layn-10q_20180430.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-34195

 

Layne Christensen Company

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

48-0920712

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1800 Hughes Landing Boulevard Ste 800 The Woodlands, TX

 

 

77380

(Address of principal executive offices)

 

(Zip Code)

(Registrant’s telephone number, including area code) (281)475-2600

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicated by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 Large accelerated filer

 

 

 

  

Accelerated filer

 

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

There were 20,068,036 shares of common stock, $.01 par value per share, outstanding on May 25, 2018.

 

 

 

 


LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

Form 10-Q

For the QUARTERLY PERIOD ENDED April 30, 2018

INDEX

 

 

 

 

  

Page

PART I

 

 

  

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

  

3

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

28

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

35

 

 

 

ITEM 4.

 

Controls and Procedures

  

35

 

 

 

PART II

 

 

  

 

 

 

 

ITEM 1.

 

Legal Proceedings

  

36

 

 

 

ITEM 1A.

 

Risk Factors

  

36

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  

36

 

 

 

ITEM 3.

 

Defaults Upon Senior Securities

  

36

 

 

 

ITEM 4.

 

Mine Safety Disclosures

  

36

 

 

 

ITEM 5.

 

Other Information

  

36

 

 

 

ITEM 6.

 

Exhibits

  

37

 

 

 

 

 

Signatures

  

38

 

 

 

 

 


PART I

 

 

ITEM 1. Financial Statements

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

April 30,

 

 

January 31,

 

(in thousands)

 

2018

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,805

 

 

$

32,041

 

Customer receivables, less allowance of $1,862 and $2,084, respectively

 

 

73,681

 

 

 

59,558

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

41,088

 

 

 

43,177

 

Inventories

 

 

23,258

 

 

 

20,020

 

Other

 

 

10,556

 

 

 

11,915

 

Total current assets

 

 

166,388

 

 

 

166,711

 

Property and equipment, net

 

 

119,441

 

 

 

120,604

 

Other assets:

 

 

 

 

 

 

 

 

Investment in affiliates

 

 

54,512

 

 

 

53,325

 

Goodwill

 

 

8,915

 

 

 

8,915

 

Other intangible assets, net

 

 

3,700

 

 

 

3,844

 

Restricted deposits - long-term

 

 

6,190

 

 

 

6,572

 

Other

 

 

8,150

 

 

 

8,408

 

Total other assets

 

 

81,467

 

 

 

81,064

 

Total assets

 

$

367,296

 

 

$

368,379

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

68,036

 

 

$

67,293

 

Accounts payable

 

 

41,487

 

 

 

42,330

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

7,960

 

 

 

8,796

 

Other current liabilities

 

 

50,291

 

 

 

53,044

 

Total current liabilities

 

 

167,774

 

 

 

171,463

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

98,985

 

 

 

98,769

 

Self-insurance reserve

 

 

11,755

 

 

 

11,464

 

Deferred income taxes

 

 

827

 

 

 

769

 

Other

 

 

28,539

 

 

 

28,404

 

Total noncurrent liabilities

 

 

140,106

 

 

 

139,406

 

Equity:

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share, 60,000 shares authorized, 20,059

   and 19,917 shares issued and outstanding, respectively

 

 

201

 

 

 

199

 

Capital in excess of par value

 

 

372,016

 

 

 

372,049

 

Accumulated deficit

 

 

(293,469

)

 

 

(296,174

)

Accumulated other comprehensive loss

 

 

(19,380

)

 

 

(18,612

)

Total Layne Christensen equity

 

 

59,368

 

 

 

57,462

 

Noncontrolling interests

 

 

48

 

 

 

48

 

Total equity

 

 

59,416

 

 

 

57,510

 

Total liabilities and equity

 

$

367,296

 

 

$

368,379

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 


LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months

 

 

 

Ended April 30,

 

 

 

(unaudited)

 

(in thousands, except per share data)

 

2018

 

 

2017

 

Revenues

 

$

114,551

 

 

$

110,913

 

Cost of revenues (exclusive of depreciation and amortization,

shown below)

 

 

(86,026

)

 

 

(86,250

)

Selling, general and administrative expenses (exclusive of

   depreciation and amortization shown below)

 

 

(17,120

)

 

 

(17,640

)

Depreciation and amortization

 

 

(6,763

)

 

 

(6,484

)

Gain on sale of fixed assets

 

 

4,609

 

 

 

612

 

Equity in earnings of affiliates

 

 

1,714

 

 

 

711

 

Restructuring costs

 

 

(2,806

)

 

 

(428

)

Interest expense

 

 

(4,408

)

 

 

(4,200

)

Other income (expense), net

 

 

99

 

 

 

(163

)

Income (loss) from continuing operations before income taxes

 

 

3,850

 

 

 

(2,929

)

Income tax expense

 

 

(970

)

 

 

(1,050

)

Net income (loss) from continuing operations

 

 

2,880

 

 

 

(3,979

)

Net loss from discontinued operations

 

 

(175

)

 

 

(19,482

)

Net income (loss)

 

$

2,705

 

 

$

(23,461

)

 

 

 

 

 

 

 

 

 

Income (loss) per share information:

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic

 

$

0.14

 

 

$

(0.20

)

Loss per share from discontinued operations - basic

 

 

(0.01

)

 

 

(0.98

)

Income (loss) per share - basic

 

$

0.13

 

 

$

(1.18

)

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - diluted

 

$

0.14

 

 

$

(0.20

)

Loss per share from discontinued operations - diluted

 

 

(0.01

)

 

 

(0.98

)

Income (loss) per share - diluted

 

$

0.13

 

 

$

(1.18

)

Weighted average shares outstanding - basic

 

 

20,122

 

 

 

19,796

 

Weighted average shares outstanding - dilutive

 

 

21,159

 

 

 

19,796

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4

 


LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months

 

 

 

Ended April 30,

 

 

 

(unaudited)

 

(in thousands)

 

2018

 

 

2017

 

Net income (loss)

 

$

2,705

 

 

$

(23,461

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (net of taxes of $0.0 and $0.0 million for 2018 and 2017, respectively)

 

 

(768

)

 

 

(356

)

Other comprehensive loss

 

 

(768

)

 

 

(356

)

Comprehensive income (loss)

 

$

1,937

 

 

$

(23,817

)

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5

 


 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital In

 

 

Earnings

 

 

Other

 

 

Layne

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Excess of

 

 

(Accumulated

 

 

Comprehensive

 

 

Christensen

 

 

Noncontrolling

 

 

 

 

 

(in thousands)

 

Shares

 

 

Amount

 

 

Par Value

 

 

Deficit)

 

 

Loss

 

 

Equity

 

 

Interests

 

 

Total

 

Balance February 1, 2018

 

 

19,917

 

 

$

199

 

 

$

372,049

 

 

$

(296,174

)

 

$

(18,612

)

 

$

57,462

 

 

$

48

 

 

$

57,510

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,705

 

 

 

 

 

 

2,705

 

 

 

 

 

 

2,705

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(768

)

 

 

(768

)

 

 

 

 

 

(768

)

Issuance of stock for vested restricted stock units

 

 

192

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased and subsequently cancelled

 

 

(50

)

 

 

 

 

 

(730

)

 

 

 

 

 

 

 

 

(730

)

 

 

 

 

 

(730

)

Equity-based compensation

 

 

 

 

 

 

 

 

699

 

 

 

 

 

 

 

 

 

699

 

 

 

 

 

 

699

 

Balance April 30, 2018

 

 

20,059

 

 

$

201

 

 

$

372,016

 

 

$

(293,469

)

 

$

(19,380

)

 

$

59,368

 

 

$

48

 

 

$

59,416

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

 

 

 

Three Months Ended April 30,

 

 

 

(unaudited)

 

(in thousands)

 

2018

 

 

2017

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,705

 

 

$

(23,461

)

Adjustments to reconcile net loss to cash flow from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,763

 

 

 

6,771

 

Bad debt (recovery) expense

 

 

(220

)

 

 

1,313

 

Loss on sale of discontinued operations

 

 

 

 

 

16,707

 

Deferred income taxes

 

 

58

 

 

 

(27

)

Equity-based compensation

 

 

699

 

 

 

682

 

Amortization of discount and deferred financing costs

 

 

1,248

 

 

 

1,098

 

Gain on sale of fixed assets

 

 

(4,609

)

 

 

(616

)

Equity in earnings of affiliates

 

 

(1,714

)

 

 

(711

)

Dividends received from affiliates

 

 

527

 

 

 

1,005

 

     Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Customer receivables

 

 

(14,138

)

 

 

(11,648

)

Costs and estimated earnings in excess

 

 

 

 

 

 

 

 

   of billings on uncompleted contracts

 

 

2,091

 

 

 

(433

)

Inventories

 

 

(3,595

)

 

 

(1,483

)

Other current assets

 

 

151

 

 

 

585

 

Accounts payable and accrued expenses

 

 

(3,992

)

 

 

(2,454

)

Billings in excess of costs and

 

 

 

 

 

 

 

 

   estimated earnings on uncompleted contracts

 

 

(836

)

 

 

1,905

 

Other, net

 

 

255

 

 

 

954

 

Cash used in operating activities

 

 

(14,607

)

 

 

(9,813

)

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(5,360

)

 

 

(11,147

)

Proceeds from sale of fixed assets

 

 

7,279

 

 

 

767

 

Proceeds from sale of business

 

 

 

 

 

5,804

 

Investment in foreign affiliate

 

 

 

 

 

(25

)

Cash provided by (used in) investing activities

 

 

1,919

 

 

 

(4,601

)

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Principal payments under capital lease obligation

 

 

(9

)

 

 

(2

)

Debt issuance costs

 

 

(1,250

)

 

 

 

Purchases and retirement of Company shares

 

 

(730

)

 

 

 

Cash used in financing activities

 

 

(1,989

)

 

 

(2

)

Effects of exchange rate changes on cash

 

 

59

 

 

 

(43

)

Net decrease in cash, cash equivalents and restricted deposits

 

 

(14,618

)

 

 

(14,459

)

Cash, cash equivalents and restricted deposits at beginning of period

 

 

38,613

 

 

 

74,055

 

Cash, cash equivalents and restricted deposits at end of period

 

$

23,995

 

 

$

59,596

 

 

See Notes to Condensed Consolidated Financial Statements.

 


7


 

LAYNE CHRISTENSEN COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

1. Summary of Significant Accounting Policies

Description of Business—Layne Christensen Company and its subsidiaries (together, “Layne,” the “Company,” “we,” “our,” or “us”) is a global water management, drilling and infrastructure services and drilling company, providing responsible solutions to the world of essential natural resources – water, minerals and energy. We primarily operate in North America and Brazil and through our affiliates in Latin America. Our customers include government agencies, investor-owned utilities, industrial companies, global mining companies, consulting engineering firms, oil and gas companies, power companies and agribusinesses. We have an ownership interest in certain foreign affiliates operating in Latin America. See Note 8 to the Condensed Consolidated Financial Statements.

 

Fiscal YearOur fiscal year end is January 31. References to fiscal years, or “FY2019” are to the twelve months then ended January 31 of that year.

Principles of ConsolidationThe Condensed Consolidated Financial Statements include our accounts and the accounts of all of our subsidiaries where we exercise control. For investments in subsidiaries that are not wholly-owned, but where we exercise control, the equity held by the minority owners and their portions of net income (loss) are reflected as noncontrolling interests. All intercompany accounts and transactions have been eliminated in consolidation.

Investment in Affiliated CompaniesInvestments in affiliates (20% to 50% owned) in which we have the ability to exercise significant influence, but do not hold a controlling interest over operating and financial policies, are accounted for by the equity method. We performed a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that a triggering event occurred that would indicate a loss in value of the investment. If such a conclusion is reached, then we would be required to perform a quantitative impairment assessment over the value of our investments. However if the assessment leads to a determination that the fair value of the investments is greater than the carrying amount, no further assessments are required. As of January 31, 2018, we performed a qualitative assessment and concluded no triggering events had occurred. Distributions from our equity method investees are accounted for using the cumulative earnings approach on our Consolidated Statement of Cash Flows. Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distribution received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current-period distribution up to this excess is considered a return on investment and classified as cash inflows from investing activities.

PresentationThe unaudited Condensed Consolidated Financial Statements included herein have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and disclosures normally included in our annual consolidated financial statements have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 (“Annual Report”). We believe the Condensed Consolidated Financial Statements included herein reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. In the Notes to Condensed Consolidated Financial Statements, all dollar amounts in tabulations are in thousands of dollars, unless otherwise indicated.

 

As discussed further in Note 11 to the Condensed Consolidated Financial Statements, during the first quarter of FY2018, we completed the sale of substantially all of the assets of our Heavy Civil business. The results of operations related to the Heavy Civil business have been classified as discontinued operations for all periods presented. Unless noted otherwise, discussion in these Notes to Condensed Consolidated Financial Statements pertain to continuing operations.

Effect of Adopting Accounting Standards Codification (“ASC”) Topic 606

On February 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, (“ASC Topic 606”) using the full retrospective method. As a result of adoption, our prior-period financial statements and disclosures have been restated using the cumulative catch-up method. We have updated our accounting policies and internal controls, and implemented changes to our business processes and information systems to support the new revenue recognition and disclosure requirements.

The objective of ASC Topic 606 is to report useful information to users of our financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with our customer and to recognize revenue at an amount that reflects the consideration to which we expect to be entitled to receive in exchange for transferring goods or services to a customer.

8


 

The adoption of ASC Topic 606, Revenue from Contracts with Customers, had three primary impacts on our Condensed Consolidated Financial Statements -

(1) Prior to adoption of ASC Topic 606, we would recognize revenue and cost under the completed contract method on smaller, shorter-term duration contracts in our Water Resource segment once the contract was completed. This method is no longer permitted under the new guidance, and we now recognize revenue and cost over time when control of the goods and/or services is transferred to the customer.

(2) Under ASC Topic 606 the unit of account is a performance obligation, which is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. This change eliminated segmentation treatment for certain customer contracts in our Inliner segment.

(3) The impact of (1) and (2) above on profit recorded in prior years is now reflected in the period identified (cumulative catch-up method), rather than prospectively over the remaining contract term. The cumulative effect of the adoption was recognized as a reduction to retained earnings of $43 thousand on January 31, 2018. See Note 9 to the Condensed Consolidated Financial Statements for further discussion.

As part of our adoption, we applied the following practical expedients:

 

We did not restate projects that utilized the completed contract method that began and ended in the same annual reporting period. (ASC Topic 606-10-65-1(f)(1))

 

We utilized the contract transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. (ASC Topic 606-10-65-1(f)(2))

 

For contracts that were modified before the beginning of the earliest reporting period presented in accordance with the standard, we did not retrospectively restate the contract for those modifications in accordance with the contract modification guidance in ASC Topic 606-10-25-12 and 25-13. Instead we reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. (ASC Topic 606-10-65-1(f)(4))

 

We recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. (ASC Topic 340-40-25-4))

 

As a practical expedient, when we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date, we recognize revenue in the amount to which we have a right to invoice. (ASC Topic 606-10-55-18)

The following tables summarize the effects of adopting this accounting standard on our unaudited Condensed Consolidated Financial Statements.

 

 

As of January 31, 2018

 

 

 

As Previously

 

 

Impact of Adoption

 

 

 

 

 

(in thousands)

 

Presented

 

 

of ASC Topic 606

 

 

As Adjusted

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

$

44,987

 

 

$

(1,810

)

 

$

43,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

10,563

 

 

 

(1,767

)

 

 

8,796

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(296,131

)

 

$

(43

)

 

$

(296,174

)

 

 

9


 

 

 

Three Months Ended April 30, 2017

 

 

 

As Previously

 

 

Impact of Adoption

 

 

 

 

 

(in thousands, except per share data)

 

Presented

 

 

of ASC Topic 606

 

 

As Adjusted

 

Revenues

 

$

111,507

 

 

$

(594

)

 

$

110,913

 

Cost of revenues (exclusive of depreciation and amortization,

shown below)

 

 

(86,283

)

 

 

33

 

 

 

(86,250

)

Loss from continuing operations before income taxes

 

 

(2,368

)

 

 

(561

)

 

 

(2,929

)

Net loss from continuing operations

 

 

(3,418

)

 

 

(561

)

 

 

(3,979

)

Net loss

 

$

(22,900

)

 

$

(561

)

 

$

(23,461

)

Loss per share from continuing operations - basic and diluted

 

$

(0.17

)

 

$

(0.03

)

 

$

(0.20

)

Loss per share - basic and diluted

 

 

(1.15

)

 

 

(0.03

)

 

 

(1.18

)

 

(1)

Of the $594 revenue adjustment, $253 relates to Water Resources and $341 relates to Inliner, all in the U.S.

 

(2)

The $33 cost of revenues (exclusive of depreciation and amortization) adjustment relates to Water Resources, in the U.S.

 

Business SegmentsWe report our financial results under three reporting segments consisting of Water Resources, Inliner, and Mineral Services.

We report corporate expenses under the title “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 expenses related to accounting, financial reporting, internal audit, treasury, legal, information technology, tax compliance, executive management and board of directors.

Use of and Changes in EstimatesThe preparation of the Condensed Consolidated Financial Statements in conformity with GAAP 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 Condensed Consolidated 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 our operating environment changes. While we believe that the estimates and assumptions used in the preparation of the Condensed Consolidated Financial Statements are appropriate, actual results could differ from those estimates.

Foreign Currency Transactions and TranslationIn accordance with ASC Topic 830, “Foreign Currency Matters,” gains and losses resulting from foreign currency transactions are included in the Condensed 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. The net foreign currency exchange differences resulting from these translations are reported in accumulated other comprehensive income (loss). Revenues and expenses are translated at average foreign currency exchange rates during the reporting period.

The cash flows and financing activities of our operations in Mexico are primarily denominated in U.S. dollars. Accordingly, these operations use the U.S. dollar as their functional currency. Monetary assets and liabilities are remeasured at period end. Foreign currency transactions are measured at the current exchange rate and nonmonetary items are measured at historical foreign currency exchange rates with exchange rate differences reported in the Condensed Consolidated Statement of Operations.

Net foreign currency transaction gains (losses) were $0.1 million and ($0.3) million for the three months ended April 30, 2018 and 2017, respectively, and are recorded in other income (expense), net in the accompanying Condensed Consolidated Statements of Operations.

InventoriesIn February 2017, we adopted Accounting Standards Update (“ASU”) 2015-11 “Inventory (Topic 330) – Simplifying the Measurement of Inventory” issued by the Financial Accounting Standards Board (the “FASB”) on July 22, 2015. We adopted this ASU on a prospective basis, as such, our inventories are valued at the lower of cost or net realizable value. Implementation did not result in a material difference in our reported inventory values. Cost of U.S. inventories and the majority of foreign operations are determined using the average cost method. Inventories consist primarily of supplies and raw materials. Supplies of $19.5 million and $17.7 million and raw materials of $3.8 million and $2.3 million were included in inventories in the Condensed Consolidated Balance Sheets as of April 30, 2018 and January 31, 2018, respectively.

Goodwill—In accordance with ASC Topic 350-20, “Intangibles – Goodwill and Other,” we are required to test for the impairment of goodwill on at least an annual basis. We conduct this evaluation annually as of December 31 or more frequently if events or changes

10


 

in circumstances indicate that goodwill might be impaired. As a result of our annual impairment analysis, no impairment was required. As of April 30, 2018 and January 31, 2018, we had $8.9 million of goodwill which is all attributable to the Inliner reporting segment.

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 assets;

 

significant changes in the use of the assets; and

 

significant negative industry or economic trends.

No impairments were indicated as of April 30, 2018.

Cash, Cash Equivalents and Restricted Deposits—On January 31, 2018, we early adopted ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” issued by the FASB in November 2016, by applying a retrospective transition method to each period presented. This ASU provides guidance about the presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows. The adoption of this ASU involved removing restricted deposits from cash provided by operating investments to reconcile net income to cash, cash equivalents and restricted deposits for each year presented in the Consolidated Statement of Cash Flows.

On January 31, 2018 we formally adopted the ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,” issued by the FASB in August 2016. 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. Our Latin American affiliates issue dividends which we account for using the cumulative earnings approach, so no accounting transition was necessary. See “Investment in Affiliated Companies” above.

We consider investments with an original maturity of three months or less when purchased to be cash equivalents. Our cash equivalents are subject to potential credit risk. Our 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 consist of escrow funds related to a certain disposition and judicial deposits associated with tax related legal proceedings in Brazil.

Our statement of cash flows explains the change in the total of cash, cash equivalents and restricted deposits. The following table provides a reconciliation of cash, cash equivalents, and restricted deposits reported within the Condensed Consolidated Balance Sheet that sum to the total of the same such amounts in the Condensed Consolidated Statements of Cash Flows at April 30, 2018 and 2017.

 

 

 

Three Months Ended April 30,

 

(in thousands)

 

2018

 

 

2017

 

Beginning of the period

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

$

32,041

 

 

$

69,000

 

    Restricted deposits

 

 

6,572

 

 

 

5,055

 

Total cash, cash equivalents and restricted deposits, beginning of period

 

 

38,613

 

 

 

74,055

 

End of the period

 

 

 

 

 

 

 

 

    Cash and cash equivalents

 

 

17,805

 

 

 

54,598

 

    Restricted deposits

 

 

6,190

 

 

 

4,998

 

Total cash, cash equivalents and restricted deposits, end of period

 

 

23,995

 

 

 

59,596

 

Net decrease in cash, cash equivalents and restricted deposits

 

$

(14,618

)

 

$

(14,459

)

Customer Receivables—Our customer receivables represents receivables from contracts with customers.

Cost and estimated earnings in excess of billings on uncompleted contractsIncludes unapproved change orders and claims included in revenue for an amount less than or equal to the amount of the costs incurred by us to date for contract price adjustments that we 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.

Allowance for Uncollectible Accounts Receivable—We make ongoing estimates relating to the collectability of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In

11


 

determining the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluations, and also consider 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 recorded as part of Selling, General and Administrative Expenses in the Condensed Consolidated Statement of Operations, amounted to $0.2 million and $0.4 million for the three months ended April 30, 2018 and 2017, respectively.

Concentration of Credit RiskWe grant credit to our customers, which may include concentrations in state and local governments. Although this concentration could affect our overall exposure to credit risk, we believe that our portfolio of accounts receivable is sufficiently diversified, thus spreading the credit risk. To manage this risk, we perform periodic credit evaluations of our customers’ financial condition, including monitoring our customers’ payment history and current credit worthiness. We do not generally require collateral in support of our trade receivables, but may require payment in advance or security in the form of a letter of credit or bank guarantee.

Billings in excess of cost and estimated earnings on uncompleted contractsRepresents the excess of contract costs and contract revenue recognized to date on when a performance obligation is accounted for using the costs incurred to date to total estimated costs at completion 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 a portion of the revenue recorded cannot be billed currently due to the billing terms in the contract.

Fair Value of Financial Instruments—The carrying amounts of financial instruments, including cash and cash equivalents, customer receivables and accounts payable, approximated fair value at April 30, 2018 and January 31, 2018, because of the relatively short maturity of those instruments. See Note 6 to the Condensed Consolidated Financial Statements for fair value disclosures.

 

Liquidity and Capital Resources—Under GAAP, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans if it is probable (1) that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been committed and/or approved before the date that the financial statements are issued. As of the date of filing these financial statements, we have debt and letters of credit coming due within one year, and we do not have committed refinancing plans or the liquidity to meet all of these obligations as they become due. These conditions, therefore, raise substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued.

 

Management’s current plans include several alternatives to manage our debt and letters of credit coming due over the next year.

 

On February 13, 2018, we entered into a definitive agreement whereby Granite Construction Incorporated will acquire all of the outstanding shares of Layne in a stock-for-stock transaction with each share of Layne common stock exchanged for 0.27 shares of Granite common stock. The transaction is subject to the approval by Layne’s shareholders and other customary closing conditions. A special meeting of Layne shareholders to approve the transaction is scheduled for June 13, 2018. Granite has stated its intention, if the transaction closes, to repay the 4.25% Convertible Notes on the maturity date of November 15, 2018, which would result in the maturity date of the 8.0% Convertible Notes being August 15, 2018. Based on the exchange ratio for the merger and the current trading price for Granite common stock, we believe most, if not all, of the holders of our 8.0% Convertible Notes would convert their notes into Granite common stock on or prior to August 15, 2018 and any remaining unconverted amounts could be paid with available cash or funding from Granite. Granite has advised us that it intends to terminate the asset-based credit facility if the transaction closes.

 

The 4.25% Convertible Notes are due November 15, 2018, and are currently classified as current. On March 19, 2018, we entered into an option to issue, at our election, $71.0 million of new 11.0% Senior Unsecured Notes (“11% Unsecured Notes”) to one of our existing bondholders. If the Granite merger is not consummated, we may elect to issue the 11.0% Unsecured Notes in order to effectively discharge the 4.25% Convertible Notes on or prior to July 16, 2018. Under this scenario, we would plan to refinance (1) the asset-based credit facility on or prior to April 14, 2019, (2) to the extent they are not converted into our common stock, the 8.0% Convertible Notes on May 1, 2019 and (3) the 11.0% Unsecured Notes on or prior to October 16, 2019. As it relates to our 8.0% Convertible Notes, if the market price of our common stock remains above the conversion price of $11.70 per share, we believe the holders would convert the 8.0% Convertible Notes into our common stock on or prior to August 15, 2018.

 

If the Granite merger is not consummated, nor the 8% Convertible Notes converted, we believe refinancing options are viable and likely. However, these conditions and events are not within the Company’s control, and management’s plans cannot be considered

12


 

probable. As such, there remains substantial doubt about our ability to continue as a going concern within one year after the date these financial statements are filed.

Litigation and Other Contingencies—We are involved in litigation incidental to our business, the disposition of which is not expected to have a material effect on our business, financial position, results of operations or cash flows. In addition, some of our contracts contain provisions that require payment of liquidated damages if we 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 we 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 quarterly or annual period could be materially affected by changes in our assumptions related to these 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 our Condensed 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 InformationThe amounts paid or refunded for income taxes, interest and non-cash investing and financing activities were as follows:

 

 

 

 

 

 

Three Months Ended April 30,

 

(in thousands)

 

2018

 

 

2017

 

Income taxes paid

 

$

398

 

 

$

490

 

Income tax refunds

 

 

(187

)

 

 

(46

)

Interest paid

 

 

351

 

 

 

245

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued capital additions

 

 

1,411

 

 

 

1,404

 

 

Income (Loss) Per Share—Income (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. For periods in which we recognize losses, the calculation of diluted loss per share is the same as the calculation of basic loss per share. For periods in which we 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 per share, except when their effect is antidilutive. The 4.25% Convertible Notes and the 8.0% Convertible Notes are included in the calculation of diluted earnings (loss) per share if their inclusion is dilutive under the if-converted method. Options to purchase 0.2 million and 0.7 million shares have been excluded from weighted average shares outstanding in the three months ended April 30, 2018 and 2017, respectively, as their effect was antidilutive. A total of 2.2 million nonvested shares have been excluded from weighted average shares outstanding in the three months ended April 30, 2017, as their effect was antidilutive.

New Accounting Pronouncements—

In February 2018, the FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The amendments in this ASU affect any entity that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We anticipate adopting this ASU beginning on February 1, 2019 and do not believe the adoption will have a material impact on our financial statements

13


 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. In January 2018, the FASB issued ASU No. 2018-01 Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. These ASUs are effective for fiscal years beginning after December 15, 2018, including interim periods within those 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 are preparing to implement changes to our accounting policies and controls, business processes and information systems to support the new accounting and disclosure requirements, which is effective for us beginning on February 1, 2019. We are currently evaluating the significance of adoption of this ASU.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. As a public business, adoption of the amendments in this ASU are required, prospectively, for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for testing dates after January 1, 2017. We anticipate adopting this ASU beginning on February 1, 2020 and do not believe the adoption will have a material impact on our financial statements.

2. Costs and Estimated Earnings on Uncompleted Contracts

Costs and estimated earnings on uncompleted contracts consisted of the following:

 

 

 

April 30,

 

 

January 31,

 

(in thousands)

 

2018

 

 

2018

 

Cost incurred on uncompleted contracts

 

$

511,629

 

 

$

496,324

 

Estimated earnings

 

 

214,325

 

 

 

204,081

 

 

 

 

725,954

 

 

 

700,405

 

Less: Billings to date

 

 

692,826

 

 

 

666,024

 

Total

 

$

33,128

 

 

$

34,381

 

Included in accompanying balance sheets under the following

   captions:

 

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings on

   uncompleted contracts

 

$

41,088

 

 

$

43,177

 

Billings in excess of costs and estimated

   earnings on uncompleted contracts

 

 

(7,960

)

 

 

(8,796

)

Total

 

$

33,128

 

 

$

34,381

 

 

 

 

 

 

 

 

 

 

 

We bill our customers based on specific contract terms. Substantially all billed amounts are collected within one year. As of April 30, 2018 and January 31, 2018, our costs and estimated earnings in excess of billings on uncompleted contracts included unbilled contract retainage amounts of $16.2 million and $16.0 million, respectively.

14


 


3. Property and Equipment:

Property and equipment consisted of the following:

 

 

April 30,

 

 

January 31,

 

(in thousands)

 

2018

 

 

2018

 

Land

 

$

11,071

 

 

$

11,156

 

Buildings and improvements

 

 

32,659

 

 

 

31,530

 

Machinery, equipment and pipeline

 

 

355,227

 

 

 

356,132

 

Property and equipment, at cost

 

 

398,957

 

 

 

398,818

 

Less - Accumulated depreciation

 

 

(279,516

)

 

 

(278,214

)

Property and equipment, net

 

$

119,441

 

 

$

120,604

 

 

 

4. Indebtedness

Debt outstanding was as follows:

 

 

April 30,

 

 

January 31,

 

(in thousands)

 

2018

 

 

2018

 

4.25% Convertible Notes

 

$

68,000

 

 

$

67,248

 

8.0% Convertible Notes

 

 

98,985

 

 

 

98,769

 

Capitalized lease obligations

 

 

36

 

 

 

45

 

Total debt

 

 

167,021

 

 

 

166,062

 

Less current maturities of long-term debt (1)

 

 

(68,036

)

 

 

(67,293

)

Total long-term debt

 

$

98,985

 

 

$

98,769

 

(1)     Based on the latest possible maturity date (May 1, 2019) for the 8.0% Convertible Notes. The maturity date for the 8.0% Convertible Notes will accelerate to August 15, 2018 under certain circumstances, including if the 4.25% Convertible Notes have not been effectively discharged by that date.

 

The following table presents the carrying value of the convertible notes:

 

 

April 30,

 

 

January 31,

 

(in thousands)

 

2018

 

 

2018

 

4.25% Convertible Notes:

 

 

 

 

 

 

 

 

Carrying amount of the equity conversion component

 

$

3,106

 

 

$

3,106

 

Principal amount of the 4.25% Convertible Notes

 

$

69,500

 

 

$

69,500

 

Unamortized deferred financing fees

 

 

(326

)

 

 

(476

)

Unamortized debt discount (1)

 

 

(1,174

)

 

 

(1,776

)

Net carrying amount

 

$

68,000

 

 

$

67,248

 

 

 

 

 

 

 

 

 

 

8.0% Convertible Notes:

 

 

 

 

 

 

 

 

Principal amount of the 8.0% Convertible Notes

 

$

99,898

 

 

$

99,898

 

Unamortized deferred financing fees

 

 

(913

)

 

 

(1,129

)

Net carrying amount

 

$

98,985

 

 

$

98,769

 

(1)

As of April 30, 2018, the remaining period over which the unamortized debt discount will be amortized is 6 months using an effective interest rate.

15


 

11% Unsecured Notes

On March 19, 2018, we entered into a note purchase agreement with two investments funds advised by Corre Partners Management, LLC to sell $ 71.0 million of our 11.0% Unsecured Notes. Corre Partners Management and its affiliated funds, including the purchasers of the 11.0% Unsecured Notes, own a portion of our 4.25% Convertible Notes and 8.0% Convertible Notes. Under the note purchase agreement, the purchasers have committed to purchase $71.0 million of our 11.0% Unsecured Notes due October 16, 2019  at a purchase price equal to 100% of the principal amount of the 11.0% Unsecured Notes. The closing of the purchase and sale of the 11.0% Unsecured Notes will be the earlier to occur of (i) October 1, 2018 and (ii) the fifth business day after delivery of a funding notice by us to the purchasers. As a result, if the proceeds of the 11.0% Unsecured Notes were to be used to effectively discharge the 4.25% Convertible Notes prior to July 16, 2018, we would then need to refinance (1) the asset-based credit facility on or prior to April 14, 2019, (2) to the extent they are not converted into our common stock, the 8.0% Convertible Notes on May 1, 2019 and (3) the 11.0% Unsecured Notes on or prior to October 16, 2019. The commitment of the purchasers to purchase the 11.0% Unsecured Notes terminates upon the earliest to occur of: (i) a change of control (including the closing of the pending merger with Granite) and (ii) delivery to the purchasers of a notice of termination by us.

We may at our option prepay the 11.0% Unsecured Notes in whole or in part at any time. The 11.0% Unsecured Notes are subject to a mandatory prepayment upon the closing of a change of control. The 11.0% Unsecured Notes are subject to an Early Payment Event Fee if the 11.0% Unsecured Notes are repaid less than 90 days after the 11.0% Unsecured Notes are issued. The amount of the Early Payment Event Fee will be equal to the excess, if any, of (x) 90 days of accrued interest on the principal amount repaid, over (y) the amount of interest accrued and paid or payable with respect to the principal amount repaid from the date of issuance to and including the date of the repayment.

There are no covenants applicable to us under the Unsecured Notes purchase agreement so long as: (i) the 11.0% Unsecured Notes have not been issued, (ii) any of the 8.0% Convertible Notes are outstanding and (iii) none of the provisions of the indenture governing the 8.00% Convertible Notes have been amended or waived. After the 11.0% Unsecured Notes have been issued, we will be subject to certain covenants, including, delivery of financial statements and other reports, compliance with material contracts and applicable laws, and maintenance of corporate existence, insurance and properties. In addition, after the earliest date that (i) none of the 8.0% Convertible Notes are outstanding or (ii) all or any of the provisions of the indenture governing the 8.0% Convertible Notes are no longer in effect or have been amended or waived, we will be subject to negative covenants related to indebtedness, liens, sale and leaseback transactions, asset sales, dividends and restricted payments, transactions with affiliates, and maximum ratio of funded indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA"). None of our 11.0% Unsecured Notes were outstanding as of April 30, 2018.

Asset-Based Credit Facility

On March 30, 2018, our asset-based credit facility agreement was amended to revise the acceleration provision included in the definition of Maturity Date to be July 16, 2018 if we have not delivered to the administrative agent for the asset-based credit facility evidence by July 15, 2018 that the 4.25% Convertible Notes have been effectively discharged with the proceeds from the issuance of the 11.0% Unsecured Notes or (b) May 15, 2018 if (i) the issuance of the 11.0% Unsecured Notes is cancelled for any reason or (ii) the proceeds of the 11.0% Unsecured Notes are used for a purpose other than to effectively discharge the 4.25% Convertible Notes in full; provided, that if an event described in clause (i) or (ii) above occurs after May 15, 2018, then the maturity date of the asset-based credit facility will be the date the event occurred.

Surety Bonds

We utilize surety bonds to secure performance of a portion of our projects. As of April 30, 2018 and January 31, 2018, the amount of surety bonds outstanding was $133.7 million and $148.3 million, respectively, based on the expected amount of revenues remaining to be recognized on the projects. Of the amount outstanding at April 30, 2018, $36.4 million related to surety bonds on contracts which were assumed by the purchasers of our Heavy Civil business. We expect to obtain releases on the remaining jobs when those jobs are completed.

 

 

5. Income Taxes

On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “The Act”), resulting in significant modifications to existing U.S. tax law, including but not limited to, (1) lowering the corporate federal income tax rate from 35% to 21% effective January 1, 2018; (2) implementing a territorial tax system; and (3) imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries.

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The Act provides for a new requirement, beginning in 2018, that certain income earned by controlled foreign corporations in excess of an allowable return on foreign subsidiary’s tangible assets is subject to U.S. income tax (the global intangible low-taxed income or “GILTI” provision). We have elected to account for GILTI tax in the period in which it is incurred. We do not expect the GILTI provisions to have a material impact to our financial statements. Also beginning in 2018, The Act provides for a new base erosion and anti-abuse tax provision (“BEAT”) which eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax if greater than regular tax. We do not expect the BEAT provision to have a material impact to our financial statements.

The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”) which provides additional clarification regarding situations where the Company does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of The Act for the reporting period in which The Act was enacted. We have recognized the provisional tax impacts, based on reasonable estimates, related to the Deemed Dividend and the revaluation of deferred tax assets and liabilities and have included these amounts in our consolidated financial statements for the year ended January 31, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of The Act. We intend to complete our accounting under The Act within the measurement period set forth in SAB 118. During the three months ended April 30, 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended January 31, 2018. The accounting is expected to be completed when the U.S. corporate income tax return is filed in 2018.

On April 2, 2018, the Internal Revenue Service issued Notice 2018-26 which provides guidance on how to determine, report and pay the repatriation tax on deemed repatriated earnings of foreign subsidiaries provided in The Act and included in the consolidated financial statements for the year ended January 31, 2018. Notice 2018-26 is not expected to have a significant impact on the Company’s consolidated financial statements.

Income tax expense for continuing operations of $1.0 million was recorded in the three months ended April 30, 2018, compared to $1.1 million for the same period last year. We recorded no tax benefit on domestic deferred tax assets and certain foreign deferred tax assets generated during the three months ended April 30, 2018. Current period tax expense is primarily related to income in Mexico and withholding tax related to our dividends from our Latin American affiliates. The effective tax rate for continuing operations for the three months ended April 30, 2018 was 25.2% compared to (35.8%) for the same period last year. The difference between the effective tax rates and the statutory tax rates resulted primarily from valuation allowances recorded during the respective periods on current year losses.

After valuation allowances, we maintain no domestic net deferred tax assets and no net deferred tax assets from foreign jurisdictions. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from using our loss carryforwards or utilizing other deferred tax assets in the future.

As of April 30, 2018 and January 31, 2018, the total amount of unrecognized tax benefits recorded was $8.9 million and $9.1 million, respectively, of which substantially all would affect the effective tax rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits will decrease during the next twelve months by approximately $4.5 million due to settlements of audit issues. We classify uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. We report income tax-related interest and penalties as a component of income tax expense. As of April 30, 2018 and January 31, 2018, the total amount of liability for income tax-related interest and penalties was $8.9 million and $9.1 million, respectively.

 

6. Fair Value Measurements

Our 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.

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 our own assumptions and best estimate of what inputs market participants would use in pricing an asset or liability.

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Our 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. Our financial instruments held at fair value are presented below as of April 30, 2018, and January 31, 2018:

 

 

 

 

 

 

 

Fair Value Measurements

 

(in thousands)

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

April 30, 2018