| Accounting Policies and Basis of Presentation | 1. Accounting Policies and Basis of Presentation Description of Business —Layne Christensen Company and its subsidiaries (together, “Layne,” the “Company,” “we,” “our,” or “us”) is a global water management, infrastructure services and drilling company, providing responsible solutions to the world of essential natural resources – water, minerals and energy. We offer innovative, sustainable products and services with an enduring commitment to safety, excellence and integrity. We primarily operate in North America and Brazil. 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 ownership interest in certain foreign affiliates operating in Latin America. See Note 7 to the Condensed Consolidated Financial Statements. Fiscal Year — Our fiscal year end is January 31. References to fiscal years, or “FY2018” are to the twelve months ended January 31 of that year. Principles of Consolidation — The 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 Companies — Investments 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 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. Presentation — The 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, 2017 (“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 9 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, including the final working capital adjustment, 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. Additionally, as part of management’s continued analysis in connection with the Water Resources Business Performance Initiative, we determined a better reflection of cost of revenues is to include indirect project manager costs that historically have been presented in selling, general and administrative expenses. Indirect project manager costs are included in cost of revenues beginning with the first quarter of FY2018, and prior periods have been revised. For the three and nine months ended October 31, 2016, approximately $2.0 million and $6.7 million, respectively, of these indirect project manager costs are now included in cost of revenue. Net gain on sale of fixed assets were previously reported in other income (expense), net within the Condensed Consolidated Statement of Operations, rather than separately as part of income (loss) from operations or within cost of revenues as per SEC Regulation S-X guidance. We have corrected all periods presented in the accompanying Condensed Consolidated Statement of Operations. The change in presentation had no effect on net loss and does not affect the Condensed Consolidated Balance Sheets. Business Segments — We currently report our financial results under three reporting segments consisting of Water Resources, Inliner, and Mineral Services. As noted above, 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. 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, tax compliance, executive management and board of directors. Use of and Changes in Estimates — The 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 Translation — In accordance with Accounting Standards Codification (“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 exchange rates with exchange rate differences reported in the Condensed Consolidated Statement of Operations. Net foreign currency transaction losses were ($0.0) million and ($0.3) million for the three and nine months ended October 31, 2017, respectively, and ($0.1) million and ($0.2) million for the three and nine months ended October 31, 2016, respectively and are recorded in other income (expense), net in the accompanying Condensed Consolidated Statements of Operations. Revenue Recognition — Revenues are recognized on large, long-term 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 these contracts using the percentage-of-completion method is such that refinements of the estimating process for changing conditions and new developments may occur and are characteristic of the process. Many factors can and do change during a contract performance period which can result in a change to contract profitability including 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 revisions to costs and income and are recognized in the period in which the revisions 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 evaluates the performance of contracts on an individual basis. In the ordinary course of business, but at least quarterly, we prepare updated estimates of cost and profit or loss for each contract. The cumulative effect of revisions in 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 projects can have a material impact on our financial statements and are reflected in results of operations when they become known. We 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 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. The amount of unapproved change orders and claims revenues are included in our Condensed Consolidated Balance Sheets as part of costs and estimated earnings in excess of billings on uncompleted contracts. When determining the likelihood of eventual recovery, we consider such factors as our 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 contracts using the completed contract method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses become known and reported in cost of revenues in the Condensed Consolidated Statements of Operations. We determine when short-term contracts are completed based on acceptance by the customer. Revenues for drilling contracts within Mineral Services are primarily recognized in terms of the value of total work performed to date on the basis of actual footage drilled, meterage drilled or services performed. Revenues for direct sales of equipment and other ancillary products not provided in conjunction with the performance of other services are recognized at the date of delivery to, and acceptance by, the customer. Our revenues are presented net of taxes imposed on revenue-producing transactions with our customers, such as, but not limited to, sales, use, value-added and some excise taxes. Inventories — In February 2017, we adopted Accounting Standards Update (“ASU”) 2015-11 “Inventory – Simplifying the Measurement of Inventory” issued by the Financial Accounting Standards Board (the “FASB”) on July 22, 2015, on a prospective basis. As such, our October 31, 2017 inventories are valued at the lower of cost or net realizable value and our inventories at January 31, 2017 are valued at the lower of cost or market. 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 $17.0 million and $16.4 million and raw materials of $2.5 million and $2.3 million were included in inventories in the Condensed Consolidated Balance Sheets as of October 31, 2017 and January 31, 2017, 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 in circumstances indicate that goodwill might be impaired. We believe at this time that the carrying value of goodwill is appropriate. As of October 31, 2017 and January 31, 2017, 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 we consider important which could trigger an impairment review include but are not limited to the following:
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significant underperformance of assets;
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significant changes in the use of the assets; and
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significant negative industry or economic trends. We found no indication for impairments as of October 31, 2017. Cash and Cash Equivalents —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 — Restricted deposits consist of amounts associated with certain letters of credit for on-going projects, escrow funds related to a certain disposition, and judicial deposits associated with tax related legal proceedings in Brazil. 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 determining the amount of the allowance, we make judgments about the credit worthiness 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. Concentration of Credit Risk — We grant credit to our customers, which may include concentrations in state and local governments or other customers. 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. Fair Value of Financial Instruments —The carrying amounts of financial instruments, including cash and cash equivalents, customer receivables and accounts payable, approximate fair value at October 31, 2017 and January 31, 2017, because of the relatively short maturity of those instruments. See Note 5 to the Condensed Consolidated Financial Statements for fair value disclosures. Liquidity and Capital Resources —In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” Under this standard, 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. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about an entity’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, 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. We adopted this standard in the fourth quarter of the fiscal year ended January 31, 2017. The accompanying financial statements have been prepared in conformity with GAAP, which contemplates Layne’s continuation as a going concern. Our debt structure currently consists of the following: Credit Facility
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a $100 million senior secured asset-based facility that is due on April 14, 2019. As of October 31, 2017, there are no outstanding borrowings on the facility although $24.5 million of letters of credits have been issued under the facility. The maturity date for the asset-based credit facility will accelerate to May 15, 2018, if the following have not occurred on or before such date:
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With respect to the 4.25% Convertible Notes, either
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all of the 4.25% Convertible Notes are converted,
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the maturity date for the 4.25% Convertible Notes (or any permitted refinancing indebtedness) is extended to a date after October 15, 2019, or
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the 4.25% Convertible Notes are redeemed, repurchased, otherwise retired, or discharged in accordance with their terms, and
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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 (or any permitted refinancing indebtedness) is extended to a date after October 15, 2019. We believe we can extend, expand or replace our asset-based facility by May 15, 2018. If we are unable to do so, we believe we could support the outstanding letters of credit with existing cash, other collateral or with a new facility. Convertible Notes
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$69.5 million of 4.25% Convertible Notes that are due on November 15, 2018.
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$99.9 million of 8.0% Convertible Notes that are due on May 1, 2019. However, if the 4.25% Convertible Notes have not been redeemed, repurchased, otherwise retired, or discharged in accordance with their terms or converted into our common stock, 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) 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. With respect to our 4.25% Convertible Notes, we have retained advisors to assist us in evaluating alternatives and raising capital to refinance or extend our debt to a date beyond October 15, 2019, and eliminate the accelerating maturity provisions of the 8.0% Convertible Notes. We believe the refinance or extension of our debt is likely based on current on-going discussions with existing and new potential lenders, our improving financial performance and credit quality, and the fact that our stock price is above the $11.70 conversion price for the 8% Convertible Notes. Although we believe these refinancing options are viable and likely, because our plans to refinance or restructure our debt have not been finalized, and therefore are not in our control (in part, due to the fact that neither of our Convertible Notes can be prepaid or have redemption provisions prior to February 2018), these plans are not considered probable under the new standard. Consequently, per the standard, these conditions, in the aggregate, raise 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. In some of the 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. Income (Loss) Per Share —Income (loss) per share is computed by dividing net income (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 (see Note 3 to the Condensed Consolidated Financial Statements) are included in the calculation of diluted loss per share if their inclusion is dilutive under the if-converted method. Options to purchase 0.7 million shares have been excluded from weighted average shares outstanding in the three and nine months ended October 31, 2017, respectively, as their effect was antidilutive. A total of 2.0 million nonvested shares have been excluded from weighted average shares outstanding in the three and nine months ended October 31, 2017, respectively, as their effect was antidilutive. Options to purchase 0.8 million shares have been excluded from weighted average shares outstanding in the three and nine months ended October 31, 2016, respectively, as their effect was antidilutive. A total of 1.9 million nonvested shares have been excluded from weighted average shares outstanding in the three and nine months ended October 31, 2016, respectively, as their effect was antidilutive. Supplemental Cash Flow Information — The amounts paid for income taxes, interest and noncash investing and financing activities were as follows:
Nine Months Ended October 31,
(in thousands)
2017
2016
Income taxes paid
$
983
$
783
Income tax refunds
(114
)
(185
)
Interest paid
6,462
6,843
Noncash investing and financing activities:
Accrued capital additions
1,162
2,184
New Accounting Pronouncements— In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” this ASU provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This ASU is effective after December 15, 2017 with early adoption permitted with prospective application. We have evaluated the impact of the adoption of this ASU and do not believe the effect will be material on our financial statements. 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 update, 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 update 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 believe the adoption of this ASU will not have a material impact on our financial statements. In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This ASU was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Public business entities should apply the amendments in this update, prospectively, to annual periods beginning after December 15, 2017, including interim periods within those periods. We believe the adoption of this ASU will not have a material impact on our financial statements. In February 2016, the FASB issued ASU No. 2016-02, “Leases,” 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. 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, 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 and currently, based on our limited number of leases, we do not believe the effect will be material on our financial statements. The FASB issued ASU 2014-09, “Revenue from Contracts with Customers” on May 28, 2014 and issued the related Update 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” in December, 2016 with the same effective dates as ASU 2014-09. On 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, 2017, including interim reporting periods within that 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. The collective guidance in these ASUs 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. We have completed our initial assessment of the guidance, where we determined the primary impact is the elimination of the completed contract method. We have reviewed our contract structure and have begun training for changes in how to account for our customers’ contracts under the new guidance. We anticipate adopting the new guidance beginning on February 1, 2018 using the full retrospective method that will result in restatement of the comparative periods presented. We are continuing 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 and quantify the potential impact that these ASUs will have on our financial position and results of operations. |
