruction's work on the project was completed in September 2014. Certain anomalies were subsequently discovered in the structural concrete, which were remediated by the general contractor during 2015. We have participated in discussions with the owner and the general contractor for the project regarding potential causes for the anomalies. During fiscal year ended January 31, 2016, the owner, the general contractor and Layne submitted a claim to the project’s insurers to cover the cost of remedial work, which claim was denied on November 2, 2016. The owner and the general contractor have filed a legal proceeding against the insurers seeking coverage under the insurance policy. Management does not believe that we are liable for any of the remediation costs related to this project. As of the date of this report, no action has been filed against us. Accordingly, no provision has been made in the Consolidated Financial Statements.
As previously reported, beginning in October 2010, the Audit Committee of the Board of Directors conducted an internal investigation into, among other things, the legality of certain payments by Layne to agents and other third parties interacting with government officials in certain countries in Africa. The internal investigation suggested potential violations of the FCPA and certain local laws. Layne made a voluntary disclosure to the United states Department of Justice (“DOJ”)DOJ and the Securities and Exchange Commission (“SEC”)SEC regarding the results of the investigation and has cooperated with the DOJ and SEC in connection with their review of the matter. The DOJ’s inquiry has been closed.was closed in 2014. As of January 31, 2014, Layne had accrued $10.4 million, representing its best estimate at that time, for settlement of these matters. During the second quarter of FY 2015, Layne reduced its accrual to $5.2 million in connection with the DOJ’s closure of its investigation. On October 27, 2014, Layne entered into a settlement with the SEC to resolve the allegations concerning potential violations of the FCPA. This settlement with the SEC resolves all outstanding government investigations with respect to Layne concerning potential FCPA violations. Under the terms of the settlement, without admitting or denying the SEC’s allegations, Laynewe consented to entry of an administrative cease-and-desist order under the books and records, internal controls and anti-bribery provisions of the FCPA. LayneWe agreed to pay to the SEC $4.7 million in disgorgement and prejudgment interest, and $0.4 million in penalties. LayneThe amounts in connection with the settlement were paid on November 6, 2014. We also agreed to undertake certain compliance, reporting and cooperation obligations to the SEC for two years following the settlement date. The amounts in connection with the settlement were paid onOn November 6, 2014.
On April 17, 2013, an individual person filed a purported class action suit against three of Layne’s subsidiaries and two other companies supposedly on behalf of all lessors and royalty owners from 20049, 2016, we made our final report to the present. The plaintiff essentially alleges that LayneSEC and two other companies allocatedhave no further reporting obligations to the market for mineral leasing rights and restrained trade in mineral leasing withinSEC under the state of Kansas. The plaintiff seeks certification as a class and unquantified damages. On April 1, 2014, the plaintiff voluntarily dismissed one of the other two company defendants without prejudice. Since this litigation is at a very early state, Layne is currently unable to predict its outcome or estimate our exposure.settlement.
Layne isWe are involved in various other matters of litigation, claims and disputes which have arisen in the ordinary course of business. Layne believesWe believe that the ultimate disposition of these matters will not, individually and in the aggregate, have a material adverse effect upon itsour business or consolidated financial position, results of operations or cash flows. However, it is possible, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the assumptions related to these proceedings. In accordance with U.S. generally accepted accounting principles, Layne recordswe record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. To the extent additional information arises or the strategies change, it is possible that Layne’sour estimate of itsthe probable liability in these matters may change.
(15)(16) Discontinued Operations
Geoconstruction On August 17, 2015, we sold our Geoconstruction business segment to a subsidiary of Keller Foundations, LLC, a member of Keller Group plc (“Keller”), for a total of $42.3 million, including the preliminary estimate of the business segment’s working capital. After post-closing adjustments, the total purchase price increased to $47.7 million, to adjust for our estimated share in the profits of one of the contracts being assumed by Keller and final working capital adjustments. As of January 31, 2016, we had approximately $1.5 million held in an escrow account, which is part of Other Assets in the Consolidated Balance Sheet, which was paid in the fourth quarter of the fiscal year ended January 31, 2017 after the satisfaction of certain conditions. In addition, as of January 31, 2017 and 2016, we recognized a $4.2 million contingent consideration receivable, included in Other Assets in the Condensed Consolidated Balance Sheet. The contingent consideration represents our best estimate of our share in the profits of one of the contracts assumed by Keller. Tecniwell On October 31, 2014, Laynewe disposed of Tecniwell to Alberto Battini (50 %) and Paolo Trubini (50 %), an employee of Tecniwell at the time of disposal. The transaction was a sale by Layne of all quotas representing 100% of the corporate capital of Tecniwell in exchange for $0.9 million. The purchase price for the quotas was paid in two equal payments. Layne received $0.5 million on October 31, 2014 and the remainder on January 22, 2015. TheWe recorded a loss to Layne on the sale of the business wasamounting to $0.8 million. This lossmillion, which is included on the Consolidated Statements of Operations for the fiscal year ended January 31, 2015, as a loss from discontinued operations. Costa Fortuna On July 31, 2014, Laynewe disposed of Costa Fortuna to Aldo Corda, the original owner and the then current manager of the business at the time of the disposal. The transaction was structured as a sale by Layne of all of the issued and outstanding shares of Holub, S.A., a Uruguay Sociedad Anonima, Costa Fortuna’s parent company, and its subsidiaries in exchange for $4.4 million, payable to Layne as described below. In conjunction with the transaction, Layne acquired certain equipment with an estimated value of $2.1 million by reducing the intercompany receivable owed by Costa Fortuna. The remaining intercompany receivable due from Costa Fortuna was assigned as part of the transaction in exchange for $1.3 million.
The purchase price for the shares and remaining intercompany receivable is payable in future years, beginning with the year ended December 31, 2015, based on 33.33% of Costa Fortuna’s income before taxes for such year. The unpaid portion of the purchase price will accrue interest at the rate of 2.5% per annum. The unpaid balance of the purchase price, plus accrued interest, is due and payable to Layne on July 31, 2024. The loss to Layne on the sale of the business was $38.3 million. This lossmillion, which is included onin the Consolidated Statements of Operations for the fiscal year ended January 31, 2015 as a loss from discontinued operations. Prior to May 30, 2012 (the date of acquisitionDuring the fiscal year ended January 31, 2016, we wrote off the balance of the remaining 50% of Costa Fortuna), Layne accounted for Costa Fortuna using the equity method. As such, operations prior to May 30, 2012 were not included in discontinued operations.
The major classes of assets and liabilities of Tecniwell and Costa Fortuna were as follows:
| | As of | | | | January 31, | | (in thousands) | | 2014 | | Major classes of assets | | | | | Cash | | $ | 4,104 | | Accounts receivable | | | 9,916 | | Inventory | | | 15,171 | | Other current assets | | | 7,449 | | Total current assets - discontinued operations | | | 36,640 | | Total other assets - discontinued operations | | | 38,752 | | Total major classes of assets - discontinued operations | | $ | 75,392 | | Major classes of liabilities | | | | | Accounts payable | | $ | 8,402 | | Short-term borrowings | | | 14,194 | | Other current liabilities | | | 9,257 | | Total current liabilities - discontinued operations | | | 31,853 | | Other long term liabilities - discontinued operations | | | 1,186 | | Total major classes of liabilities - discontinued operations | | $ | 33,039 | | | | | | |
SolmeteX
Layne authorizedreceivable from the sale of its SolmeteXCosta Fortuna amounting to $3.2 million, which is included under other income (expense) line in loss from discontinued operations during the first quarter of FY 2014 as part of a strategic analysis of its businesses. As of April 30, 2013, Layne considered SolmeteX a discontinued operation and reflected it as such in the consolidated financial statements. On July 30, 2013, Layne completed the saleConsolidated Statement of its SolmeteX operations to a third party. Pursuant to the sale agreement, Layne received $750,000 in preferred units of SolmeteX, LLC and received $10.6 million of cash on August 1, 2013. The preferred units had a 4% yield accruing daily, compounded quarterly on the unreturned capital and unpaid preferred yield. Layne valued the units at $0.4 million based on the redemption timeline and the stated yield. These preferred units were recorded at their valuation amount on the Consolidated Balance Sheets as part of Other Assets. During the second quarter of FY 2014, the gain on the sale of the operation was $8.3 million and was included on the Consolidated Statements of Operations as income from discontinued operations.
In July 2014, Layne sold all of the preferred units of SolmeteX, LLC for $0.5 million, the then recorded valuation.
Energy
After weighing alternatives, during the second quarter of FY 2013, Layne authorized the sale of the Energy segment and entered into negotiations for the sale of substantially all of the Energy segment assets to a third party. As of July 31, 2012, Layne considered the Energy segment as a discontinued operation and reflected it as such in the consolidated financial statements. Layne recorded a loss of $32.6 million as of July 31, 2012, based on the difference between its carrying value as a continuing operation and the expected selling price, less costs to sell. The tax benefit related to this loss was $12.5 million.
On October 1, 2012, Layne completed the sale of all of the exploration and production assets of its Energy segment for $15.0 million. No additional loss on disposal of the net assets was recognized. Pursuant to the sale agreement, Layne received $13.5 million at the time of the sale and received $1.5 million in October 2013 upon termination of an indemnification escrow fund that was established at the closing of the sale. The sale agreement provides for additional proceeds of $2.0 million contingent on natural gas futures prices exceeding $5.25 per MMBTU for five months out of any given six consecutive months occurring during the 36 months following closing. The amount will be recorded as additional proceeds if the conditions are met.
The financial results of discontinued operations include an accrual of $3.9 million recorded in the fourth quarter of FY 2013 associated with certain litigation claims, related to the discontinued Energy segment, which were retained by Layne.Operations.
The financial results of the discontinued operations are as follows: | | Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Revenue | | $ | 45,875 | | | $ | 109,588 | | Cost of revenues (exclusive of depreciation and amortization shown below) | | | (34,120 | ) | | | (97,103 | ) | Selling, general and administrative expenses (exclusive of depreciation and amortization shown below) | | | (10,004 | ) | | | (11,385 | ) | Depreciation and amortization | | | (3,240 | ) | | | (9,864 | ) | Equity in earnings of affiliates | | | 1,104 | | | | 3,390 | | Other expense items | | | (821 | ) | | | (1,822 | ) | Total operating loss on discontinued operations before income taxes | | | (1,206 | ) | | | (7,196 | ) | Income tax expense (benefit) | | | 1,460 | | | | (551 | ) | Total operating income (loss) on discontinued operations | | $ | 254 | | | $ | (7,747 | ) | Total consideration | | $ | 47,717 | | | $ | 3,538 | | Net book value of assets sold | | | (31,776 | ) | | | (38,610 | ) | Reclassification adjustment for foreign currency translation | | | — | | | | (3,794 | ) | Transaction costs associated with sale | | | (3,036 | ) | | | (145 | ) | Gain (loss) on sale of discontinued operations before income taxes | | | 12,905 | | | | (39,011 | ) | Income tax expense | | | (5,102 | ) | | | (120 | ) | Total income (loss) on discontinued operations | | $ | 8,057 | | | $ | (46,878 | ) |
Prior to the completion of the sale of the Geoconstruction business segment, we owned 65% and 50% of Case-Bencor Joint Venture (Washington) and Case-Bencor Joint Venture (Iowa), respectively, which were both included as part of the Geoconstruction business segment as investments in affiliates, and were discontinued as a result of the sale. Summarized financial information of the entities, which were accounted for as equity method investments, through the date of the sale was as follows: | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | Revenues | | $ | 32,555 | | | $ | 64,490 | | | $ | 70,220 | | (Loss) income before income taxes | | | (41,762 | ) | | | 5,186 | | | | (35,466 | ) | Income tax (expense) benefit | | | (671 | ) | | | (3,493 | ) | | | 14,425 | | Net (loss) income from discontinued operations | | | (42,433 | ) | | | 1,693 | | | | (21,041 | ) |
| | Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Income statement data: | | | | | | | | | Revenues | | $ | 10,720 | | | $ | 24,879 | | Gross profit | | | 2,466 | | | | 5,496 | | Net income | | | 2,466 | | | | 5,496 | |
In accordance with our adoption of ASU 2014-08 effective February 1, 2015, additional disclosure relating to cash flow is required for discontinued operations. Cash flow information for Costa Fortuna and Tecniwell is not required since they were accounted for based on the previous accounting guidance. Cash flow data relating to the Geoconstruction business segment is presented below: | | Years Ended January 31, | | (in thousands) | | 2016 | | | 2015 | | Cash flow data: | | | | | | | | | Depreciation and amortization | | $ | 3,240 | | | $ | 7,305 | | Capital expenditures | | | 207 | | | | 366 | |
(16)
(17) Segments and Foreign Operations Layne isWe are a global solutions provider to the world of essential natural resources – water, minerals and energy. The Chief Operating Decision Maker (CODM) reviews operating results to determine the appropriate allocation of resources within the organization. The CODM defines the operational and organizational structure into discrete segments based on itsour primary product lines.
In the first quarter of the fiscal year ended January 31, 2017, changes were made to simplify our business and streamline our operating and reporting structure. Our Collector Wells group was shifted from Heavy Civil to Water Resources to better align their operational expertise. We also shifted certain other smaller operations out of our “Other” segment and into our four reporting segments, and no longer report an “Other” segment. Information for prior periods has been recast to conform to our new presentation.
During the third quarter of the fiscal year ended January 31, 2016, as a result of our strategic review of all aspects of our operations, we realigned our operating structure to combine the Energy Services segment with Water Resources segment. We determined that given the similar nature of the equipment and services for Energy Services and Water Resources, we can effectively manage our cost structure and serve our customer base in a combined segment. We now manage and report our operations through four segments: Water Resources, Inliner, Heavy Civil, and Mineral Services. Historical segment numbers have been recast to conform to this new operating structure. During the second quarter of the fiscal year ended January 31, 2016, we entered into a definitive agreement to sell our Geoconstruction business segment. The operating results of the Geoconstruction business are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 16 to Consolidated Financial Statements for further discussion. Layne’s segments are defined as follows: Water Resources Water Resources provides its customers with every aspectan array of water management solutions, including discovery and defining of water sources through hydrologic studies, water supply system development and technology, including hydrologic design and construction, source of supply exploration,through water well drilling and intake construction, and wellwater delivery through pipeline and pump rehabilitation. The segmentpumping infrastructure. Water Resources also brings new technologies to the water and wastewater markets and offers water treatment equipment engineering services, providing systems for the treatment of regulated and “nuisance”nuisance contaminants, specifically, iron, manganese, hydrogen sulfide, arsenic, radium, nitrate, perchlorate, and volatile organic compounds. Water Resources drilldrills deep injection wells for industrial (primarily power) and municipal clients that need to dispose of wastewater associated with their processes. Water Resources also performs complete diagnostic and rehabilitation services for existing wells, pumps and related equipment, including conducting downhole closed circuit televideo inspections to investigate and resolve water well and pump performance problems. In addition, Water Resources constructs radial collector wells through its Ranney® Collector Wells technology, which is an alternative to conventional vertical wells and can be utilized to develop moderate to very high capacities of groundwater. Water Resources provides water systems and services in most regions of the U.S. Inliner Inliner provides a wide range of process, sanitary and storm water rehabilitation solutions to municipalities and industrial customers dealing with aging infrastructure needs. Inliner focuses on its proprietary Inliner® cured-in-place pipe (“CIPP”) which allows usit to rehabilitate aging sanitary sewer, storm water and process water infrastructure to provide structural rebuilding as well as infiltration and inflow reduction. Inliner’s trenchless technology minimizes environmental impact and reduces or eliminates surface and social disruption. Inliner now has the ability to supply both traditional felt basedfelt-based CIPP lining tubes cured with water or steam as well as fiberglass baseda fiberglass-based lining tubes cured with ultraviolet light. Inliner owns the North American rights to the Inliner CIPP technology, owns and operates the liner manufacturer, and also provides installation of Inliner CIPP product. While Inliner focuses on itsour proprietary Inliner CIPP, it is committed toprovides full system renewal. Inliner also providesrenewal, including a wide variety of other rehabilitative methods including Janssen structural renewal for service lateral connections and mainlines, slip lining, traditional excavation and replacement, and form and manhole renewal with cementitious and epoxy products. Inliner provides services in most regions of the U.S. Heavy Civil Heavy Civil delivers sustainable solutions to government agencies and industrial clients by overseeing theperforms design and constructionbuild services of water and wastewater treatment plants, as well as pipeline installation, to government agencies and pipeline installation.industrial clients. In addition, Heavy Civil builds radial collector wells (Ranney Method), surface water intakes, pumping stations, hard rock tunnels and marine construction services – allservices-all in support of the world’s water infrastructure.infrastructure in the U.S. Beyond water solutions, Heavy Civil also designs and constructs biogas facilities (anaerobic digesters) for the purpose of generating and capturing methane gas, an emerging renewable energy
resource. Heavy Civil provides services in most regions of the U.S. Geoconstruction
Geoconstruction provides specialized geotechnical foundation construction services As disclosed in Note 21 to the heavy civil, industrial, commercial and private construction markets around the globe. Geoconstruction has the expertise and equipmentConsolidated Financial Statements, on February 8, 2017, we entered into an Asset Purchase Agreement to provide the most appropriate deep foundation system, ground improvement and earth support solution to be applied given highly variable geological and site conditions. In addition, it has extensive experience in completing complex and schedule-driven major underground construction projects. Geoconstruction provides services that are focused primarily on the foundation systems for dams/levees, tunnel shafts, utility systems, subways or transportation systems, commercial building and port facilities. Services offered include jet grouting, structural diaphragm and slurry cutoff walls, cement and chemical grouting, drilled piles, ground improvement and earth retention systems. Geoconstruction provides services in most regionssell substantially all of the U.S.assets of our Heavy Civil business.
Mineral Services Mineral Services conducts primarily abovegroundabove ground drilling activities, including all phases of core drilling, reverse circulation, dual tube, hammer and rotary air-blast methods. TheOur service offerings include both exploratory (‘greenfield’) and definition (‘brownfield’)definitional drilling. Global mining companies hireengage companies such as Mineral Services to extract samples from their sites that theythe mining companies analyze for mineral content before investing heavily in development to extract the minerals. Mineral Services helps its clients determine if a minable mineral deposit existsis on the site, the economic viability of the mining the site and the geological properties of the ground, which helps in the determination of mine planning. Mineral Services also offers its customers water management and soil stabilization expertise. Mine water management consists of vertical, large diameter wells for sourcing and dewatering; and horizontal drains for slope de-pressurization. The primary markets are in the western U.S., Mexico, Australia,and South AmericaAmerica. As discussed in Note 18 to the Consolidated Financial Statements, during the fiscal year ended January 31, 2016, we implemented a plan to exit our operations in Africa and Africa.Australia. Mineral Services also has ownership interests in foreign affiliates operating in Latin America that form itsour primary presence in this market.
Energy Services
Energy Services focuses its efforts to provide a closed loop water management solution to energy companies involved in hydraulic fracturing. The initial focus is in the water-stressed Permian Basin of West Texas, an oil provenance, where Energy Services is providing water sourcing, transferChile and treatment. Layne’s expertise in water well drilling coupled with its flat-hose transfer solution from the water source to the well site where hydraulic fracturing occurs, followed by treatment of the produced water and then recapture and recycling that water for reuse in other hydraulic fracturing operations, provides a sustainable and environmentally responsible solution to energy companies operating in a part of the country which has significant water shortages and drought. The system is designed to have virtually no surface discharge of formation or produced and treated water. Energy Services provides services in most regions of the U.S.
Other
Other includes specialty and purchasing operations not included in one of the other segments.Peru.
Financial information for Layne’sour segments is presented below. Unallocated corporate expenses primarily consist of general and administrative functions performed on a company-wide basis and benefiting all segments. These costs include accounting, financial reporting, internal audit, treasury, corporate and securities law,legal, tax compliance, executive management and board of directors. Corporate assets are allconsist of assets not directly associated with a segment, and consist primarily of cash and deferred income taxes. Management evaluates segment performance based primarily on revenues and Adjusted EBITDA. Adjusted EBITDA represents income or loss from continuing operations before interest, taxes, depreciation and amortization, non-cash equity-based compensation, equity in earnings or losses from affiliates, certain non-recurring items such as impairment charges, restructuring costs, gain on extinguishment of debt, and certain other gains or losses, plus dividends received from affiliates. Refer to further discussion on Non-GAAP Financial Measures included in Part II, Item 7 in this Form 10-K. | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | Revenues | | | | | | | | | | | | | Water Resources | | $ | 196,243 | | | $ | 175,875 | | | $ | 214,091 | | Inliner | | | 175,001 | | | | 148,384 | | | | 133,256 | | Heavy Civil | | | 207,036 | | | | 267,192 | | | | 278,131 | | Geoconstruction | | | 77,032 | | | | 26,242 | | | | 78,045 | | Mineral Services | | | 120,217 | | | | 172,960 | | | | 302,119 | | Energy Services | | | 20,209 | | | | 6,336 | | | | 5,885 | | Other | | | 19,179 | | | | 19,936 | | | | 11,509 | | Intersegment Eliminations | | | (17,316 | ) | | | (18,580 | ) | | | (9,112 | ) | Total revenues | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | Equity in (losses) earnings of affiliates | | | | | | | | | | | | | Geoconstruction | | $ | 3,390 | | | $ | — | | | $ | 3,872 | | Mineral Services | | | (2,002 | ) | | | (2,974 | ) | | | 16,700 | | Total equity in (losses) earnings of affiliates | | $ | 1,388 | | | $ | (2,974 | ) | | $ | 20,572 | | Loss from continuing operations before income taxes | | | | | | | | | | | | | Water Resources | | $ | 14,356 | | | $ | 1,016 | | | $ | (1,290 | ) | Inliner | | | 22,870 | | | | 17,650 | | | | 9,936 | | Heavy Civil | | | (21,502 | ) | | | (7,781 | ) | | | (32,308 | ) | Geoconstruction | | | (4,443 | ) | | | (24,810 | ) | | | (4,127 | ) | Mineral Services | | | (14,909 | ) | | | (9,534 | ) | | | 49,406 | | Energy Services | | | (3,661 | ) | | | (3,212 | ) | | | (7,444 | ) | Other | | | (55 | ) | | | 193 | | | | 126 | | Unallocated corporate expenses | | | (49,788 | ) | | | (42,957 | ) | | | (36,009 | ) | Interest expense | | | (13,707 | ) | | | (7,132 | ) | | | (3,301 | ) | Total loss from continuing operations before income taxes | | $ | (70,839 | ) | | $ | (76,567 | ) | | $ | (25,011 | ) | Investment in affiliates | | | | | | | | | | | | | Geoconstruction | | $ | 1,847 | | | $ | 134 | | | $ | 384 | | Mineral Services | | | 61,828 | | | | 67,159 | | | | 77,906 | | Total investment in affiliates | | $ | 63,675 | | | $ | 67,293 | | | $ | 78,290 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Unallocated | | | | | | | | | | Year Ended January 31, 2017 | | Water | | | | | | | Heavy | | | Mineral | | | Corporate | | | Other Items/ | | | | | | (in thousands) | | Resources | | | Inliner | | | Civil | | | Services | | | Expenses | | | Eliminations | | | Total | | Revenues | | $ | 204,577 | | | $ | 196,845 | | | $ | 137,189 | | | $ | 63,777 | | | $ | — | | | $ | (416 | ) | | $ | 601,972 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations before income taxes | | $ | (17,551 | ) | | $ | 25,981 | | | $ | (5,187 | ) | | $ | (9,154 | ) | | $ | (28,022 | ) | | $ | (16,883 | ) | | $ | (50,816 | ) | Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | 16,883 | | | | 16,883 | | Depreciation and amortization | | | 12,056 | | | | 5,551 | | | | 1,609 | | | | 6,343 | | | | 1,352 | | | | — | | | | 26,911 | | Non-cash equity-based compensation | | | 297 | | | | 380 | | | | 150 | | | | 208 | | | | 2,509 | | | | — | | | | 3,544 | | Equity in earnings of affiliates | | | — | | | | — | | | | — | | | | (2,655 | ) | | | — | | | | — | | | | (2,655 | ) | Restructuring costs | | | 3,204 | | | | 118 | | | | 424 | | | | 13,321 | | | | 281 | | | | — | | | | 17,348 | | Other (income) expense, net | | | (416 | ) | | | 6 | | | | (222 | ) | | | (4,369 | ) | | | 50 | | | | — | | | | (4,951 | ) | Dividends received from affiliates | | | — | | | | — | | | | — | | | | 4,941 | | | | — | | | | — | | | | 4,941 | | Adjusted EBITDA | | $ | (2,410 | ) | | $ | 32,036 | | | $ | (3,226 | ) | | $ | 8,635 | | | $ | (23,830 | ) | | $ | — | | | $ | 11,205 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated | | | | | | | | | | Year Ended January 31, 2016 | | Water | | | | | | | Heavy | | | Mineral | | | Corporate | | | Other Items/ | | | | | | (in thousands) | | Resources | | | Inliner | | | Civil | | | Services | | | Expenses | | | Eliminations | | | Total | | Revenues | | $ | 239,897 | | | $ | 193,704 | | | $ | 164,905 | | | $ | 86,390 | | | $ | — | | | $ | (1,886 | ) | | $ | 683,010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | $ | 5,867 | | | $ | 22,946 | | | $ | (6,882 | ) | | $ | (29,176 | ) | | $ | (33,477 | ) | | $ | (13,775 | ) | | $ | (54,497 | ) | Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18,011 | | | | 18,011 | | Depreciation and amortization | | | 13,486 | | | | 4,455 | | | | 2,593 | | | | 10,317 | | | | 1,834 | | | | — | | | | 32,685 | | Non-cash equity-based compensation | | | 413 | | | | 661 | | | | 258 | | | | 287 | | | | 2,198 | | | | — | | | | 3,817 | | Equity in losses of affiliates | | | — | | | | — | | | | — | | | | 612 | | | | — | | | | — | | | | 612 | | Impairment charges | | | 4,598 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,598 | | Restructuring costs(1) | | | (1 | ) | | | 14 | | | | 765 | | | | 16,760 | | | | 321 | | | | — | | | | 17,859 | | Gain on extinguishment of debt | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,236 | ) | | | (4,236 | ) | Other income, net | | | (493 | ) | | | (127 | ) | | | (765 | ) | | | (774 | ) | | | (195 | ) | | | — | | | | (2,354 | ) | Dividends received from affiliates | | | — | | | | — | | | | — | | | | 3,852 | | | | — | | | | — | | | | 3,852 | | Adjusted EBITDA | | $ | 23,870 | | | $ | 27,949 | | | $ | (4,031 | ) | | $ | 1,878 | | | $ | (29,319 | ) | | $ | — | | | $ | 20,347 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unallocated | | | | | | | | | | Year Ended January 31, 2015 | | Water | | | | | | | Heavy | | | Mineral | | | Corporate | | | Other Items/ | | | | | | (in thousands) | | Resources | | | Inliner | | | Civil | | | Services | | | Expenses | | | Eliminations | | | Total | | Revenues | | $ | 227,626 | | | $ | 175,001 | | | $ | 198,511 | | | $ | 121,247 | | | $ | — | | | $ | (1,817 | ) | | $ | 720,568 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | $ | 10,209 | | | $ | 21,996 | | | $ | (23,456 | ) | | $ | (16,011 | ) | | $ | (45,425 | ) | | $ | (13,707 | ) | | $ | (66,394 | ) | Interest expense | | | — | | | | — | | | | — | | | | — | | | | — | | | | 13,707 | | | | 13,707 | | Depreciation and amortization | | | 12,595 | | | | 4,578 | | | | 4,359 | | | | 18,187 | | | | 2,259 | | | | — | | | | 41,978 | | Non-cash equity-based compensation | | | 441 | | | | 1,422 | | | | 432 | | | | 402 | | | | (205 | ) | | | — | | | | 2,492 | | Equity in losses of affiliates | | | — | | | | — | | | | — | | | | 2,002 | | | | — | | | | — | | | | 2,002 | | Restructuring costs | | | 524 | | | | — | | | | 54 | | | | 1,403 | | | | 717 | | | | — | | | | 2,698 | | Other (income) expense, net | | | (1,029 | ) | | | (115 | ) | | | (1,959 | ) | | | 895 | | | | 856 | | | | — | | | | (1,352 | ) | Dividends received from affiliates | | | — | | | | — | | | | — | | | | 3,327 | | | | — | | | | — | | | | 3,327 | | Adjusted EBITDA | | $ | 22,740 | | | $ | 27,881 | | | $ | (20,570 | ) | | $ | 10,205 | | | $ | (41,798 | ) | | $ | — | | | $ | (1,542 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Restructuring costs for the fiscal year ended January 31, 2016 includes $7.9 million relating to the write-down of the carrying value of inventory in our African and Australian operations, which are reflected as part of cost of revenues in the Consolidated Statement of Operations. |
The following table presents various financial information for each segment. | | As of and Years Ended January 31, | | | Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2013 | | | 2017 | | | 2016 | | | 2015 | | Revenues by product line | | | | | | | | | | | | | | | | | | | | | | | | | Water systems | | $ | 207,363 | | | $ | 179,372 | | | $ | 219,693 | | | $ | 181,382 | | | $ | 217,001 | | | $ | 207,363 | | Water treatment technologies | | | 15,226 | | | | 34,005 | | | | 47,778 | | | | 16,626 | | | | 13,746 | | | | 15,226 | | Sewer rehabilitation | | | 175,001 | | | | 148,384 | | | | 133,256 | | | | 196,845 | | | | 193,704 | | | | 175,001 | | Water and wastewater plant construction | | | 142,261 | | | | 157,590 | | | | 129,446 | | | | 67,688 | | | | 126,287 | | | | 142,261 | | Pipeline construction | | | 49,026 | | | | 77,497 | | | | 108,408 | | | | 65,433 | | | | 36,473 | | | | 49,026 | | Soil stabilization | | | 79,135 | | | | 38,328 | | | | 112,509 | | | Environmental and specialty drilling | | | 6,393 | | | | 7,543 | | | | 7,246 | | | | 8,858 | | | | 7,056 | | | | 6,393 | | Exploration drilling | | | 108,060 | | | | 150,695 | | | | 249,247 | | | | 60,975 | | | | 79,723 | | | | 108,060 | | Other | | | 15,136 | | | | 4,931 | | | | 6,341 | | | | 4,165 | | | | 9,020 | | | | 17,238 | | Total revenues by product line | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | | $ | 601,972 | | | $ | 683,010 | | | $ | 720,568 | | Geographic Information: | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues by geographic location | | | | | | | | | | | | | | United States | | $ | 717,216 | | | $ | 672,430 | | | $ | 832,839 | | | $ | 569,838 | | | $ | 635,018 | | | $ | 640,231 | | Africa/Australia | | | 25,982 | | | | 42,909 | | | | 88,888 | | | | 151 | | | | 12,521 | | | | 25,982 | | South America | | | 13,106 | | | | 16,056 | | | | 19,161 | | | | 7,989 | | | | 6,363 | | | | 13,106 | | Mexico | | | 38,436 | | | | 58,260 | | | | 69,970 | | | | 23,406 | | | | 27,448 | | | | 38,436 | | Other foreign | | | 2,861 | | | | 8,690 | | | | 3,066 | | | | 588 | | | | 1,660 | | | | 2,813 | | Total revenues | | $ | 797,601 | | | $ | 798,345 | | | $ | 1,013,924 | | | $ | 601,972 | | | $ | 683,010 | | | $ | 720,568 | | | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | | | | Water Resources | | $ | 9,997 | | | $ | 9,903 | | | $ | 8,126 | | | $ | 12,056 | | | $ | 13,486 | | | $ | 12,595 | | Inliner | | | 2,767 | | | | 2,805 | | | | 2,647 | | | | 5,551 | | | | 4,455 | | | | 4,578 | | Heavy Civil | | | 4,060 | | | | 6,491 | | | | 7,096 | | | | 1,609 | | | | 2,593 | | | | 4,359 | | Geoconstruction | | | 7,305 | | | | 7,495 | | | | 7,826 | | | Mineral Services | | | 18,187 | | | | 23,321 | | | | 25,950 | | | | 6,343 | | | | 10,317 | | | | 18,187 | | Energy Services | | | 2,533 | | | | 1,283 | | | | 550 | | | Other | | | 2,175 | | | | 2,344 | | | | — | | | Corporate | | | 2,259 | | | | 2,660 | | | | 5,376 | | | | 1,352 | | | | 1,834 | | | | 2,259 | | Total depreciation and amortization | | $ | 49,283 | | | $ | 56,302 | | | $ | 57,571 | | | $ | 26,911 | | | $ | 32,685 | | | $ | 41,978 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of January 31, | | | As of and Years Ended January 31, | | (in thousands) | | 2015 | | | 2014 | | | 2017 | | | 2016 | | | 2015 | | Assets | | | | | | | | | | | | | | | | | | | | | Water Resources | | $ | 101,330 | | | $ | 98,576 | | | $ | 97,062 | | | $ | 123,246 | | | $ | 128,971 | | Inliner | | | 76,071 | | | | 67,384 | | | | 92,305 | | | | 93,107 | | | | 80,495 | | Heavy Civil | | | 94,283 | | | | 99,963 | | | | 62,166 | | | | 75,923 | | | | 94,284 | | Geoconstruction | | | 50,240 | | | | 55,682 | | | Mineral Services | | | 164,762 | | | | 206,575 | | | | 116,148 | | | | 128,196 | | | | 165,023 | | Energy Services | | | 26,200 | | | | 14,636 | | | Other | | | 6,127 | | | | 6,947 | | | Discontinued Operations | | | - | | | | 75,392 | | | | — | | | | — | | | | 36,760 | | Corporate | | | 26,500 | | | | 21,463 | | | | 68,470 | | | | 68,185 | | | | 36,409 | | Total assets | | $ | 545,513 | | | $ | 646,618 | | | $ | 436,151 | | | $ | 488,657 | | | $ | 541,942 | | | | | | | | | | | | | | | | | | | | | | | Property and equipment, net | | | | | | | | | | | | | | | | | | | | | United States | | $ | 127,951 | | | $ | 154,627 | | | $ | 95,155 | | | $ | 99,718 | | | $ | 110,296 | | Africa/Australia | | | 15,726 | | | | 21,314 | | | | 124 | | | | 7,302 | | | | 15,726 | | South America | | | 4,882 | | | | 5,931 | | | | 3,818 | | | | 3,269 | | | | 4,882 | | Mexico | | | 4,559 | | | | 8,498 | | | | 3,123 | | | | 3,193 | | | | 4,559 | | Other foreign | | | 66 | | | | 1,023 | | | | — | | | | 15 | | | | 66 | | Total property and equipment, net | | $ | 153,184 | | | $ | 191,393 | | | $ | 102,220 | | | $ | 113,497 | | | $ | 135,529 | | | | | | | | | | | | | | | | | | | | | | | Capital Expenditures | | | | | | | | | | | | | | | | | | | | | Water Resources | | $ | 2,037 | | | $ | 2,864 | | | $ | 7,305 | | | $ | 11,812 | | | $ | 9,549 | | Inliner | | | 999 | | | | 2,194 | | | | 10,268 | | | | 9,015 | | | | 1,897 | | Heavy Civil | | | 164 | | | | 166 | | | | 1,783 | | | | 1,595 | | | | 207 | | Geoconstruction | | | 366 | | | | 921 | | | Mineral Services | | | 2,855 | | | | 7,741 | | | | 3,066 | | | | 3,309 | | | | 2,855 | | Energy Services | | | 7,454 | | | | 7,732 | | | Other | | | 997 | | | | 352 | | | Discontinued operations | | | 383 | | | | 8,619 | | | | — | | | | 207 | | | | 749 | | Corporate | | | 634 | | | | 4,460 | | | | 392 | | | | 490 | | | | 632 | | Total capital expenditures | | $ | 15,889 | | | $ | 35,049 | | | $ | 22,814 | | | $ | 26,428 | | | $ | 15,889 | | | | | | | | | | | | | | | | | | | | | | |
(17)(18) Restructuring Costs
Layne commencedDuring the second quarter of the fiscal year ended January 31, 2017, we initiated a plan to reduce costs and improve our profitability in our Water Resources segment (“Water Resources Business Performance Initiative”). The Water Resources Business Performance Initiative involves cost rationalization, increased standardization of functions such as sales, pricing and estimation, disposal of underutilized assets, and process improvements to drive efficiencies. We recorded approximately $3.2 million in restructuring costs related to the Water Resources Business Performance Initiative for the fiscal year ended January 31, 2017, which includes costs related to office closures and severance costs. We estimate remaining amounts to be incurred for the Water Resources Business Performance Initiative of approximately $0.1 million.
During the fiscal year ended January 31, 2017, we continued the implementation of our FY2016 Restructuring Plan, which involves the exit of our operations in Africa and Australia and other actions to support our strategic focus in simplifying the business and build upon our capabilities in water (“FY2016 Restructuring Plan”). For the fiscal year ended January 31, 2017, we recognized approximately $14.1 million of restructuring expenses for the FY2016 Restructuring Plan, primarily related to the closure of our Australian and African entities resulting in the impairment of our assets held for sale. In calculating the impairment, the carrying amount of the assets included the cumulative currency translation adjustment related to our Australian and African entities. Also included are severance costs and other personnel-related costs, and other costs to support our business focus and strategy. For the fiscal year ended January 31, 2017, the FY2016 Restructuring Plan related to the segments as follows: $13.3 million in Mineral Services, $0.4 million in Heavy Civil, $0.3 million in Corporate, and $0.1 million in Inliner. The FY2016 Restructuring Plan was substantially completed as of January 31, 2017. We estimate remaining amounts to be incurred for the FY2016 Restructuring Plan of approximately $0.1 million. We previously implemented a restructuring plan (“Plan”) during the second quarter of the fiscal year ended JulyJanuary 31, 2014.2015 (“FY2015 Restructuring Plan”). The FY2015 Restructuring Plan involved, among other things, reductions in the global workforce, asset relocation or disposal and process improvements. The FY2015 Restructuring Plan was designed to achieve short and long-term cost reductions. Asreductions, and was completed during the first quarter of the fiscal year ended January 31, 2015,2016.
The following table summarizes the implementation Plan is substantially complete. The accrued liabilitycarrying amount of the accrual for costs associated with the restructuring was approximately $1.0 million as of January 31, 2015. plans discussed above: | | Incurred as | | | Expected | | | | | | | | of January 31, | | | to be | | | | | | | | 2015 | | | incurred | | | Total | | Water Resources | | | | | | | | | | | | | Severance and other personnel-related costs | | $ | 380 | | | $ | — | | | $ | 380 | | Other | | | 55 | | | | — | | | | 55 | | Total Water Resources | | $ | 435 | | | $ | — | | | $ | 435 | | Heavy Civil | | | | | | | | | | | | | Severance and other personnel-related costs | | $ | 54 | | | $ | — | | | $ | 54 | | Other | | | — | | | | — | | | | — | | Total Heavy Civil | | $ | 54 | | | $ | — | | | $ | 54 | | Mineral Services | | | | | | | | | | | | | Severance and other personnel-related costs | | $ | 200 | | | $ | — | | | $ | 200 | | Other | | | 1,203 | | | | — | | | | 1,203 | | Total Mineral Services | | $ | 1,403 | | | $ | — | | | $ | 1,403 | | Energy Services | | | | | | | | | | | | | Severance and other personnel-related costs | | $ | 89 | | | $ | — | | | $ | 89 | | Other | | | — | | | | — | | | | — | | Total Energy Services | | $ | 89 | | | $ | — | | | $ | 89 | | Unallocated Corporate | | | | | | | | | | | | | Severance and other personnel-related costs | | $ | 717 | | | $ | — | | | $ | 717 | | Other | | | — | | | | 50 | | | | 50 | | Total Unallocated Corporate | | $ | 717 | | | $ | 50 | | | $ | 767 | | Total restructuring costs | | $ | 2,698 | | | $ | 50 | | | $ | 2,748 | | | | | | | | | | | | | | |
| | Severance | | | | | | | | | | | | | | | | | | | | and other | | | | | | | | | | | | | | | | | | | | personnel- | | | Write-down | | | | | | | | | | | | | | | | related | | | of | | | Asset | | | | | | | | | | (in thousands) | | costs | | | inventory | | | write-down | | | Other | | | Total | | | | | | | | | | | | | | | | | | | | | | | FY2015 Restructuring Plan | | $ | 1,440 | | | $ | — | | | $ | — | | | $ | 1,258 | | | $ | 2,698 | | Cash expenditures | | | (935 | ) | | | — | | | | — | | | | (776 | ) | | | (1,711 | ) | Balance at January 31, 2015 | | $ | 505 | | | $ | — | | | $ | — | | | $ | 482 | | | $ | 987 | | | | | | | | | | | | | | | | | | | | | | | Restructuring Costs | | | | | | | | | | | | | | | | | | | | | FY2016 Restructuring Plan | | $ | 3,657 | | | $ | — | | | $ | 3,870 | | | $ | 835 | | | $ | 8,362 | | FY2015 Restructuring Plan | | | 13 | | | | — | | | | — | | | | 1,579 | | | | 1,592 | | Total Restructuring Costs | | $ | 3,670 | | | $ | — | | | $ | 3,870 | | | $ | 2,414 | | | $ | 9,954 | | Write-down of inventory | | | — | | | | 7,905 | | | | — | | | | — | | | | 7,905 | | Cash expenditures | | | (3,105 | ) | | | — | | | | — | | | | (1,218 | ) | | | (4,323 | ) | Non-cash expense | | | — | | | | (7,905 | ) | | | (3,870 | ) | | | (1,245 | ) | | | (13,020 | ) | Adjustment to liability | | | 87 | | | | — | | | | — | | | | (377 | ) | | | (290 | ) | Balance at January 31, 2016 | | $ | 1,157 | | | $ | — | | | $ | — | | | $ | 56 | | | $ | 1,213 | | | | | | | | | | | | | | | | | | | | | | | Restructuring Costs | | | | | | | | | | | | | | | | | | | | | Water Resources Business Performance Initiative | | $ | 459 | | | $ | — | | | $ | — | | | $ | 2,745 | | | $ | 3,204 | | FY2016 Restructuring Plan | | | 397 | | | | — | | | | 12,878 | | | | 869 | | | | 14,144 | | Total Restructuring Costs | | $ | 856 | | | $ | — | | | $ | 12,878 | | | $ | 3,614 | | | $ | 17,348 | | Cash expenditures | | | (1,354 | ) | | | — | | | | — | | | | (3,532 | ) | | | (4,886 | ) | Non-cash expense(1) | | | — | | | | — | | | | (12,878 | ) | | | — | | | | (12,878 | ) | Adjustment to liability | | | 10 | | | | — | | | | — | | | | 32 | | | | 42 | | Balance at January 31, 2017 | | $ | 669 | | | $ | — | | | $ | — | | | $ | 170 | | | $ | 839 | |
(18) Relocation
Layne moved into its new corporate headquarters in The Woodlands, Texas, a suburb of Houston in September 2013. The move involved most executive positions in Layne’s corporate leadership, as well as certain other management and staff positions. The relocation is now complete. Expenses of $1.8 million, $8.6 million and $2.7 million were incurred for FY 2015, FY 2014, FY 2013, respectively. The expenses are included in selling, general and administrative expenses in the Consolidated Statements of Operations, and consist primarily of employee relocation costs, severance and employee retention arrangements.
| (1) | For the fiscal year ended January 31, 2017, we recognized an impairment of assets held for sale in Australia and Africa. In calculating the impairment, the carrying amount of the assets included the cumulative currency translation adjustment of $12.4 million associated with the closure of our Australian and African entities. |
(19) New Accounting Pronouncements On April 7, 2015, TheJanuary 26, 2017, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment,” which simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. However, under the amendments in this ASU, 2015-03, “Simplifyingan entity should (1) perform its annual or interim goodwill impairment test by comparing the Presentationfair value of Debt Issuance Costs”.a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for us beginning on February 1, 2020 and will be applied on a prospective basis. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements. On December 22, 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Revenue from Contracts with Customers.” The amendments in ASU 2016-20 include thirteen technical corrections and improvements that affect only narrow aspects of the guidance issued in ASU 2014-09. These narrow aspects include (1) pre-production costs related to long-term supply arrangements; (2) contract costs–impairment testing; (3) contract costs–interaction of impairment testing with guidance in other Topics; (4) provisions for losses on production-type and construction-type contracts; (5) scope of FASB ASC 606; (6) disclosure of remaining performance obligations; (7) contract modifications example; (8) fixed-odds wagering contracts in the casino industry; (9) cost capitalization for advisors to private and public funds, (10) loan guarantee fees; (11) contract asset versus receivable; (12) refund liability; and (13) advertising costs. ASU 2016-20 will become effective when the guidance in ASU No. 2014-09 becomes effective, beginning February 1, 2018 for Layne. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” which provides guidance about the presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows. This ASU is effective for us beginning on February 1, 2018 and will be applied using a retrospective transition method to each period presented. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements. In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance and clarification in regards to the classification of eight types of receipts and payments in the statement of cash flows, including debt repayment or extinguishment costs, settlement of zero-coupon bonds, proceeds from the settlement of insurance claims, distributions received from equity method investees and cash receipts from beneficial interest in securitization transactions. The guidance is effective for us beginning on February 1, 2018 and will be applied using a retrospective transition method to each period presented. We are currently evaluating the effect that the adoption of this ASU will have on our financial statements. In February 2016, the FASB issued ASU 2016-02, “Leases,” which establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016, changes the presentation of debt issuance costs in financial statements as a direct deduction from the related debt liability rather than as an asset. Layne does not believe adoption of the ASU will have a material effect on its financial statements. On February 18, 2015, FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. This guidance which is effective for annual periods, and2018, including interim periods within those annual periods,fiscal years. Early adoption is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We anticipate adopting this ASU beginning after December 15, 2015, changeson February 1, 2019. We are currently evaluating the consolidation analysis required under U.S. GAAP for limited partnerships and other variable interest entities (“VIE”). Layne does not believeeffect that the adoption of this ASU will have on our financial statements. See Note 11 to the Consolidated Financial Statements for further discussion of our operating leases.
On July 22, 2015, the FASB issued ASU 2015-11, “Inventory – Simplifying the Measurement of Inventory,” which applies to inventory measured using first-in, first-out or average cost. The guidance in this update states that inventory within scope shall be measured at the lower of cost or net realizable value, and when the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings. The new standard is effective for us beginning on February 1, 2017 and will be applied on a prospective basis. The adoption of this ASU will not have a material effectimpact on itsour financial statements.
On August 27, 2014, FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern”. The guidance, which is effective for annual reporting periods ending after December 15, 2016, extends the responsibility for performing the going-concern assessment to management and contains guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under GAAP. Layne doesWe adopted this guidance on the fourth quarter of the fiscal year ended January 31, 2017 and it did not believe adoption of this ASU will have a material effect on itsour financial statements. In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payment When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite Service Period”. The guidance, which is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, contains explicit guidance on how to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. Layne does not believe adoption of this ASU will have a material effect on its financial statements.
The FASB issued ASU 2014-09, “Revenue from Contracts with Customers” on May 28, 2014. The guidance, when announced was effective forOn August 12, 2015, the FASB issued ASU 2015-14, which defers the adoption of ASU 2014-09 to annual reporting periods beginning after December 15, 2016. On April 1, 2015, it was announced2017, including interim reporting periods within that a tentative decision had been reached by FASB to delay the implementation by a year.reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. This guidance defines the steps to recognize revenue for entities that have contracts with customers as well as requiring significantly expanded disclosures regarding the qualitative and quantitative information of the nature, amount, timing, and uncertainty of revenue and cash flows arising from such contracts. Early adoptionWe have completed our initial assessment of this guidance is not permitted. This guidance provides companies with a choice of applying it retrospectively to each reporting period presented or by recognizing the cumulative effect of applying it at the date of initial application (February 1, 2017 for Layne)ASU and not adjusting comparative information. At this point, Layne is currently evaluating the requirements and has not yet determined the impact of this new guidance. In April 2014, the FASB issued ASU 2014.08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. This ASU amends the definition of a discontinued operation and requires entities to provide additional disclosure about disposal transactions that do not meet the discontinued operations criteria. Underanticipate adopting the new guidance a discontinued operation is defined as a disposalbeginning on February 1, 2018 using the full retrospective method that will result in restatement of a component or groupthe comparative periods presented. We are in the process of componentspreparing to implement changes to our accounting policies and controls, business processes and information systems to support the new revenue recognition and disclosure requirements. We are continuing to evaluate the potential impact that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. Layne will adopt this ASU beginning February1, 2015 for any future discontinued operations. Layne does not believe adoption of this ASU will have a material impact on itsour financial statements. Adoption will impact the additional disclosure required on future discontinuedposition and results of operations.
(20) Quarterly Results (Unaudited) Unaudited quarterly results were as follows: | | 2015 | | (in thousands, except per share data) | | First | | | Second | | | Third | | | Fourth | | Revenues | | $ | 174,389 | | | $ | 206,403 | | | $ | 222,906 | | | $ | 193,903 | | Cost of revenues (exclusive of depreciation and amortization shown below)(1) | | | (151,731 | ) | | | (176,101 | ) | | | (185,459 | ) | | | (169,268 | ) | Depreciation and amortization | | | (12,648 | ) | | | (13,246 | ) | | | (11,967 | ) | | | (11,422 | ) | Net loss from continuing operations | | | (28,063 | ) | | | (11,993 | ) | | | (3,708 | ) | | | (23,130 | ) | Net loss | | | (26,751 | ) | | | (54,960 | ) | | | (4,486 | ) | | | (23,130 | ) | Net (income) loss attributable to noncontrolling interests | | | (976 | ) | | | (69 | ) | | | (18 | ) | | | 239 | | Net loss attributable to Layne Christensen Company | | | (27,727 | ) | | | (55,029 | ) | | | (4,504 | ) | | | (22,891 | ) | Basic loss per share - continuing operations(2) | | | (1.48 | ) | | | (0.61 | ) | | | (0.19 | ) | | | (1.17 | ) | Diluted loss per share - continuing operations(2) | | | (1.48 | ) | | | (0.61 | ) | | | (0.19 | ) | | | (1.17 | ) | Basic loss per share(2) | | | (1.41 | ) | | | (2.80 | ) | | | (0.23 | ) | | | (1.17 | ) | Diluted loss per share(2) | | | (1.41 | ) | | | (2.80 | ) | | | (0.23 | ) | | | (1.17 | ) |
| | 2017 | | (in thousands, except per share data) | | First | | | Second | | | Third | | | Fourth | | Revenues | | $ | 159,739 | | | $ | 159,049 | | | $ | 153,567 | | | $ | 129,617 | | Cost of revenues (exclusive of depreciation and amortization shown below)(1) | | | (130,369 | ) | | | (130,354 | ) | | | (125,945 | ) | | | (115,382 | ) | Depreciation and amortization | | | (6,428 | ) | | | (6,954 | ) | | | (6,865 | ) | | | (6,664 | ) | Net loss from continuing operations | | | (8,803 | ) | | | (5,310 | ) | | | (5,043 | ) | | | (33,080 | ) | Net loss | | | (8,803 | ) | | | (5,310 | ) | | | (5,043 | ) | | | (33,080 | ) | Loss per share from continuing operations - basic and diluted(2) | | | (0.45 | ) | | | (0.26 | ) | | | (0.26 | ) | | | (1.67 | ) | Loss per share - basic and diluted(2) | | | (0.45 | ) | | | (0.26 | ) | | | (0.26 | ) | | | (1.67 | ) |
(1) | As discussed in Note 1 to the consolidated financial statements, Layne utilizesConsolidated Financial Statements, we utilize multiple methods of revenue recognition based on the nature of work performed. As a result, it is not practical to allocate a portion of depreciation and amortization to cost of revenues for the presentation of gross profit. |
(2) | Loss per share was computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding. |
We incurred restructuring costs as part of our Water Resources Business Performance Initiative and our FY2016 Restructuring Plan, consisting primarily of costs related to office closures, severance costs, impairment of our assets held for sale related to the closure of our Australian and African entities, and other costs to support our business focus and strategy. The total impact of these restructuring costs was $0.5 million, $1.0 million, $1.7 million and $14.2 million during the first quarter, second quarter, third quarter and fourth quarter of the fiscal year ended January 31, 2017, respectively. | | 2014 | | | 2016 | | (in thousands, except per share data) | | First | | | Second | | | Third | | | Fourth | | | First | | | Second | | | Third | | | Fourth | | Revenues | | $ | 211,916 | | | $ | 214,517 | | | $ | 201,978 | | | $ | 169,934 | | | $ | 174,271 | | | $ | 176,317 | | | $ | 173,179 | | | $ | 159,243 | | Cost of revenues (exclusive of depreciation, amortization, and impairment charges shown below)(1) | | | (177,981 | ) | | | (178,094 | ) | | | (166,313 | ) | | | (143,907 | ) | | Cost of revenues (exclusive of depreciation, amortization and impairment charges shown below)(1) | | | | (143,231 | ) | | | (151,249 | ) | | | (142,941 | ) | | | (132,657 | ) | Depreciation and amortization | | | (14,082 | ) | | | (14,086 | ) | | | (14,055 | ) | | | (14,079 | ) | | | (8,735 | ) | | | (8,254 | ) | | | (7,940 | ) | | | (7,756 | ) | Impairment charges | | | — | | | | (14,646 | ) | | | — | | | | — | | | | — | | | | (4,598 | ) | | | — | | | | — | | Net loss from continuing operations | | | (23,567 | ) | | | (78,854 | ) | | | (15,235 | ) | | | (12,088 | ) | | | (6,574 | ) | | | (23,510 | ) | | | (8,994 | ) | | | (13,784 | ) | Net loss | | | (23,710 | ) | | | (74,543 | ) | | | (15,541 | ) | | | (14,257 | ) | | | (6,558 | ) | | | (18,154 | ) | | | (3,442 | ) | | | (16,651 | ) | Net income attributable to noncontrolling interests | | | (69 | ) | | | (277 | ) | | | (231 | ) | | | (11 | ) | | Net (loss) income attributable to noncontrolling interests | | | | — | | | | — | | | | — | | | | 28 | | Net loss attributable to Layne Christensen Company | | | (23,779 | ) | | | (74,820 | ) | | | (15,772 | ) | | | (14,268 | ) | | | (6,558 | ) | | | (18,154 | ) | | | (3,442 | ) | | | (16,623 | ) | Basic loss per share - continuing operations(2) | | | (1.21 | ) | | | (4.03 | ) | | | (0.79 | ) | | | (0.62 | ) | | Diluted loss per share - continuing operations(2) | | | (1.21 | ) | | | (4.03 | ) | | | (0.79 | ) | | | (0.62 | ) | | Basic loss per share(2) | | | (1.22 | ) | | | (3.81 | ) | | | (0.80 | ) | | | (0.73 | ) | | Diluted loss per share(2) | | | (1.22 | ) | | | (3.81 | ) | | | (0.80 | ) | | | (0.73 | ) | | Loss per share from continuing operations - basic and diluted(2) | | | | (0.34 | ) | | | (1.19 | ) | | | (0.45 | ) | | | (0.70 | ) | Loss per share - basic and diluted(2) | | | | (0.33 | ) | | | (0.93 | ) | | | (0.17 | ) | | | (0.84 | ) |
(1) | As discussed in Note 1 to the consolidated financial statements, Layne utilizesConsolidated Financial Statements, we utilize multiple methods of revenue recognition based on the nature of work performed. As a result, it is not practical to allocate a portion of depreciation and amortization to cost of revenues for the presentation of gross profit. |
(2) | Loss per share was computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding. |
The fourth quarter of FY 2014 was impacted by changes in estimate of incentive compensation of $7.4 million as a result of the decrease in results from operations experienced during the year. These plans are discretionary in nature, subject to board approval. The expense was reduced in the fourth quarter as results for the year were reviewed by the executive team. Also in the fourth quarter of FY 2014, Layne modified its vacation policy resulting in a decrease in expense of $4.5 million as a change in estimate.
The second quarter of FY 2014the fiscal year ended January 31, 2016 was impacted by a $14.6$4.6 million impairment charge for the Energy Services segment, which was previously reported as a separate segment prior to the segment being combined with Water Resources segment effective the third quarter of the fiscal year ended January 31, 2016. As discussed in Note 4 to the Consolidated Financial Statements, the impairment charge was recorded to reflect reductions in Geoconstruction, representing the total carrying value of its goodwill. Layne reassessed its estimates ofestimated fair value of the goodwillcertain long-lived assets. As part of this segmentour exit of operations in Africa and Australia, we incurred restructuring costs consisting primarily of severance costs and other personnel-related costs, as well as a resultwrite-down of continuing weakness as discussed in Note 5 to the consolidated financial statements. Based on this analysis, it was determined the carrying value of goodwill exceeded its fair value. Also ininventory and fixed assets. The total impact of these restructuring costs was $10.6 million, $2.1 million and $2.9 million during the second quarter, third quarter and fourth quarter of FY 2014, Layne recorded a $50.6 million valuation allowance on U.S. deferred tax assets as discussed in Note 9 to the consolidated financial statements. This allowance was recorded as a result of continued weakness in Mineral Services and Geoconstruction.fiscal year ended January 31, 2016, respectively.
(21)
(21) Subsequent Events As discussed in Note 7 to the consolidated financial statements, on March 2, 2015, Layne completed Exchange and Subscription Agreements with certain investors that currently hold approximately $55.5 million of Layne’s 4.25% Convertible Notes. In these agreements, the investors agreed to (i) exchange the 4.25% Convertible Notes for approximately $49.9 million of 8.0% Convertible Notes and (ii) purchase approximately $49.9 million aggregate principal amount of additional 8.0% Convertible Notes. The amount of the accrued interest on the 4.25% Convertible Notes delivered by investors in the exchange will be credited to the cash purchase price payable by investors in the purchase of the 8.0% Convertible Notes. The 8.0% Convertible Notes will bear interest at a rate of 8.0% per year, payable on May 1 and November 1 of each year, beginning on May 1, 2015. See Note 7 to the consolidated financial statements for an additional discussion. Layne expects to recognize a gain on extinguishment of debt in the quarter ending April 30, 2015.Event
Supplemental Information on Oil and Gas Producing Activities (Unaudited)
As further discussed in Note 15On February 8, 2017, we entered into an Asset Purchase Agreement to the consolidated financial statements, during FY 2013, Layne completed the sale ofsell substantially all of the assets of its Energy segment. Atour Heavy Civil business for $10.1 million, subject to certain working capital adjustments. The purchaser of the Heavy Civil business is Reycon Partners LLC (the "Buyer"), which is owned by a group of private investors, including members of the current Heavy Civil senior management team. The Buyer has the option to pay up to $3.7 million of the consideration in the form of Layne common stock currently owned by the owners of the Buyer (valued at the weighted average price of Layne's common stock for the 10 trading days immediately prior to the closing date). The total purchase price for the assets will increase or decrease on a dollar-for-dollar basis to the extent the Heavy Civil division's working capital is more or less than an agreed upon target working capital amount. In addition, Layne and the Buyer have agreed to split equally any amounts received with respect to a $3.5 million outstanding receivable related to a job contract that is substantially completed. Subject to satisfaction of closing conditions, including obtaining any required consents and approvals, the transaction is expected to close within 90 days from the date of the Asset Purchase Agreement. We expect to recognize a loss on the sale of our Heavy Civil business during the first half of fiscal year ended January 31, 2015 and 2014, Layne had no oil and gas producing activities. Accordingly, the information presented below only includes information of its operations through the completion of the sale on October 1, 2012. Layne’s oil and gas activities were primarily conducted in the U.S.2018.
Results of Operations for Oil and Gas Producing Activities
Results of operations relating to oil and gas producing activities are set forth in the following tables for the year ended January 31, 2013, on a dollar and per Mcf basis and include only revenues and operating costs directly attributable to oil and gas producing activities. General corporate overhead, interest costs, transportation of third party gas and other non-oil and gas producing activities are excluded. The income tax expense is calculated by applying statutory tax rates to the revenues after deducting costs, which include depletion allowances.
| | Year Ended | | | | January 31, | | (in thousands) | | 2013 | | Revenues | | $ | 7,420 | | Production taxes | | | (118 | ) | Lease operating expenses | | | (4,282 | ) | Depletion | | | (2,946 | ) | Depreciation and amortization | | | (1,522 | ) | Administrative expenses | | | (1,889 | ) | Income tax benefit | | | 1,302 | | Results of operations from producing activities (excluding corporate overhead and interest costs) | | $ | (2,035 | ) | | | | | |
| | Year Ended | | | | January 31, | | (per Mcf) | | 2013 | | Revenues | | $ | 2.47 | | Production taxes | | | (0.04 | ) | Lease operating expenses | | | (1.42 | ) | Depletion | | | (0.98 | ) | Depreciation and amortization | | | (0.51 | ) | Administrative expenses | | | (0.63 | ) | Income tax benefit | | | 0.43 | | Results of operations from producing activities (excluding corporate | | | | | overhead and interest costs) | | $ | (0.68 | ) | | | | | |
ScheduleSchedule II: Valuation and Qualifying Accounts
| | | | | | Additions | | | | | | | | | | | | | | | Additions | | | | | | | | | | (in thousands) | | Balance at Beginning of Period | | | Charges to Costs and Expenses | | | Charges to Other Accounts | | | Deductions | | | Balance at End of Period | | | Balance at Beginning of Period | | | Charges to Costs and Expenses | | | Charges to Other Accounts | | | Deductions | | | Balance at End of Period | | Allowance for customer receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal year ended January 31, 2013 | | $ | 8,141 | | | $ | 1,763 | | | $ | — | | | $ | (2,688 | ) | | $ | 7,216 | | | Fiscal year ended January 31, 2014 | | | 7,216 | | | | 1,101 | | | | — | | | | (836 | ) | | | 7,481 | | | Fiscal year ended January 31, 2015 | | | 7,481 | | | | 2,539 | | | | — | | | | (5,821 | ) | | | 4,199 | | | Fiscal year ended January 31, 2015(1) | | | $ | 7,481 | | | $ | 2,539 | | | $ | — | | | $ | (5,821 | ) | | $ | 4,199 | | Fiscal year ended January 31, 2016 | | | | 4,199 | | | | 1,392 | | | | — | | | | (2,097 | ) | | | 3,494 | | Fiscal year ended January 31, 2017 | | | | 3,494 | | | | 243 | | | | — | | | | (235 | ) | | | 3,502 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Valuation allowance for deferred tax asset: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal year ended January 31, 2013 | | $ | 11,084 | | | $ | 16 | | | $ | — | | | $ | (1,746 | ) | | $ | 9,354 | | | Fiscal year ended January 31, 2014 | | | 9,354 | | | | 69,114 | | | | (4,732 | ) | | | (1,249 | ) | | | 72,487 | | | Fiscal year ended January 31, 2015 | | | 72,487 | | | | 44,618 | | | | (1,913 | ) | | | (202 | ) | | | 114,990 | | | $ | 72,487 | | | $ | 44,618 | | | $ | (1,913 | ) | | $ | (202 | ) | | $ | 114,990 | | Fiscal year ended January 31, 2016 | | | | 114,990 | | | | 26,923 | | | | (1,580 | ) | | | (209 | ) | | | 140,124 | | Fiscal year ended January 31, 2017 | | | | 140,124 | | | | 20,792 | | | | (57 | ) | | | (3,195 | ) | | | 157,664 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for inventory: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal year ended January 31, 2013 | | $ | 2,592 | | | $ | 767 | | | $ | — | | | $ | (294 | ) | | $ | 3,065 | | | Fiscal year ended January 31, 2014 | | | 3,065 | | | | 1,027 | | | | — | | | | (1,680 | ) | | | 2,412 | | | Fiscal year ended January 31, 2015 | | | 2,412 | | | | 18 | | | | — | | | | (811 | ) | | | 1,619 | | | $ | 2,412 | | | $ | 18 | | | $ | — | | | $ | (811 | ) | | $ | 1,619 | | Fiscal year ended January 31, 2016 | | | | 1,619 | | | | 571 | | | | — | | | | (974 | ) | | | 1,216 | | Fiscal year ended January 31, 2017 | | | | 1,216 | | | | 123 | | | | — | | | | (430 | ) | | | 909 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | For the fiscal year ended January 31, 2015, deductions on the allowance for customer receivables primarily relates to a write-off of invoices from a certain customer, as well as collections on receivables previously reserved. |
Item 9. | Changes in and Disagreements with |
Accountants on Accounting and Financial Disclosure |