| Summary of Significant Accounting Policies | 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 Year — Our 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 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 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. 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, 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. 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
)
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 Segments — We 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 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 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. Inventories — In 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 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 contract s Includes 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 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 Risk — We 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 contract s Represents 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 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 Supplemental Cash Flow Information — The 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 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. |
