(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including, but not limited to, those described under "Item 1A. Risk Factors." The tables and information in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") section were derived from exact numbers and may have immaterial rounding differences.
Throughout 2019, our continuing operational strategic goals included growing revenue through organic growth, strategic acquisitions and new revenue streams such as managed services. In addition, we expanded our operating margins by leveraging our infrastructure, optimizing our high-return, long-lived fleet and through continuous improvements in efficiency. To accomplish these goals, we have and will continue to introduce both internal and customer-facing technology solutions, including increased ERP system functionality and enhanced mobile applications and processes around the management of fleet.
As of December 31, 2019, our network includes 120 Storage Solutions locations, 20 Tank & Pump Solutions locations and 16 combined locations. Our Storage Solutions fleet consists of approximately 200,200 units and our Tank & Pump Solutions business has a fleet of approximately 12,700 units.
For the year ended December 31, 2019, our achievements included:
Grew total rental revenues 4.2% year-over-year,
Generated adjusted EBITDA of $242.9 million and expanded the margin to 39.6%, a 300 basis point increase,
Nearly doubled free cash flow to $143.1 million and returned $78.4 million to shareholders through dividends and purchases of treasury shares,
Improved return on capital employed year-over-year, exceeding our weighted average cost of capital,
Decreased our leverage ratio to 3.6x as of December 31, 2019, from 4.2x as of December 31, 2018 (leverage ratio calculated by dividing debt, less cash, by adjusted EBITDA),
Successfully refinanced our $1.0 billion line of credit, extending the maturity to March 2024 and reducing certain recurring fees.
Within our Storage Solutions business, which represented approximately 80% of rental revenue in 2019:
- Strengthened and expanded our North America service area through the execution of four strategic acquisitions, and established a robust pipeline of potential acquisitions,
- Grew total rental revenues 4.0% year-over-year, with a 6.3% increase in North America,
- Increased year-over-year Storage Solutions rental rates by 3.3%,
- Increased utilization of owned fleet, using original equipment cost, by 370 basis points to 77.9%, and increased owned fleet on rent by 1.7% for total Storage Solutions and 3.6% in North America, and
- Grew our North America managed services rental revenue by 80% to $10.6 million,
Within our Tank & Pump Solutions business, which represented approximately 20% of rental revenue in 2019:
- Year-over-year rental revenue growth of 5.0%,
- Increased average owned fleet on rent (based on original equipment cost) by 7.3% year-over-year, and
- Grew adjusted EBITDA $4.7 million to $41.8 million and expanded the adjusted EBITDA margin to 34.3%, an increase of 230 basis points.
In March 2019, we created more capital flexibility and positioned Mobile Mini for future growth by entering into the Second Amended and Restated ABL Credit Agreement dated as of March 22, 2019 (the "Credit Agreement") with Deutsche Bank AG New York Branch ("Deutsche Bank"), as administrative agent, and the other lenders party thereto, which replaced our prior Amended and Restated ABL Credit Agreement dated as of December 14, 2015 (the "Prior Credit Agreement"). The Credit Agreement extends the maturity of our ABL credit facility to March 2024 and reduces fees associated with unused credit.
Asset Impairment Charge and Loss on Divestiture, Net of Proceeds
Consistent with our strategy to focus on high returning assets, during the second quarter of 2018 we initiated an organization-wide project to assess the economic and operational status of our fleet and other assets as well as an in-depth analysis of our fleet management process to identify inefficiencies. The result of this review was the identification of specific assets over which a further determination as to the economics of continued retention and repair could be made. In July 2018, management presented a proposed plan of sale for certain identified assets to the Board of Directors, and on July 24, 2018 the Board of Directors made the strategic decision to approve the plan and authorized management to begin actively marketing the assets for sale. As a result, we classified these assets, which were primarily rental fleet, as held for sale and recognized a loss of $102.1 million in 2018. We also identified and placed as held for sale, property, plant and equipment and inventory that were not being used efficiently. The assets represented a subset of larger asset groups held by the Company. The sale was completed as of December 31, 2018.
Overall, between the disposal of fleet and our strengthened processes around fleet management, we realized operating expense savings of approximately $4.5 million in 2019 and $2.1 million in 2018.
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"), which, among other things, reduced the federal income tax rate from 35% to 21% effective January 1, 2018, and requires mandatory repatriation of foreign earnings. As a result of the Tax Act, we remeasured our net deferred tax liabilities and recognized a net tax benefit of $77.6 million during the fourth quarter of 2017. In addition, in 2017 we recorded a provisional income tax expense of $3.1 million related to the repatriation of foreign earnings. The Company finalized its analysis of the impact of the Tax Act in 2018 and recorded a reduction of $2.6 million to provisional amounts that were recorded in 2017.
Business Environment and Outlook
Approximately 67% of our consolidated rental revenue during the twelve-month period ended December 31, 2019 was derived from our North American Storage Solutions business, 13% was derived from our U.K. Storage Solutions business and 20% was derived from the Tank & Pump Solutions business. Our business is subject to the general health of the economy and we utilize a variety of general economic indicators to assess market trends and determine the direction of our business.
Based on our assessment, we expect that the majority of our North American end markets will continue to drive demand for our products, although some macro-economic indicators are pointing to slower growth. The construction industry, which represents approximately 36% of our consolidated rental revenue, is forecasted to continue to show growth. Economic indicators related to the industrial and commercial end-segment are mixed. Industrial and commercial customers, which comprise approximately 26% of our rental revenue, generally operate in industries such as: large processing plants for organic and inorganic chemicals, refineries, distributors and trucking and utility companies. Our national retail accounts typically involve seasonal demand in the third and fourth quarter during the holiday season. Retail and consumer service customers comprise approximately 23% of our rental revenue and include department, drug, grocery and strip mall stores as well as hotels, restaurants, service stations and dry cleaners. Upstream oil and gas customers comprise approximately 2% of our rental revenue and include companies performing such activities as exploratory well drilling, operation of producing wells and bringing crude oil and/or raw natural gas to the surface using alternative methods.
In October 2019, the U.K. and E.U. agreed upon the terms of the U.K.'s withdrawal from the E.U. in the form of a Withdrawal Agreement. The Withdrawal Agreement was ratified by the U.K. Parliament, and the European Parliament in Brussels, in late January, with the consequence that Brexit formally occurred on January 31, 2020.
Economists predict there may be a modest improvement in the U.K. economy in the early months of 2020, as certain of the uncertainties facing the economy are diluted by the decisive U.K. election result and the certainty of the U.K. leaving the E.U. on January 31, 2020. This may lead to business investment decisions and commitments to major projects going ahead. However, the upside is expected to be limited by, among other things, longer-term Brexit uncertainties after the end of 2020.
The current opinion of most economists is that, even after the U.K. formally leaves the E.U., there will be no lasting recovery until a U.K.-E.U. trade deal is in place.
Accounting and Operating Overview
Our principal operating revenues and expenses are:
Rental revenues include all rent and ancillary revenues we receive for our rental fleet.
Sales revenues consist primarily of sales of new and used fleet and, to a lesser extent, parts and supplies sold to customers.
Costs and Expenses:
Rental, selling and general expenses include, among other expenses, payroll and payroll-related costs (including share-based compensation and commissions for our sales team), fleet transportation and fuel costs, repair and maintenance costs for our rental fleet and transportation equipment, real estate lease expense, insurance costs, and general corporate expenses.
Cost of sales is the net book value of the units that were sold during the reported period and includes both our cost to buy, transport, remanufacture and modify used containers and our cost to manufacture Storage Solutions units and other structures.
Depreciation and amortization includes depreciation on our rental fleet, our property, plant and equipment, and amortization of definite-lived intangible assets.
In addition to focusing on GAAP measurements, we focus on EBITDA, adjusted EBITDA, and free cash flow to measure our operating results. As such, we include in this Annual Report on Form 10-K reconciliations to their most directly comparable GAAP financial measures. We also evaluate our operations on a constant currency basis. These reconciliations and descriptions of why we believe these measures provide useful information to investors as well as a description of the limitations of these measures are included in "Item 6. Selected Financial Data."
Results of Operations
Twelve Months Ended December 31, 2019, Compared to Twelve Months Ended December 31, 2018 The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented: Percent of Revenue Years Ended Years Ended December 31, December 31, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 581,657 $ 558,197 94.9 % 94.1 % $ 23,460 4.2 % Sales 30,394 34,354 5.0 5.8 (3,960 ) (11.5 ) Other 574 678 0.1 0.1 (104 ) (15.3 ) Total revenues 612,625 593,229 100.0 100.0 19,396 3.3 Costs and expenses: Rental, selling and general expenses 369,525 364,123 60.3 61.4 5,402 1.5 Cost of sales 18,675 22,437 3.0 3.8 (3,762 ) (16.8 ) Restructuring expenses - 2,006 - 0.3 (2,006 ) n/a Asset impairment charge and loss on divestiture, net - 102,140 - 17.2 (102,140 ) n/a Depreciation and amortization 70,583 67,000 11.5 11.3 3,583 5.3 Total costs and expenses 458,783 557,706 74.9 94.0 (98,923 ) (17.7 ) Income from operations 153,842 35,523 25.1 6.0 118,319 333.1 Other income (expense): Interest income 12 6 - - 6 n/a Interest expense (41,378 ) (40,904 ) (6.8 ) (6.9 ) (474 ) 1.2 Deferred financing costs write-off (123 ) - - - (123 ) n/a Foreign currency exchange (274 ) 64 - - (338 ) n/a Income (loss) before income tax provision 112,079 (5,311 ) 18.3 (0.9 ) 117,390 Income tax provision 28,345 2,751 4.6 0.5 25,594 Net income (loss) $ 83,734 $ (8,062 ) 13.7 % (1.4 ) % $ 91,796 Percent of Revenue Years Ended Years Ended December 31, December 31, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) EBITDA (1) $ 224,163 $ 102,593 36.6 % 17.3 % $ 121,570 118.5 % Adjusted EBITDA (1) 242,893 217,243 39.6 36.6 25,650 11.8 Free Cash Flow (1) 143,059 72,882 23.4 12.3 70,177 96.3
(1) See "Non-GAAP Data and Reconciliations" earlier in this Annual Report on Form 10-K.
The following table sets forth certain financial information as calculated on a constant currency basis:
For the Year Ended December 31, 2019 Calculated in Constant Currency (1) As Reported Difference (In thousands) Rental revenues $ 585,099 $ 581,657 $ 3,442 Rental, selling and general expenses 371,853 369,525 2,328 Adjusted EBITDA 244,083 242,893 1,190
(1) See "Non-GAAP Data and Reconciliations" earlier in this Annual Report on Form 10�K.
Total Revenues. The following table depicts revenue by type of business for the twelve-month periods ended December 31:
Increase (Decrease) 2019 2018 2019 versus 2018 (In thousands, except percentages) Rental Revenues: North America Storage Solutions $ 389,674 $ 366,713 $ 22,961 6.3 % U.K. Storage Solutions 75,738 80,751 (5,013 ) (6.2 ) Total Storage Solutions 465,412 447,464 17,948 4.0 Tank & Pump Solutions 116,245 110,733 5,512 5.0 Total Rental Revenues $ 581,657 $ 558,197 $ 23,460 4.2 U.K. Storage Solutions in Constant Currency $ 79,180 $ 80,751 $ (1,571 ) (1.9 ) Total Storage Solutions in Constant Currency 468,854 447,464 21,390 4.8 Sales Revenues: North America Storage Solutions $ 18,047 $ 20,008 $ (1,961 ) (9.8 ) U.K. Storage Solutions 6,819 9,024 (2,205 ) (24.4 ) Total Storage Solutions 24,866 29,032 (4,166 ) (14.3 ) Tank & Pump Solutions 5,528 5,322 206 3.9 Total Sales Revenues $ 30,394 $ 34,354 $ (3,960 ) (11.5 ) Total Revenues: North America Storage Solutions $ 408,120 $ 387,025 $ 21,095 5.5 U.K. Storage Solutions 82,557 89,999 (7,442 ) (8.3 ) Total Storage Solutions 490,677 477,024 13,653 2.9 Tank & Pump Solutions 121,948 116,205 5,743 4.9 Total Revenues $ 612,625 $ 593,229 $ 19,396 3.3
Of the $612.6 million of total revenues for the twelve months ended December 31, 2019, $490.7 million, or 80.1%, related to the Storage Solutions business and $121.9 million, or 19.9%, related to the Tank & Pump Solutions business. Of the $593.2 million of total revenues for the twelve-month period ended December 31, 2018, $477.0 million, or 80.4%, related to the Storage Solutions business and $116.2 million, or 19.6%, related to the Tank & Pump Solutions business.
Rental Revenues. Storage Solutions rental revenues increased 4.0% during the twelve-month period ended December 31, 2019, as compared to the prior-year period. Excluding revenues and units related to managed rental service arrangements, yield (calculated as rental revenues divided by average units on rent and adjusted to a 28-day period) for the twelve months ended December 31, 2019 increased 3.5%, or 4.3% in constant currency as compared to the prior-year period, due primarily to increased rates and increased delivery and pickup revenue.
North America Storage Solutions rental revenues increased 6.3% driven by a 3.5% increase in year-over-year rental rates as well as favorable mix, managed services growth and increases in delivery and pickup. Average units on rent in North America Storage Solutions, excluding managed services, were up slightly compared to the prior year, while average owned fleet on rent increased 3.6%, when using original equipment cost. During 2018, we began to pursue partnerships with other rental companies to provide supplementary product offerings for certain of our Storage Solutions customers. Arranging these comprehensive managed rental services for our customers increases loyalty while generating additional revenue, without additional investment in fleet. While these revenues were not material for 2019 or 2018, we do expect to continue to develop these revenues. During the twelve months ended December 31, 2019 we recognized $10.6 million of rental revenue related to managed service arrangements, compared to $5.9 million in 2018.
In constant currency, rental revenues for the U.K. Storage Solutions business decreased 1.9% due to a 3.0% decrease in average units on rent and unfavorable
Rental revenues within the Tank & Pump Solutions business increased $5.5 million, or 5.0%, for the twelve-month period ended December 31, 2019, as compared to the prior-year period. Delivery, pickup and similar revenue increased due to growth in areas such as equipment monitoring and other trucking services. Direct rental revenue increased due to an increase in owned fleet on rent for the current year as well as increased year-over-year rental rates, partially offset by unfavorable mix. The majority of the rental revenue increase occurred in the first half of the year and was offset by lower year-over-year growth in the third quarter and a year-over-year decrease in the fourth quarter of the current year compared to the prior year period.
In the downstream segment, year-over-year rental revenue increased 5.5% for the twelve months ended December 31, 2019 and was driven by the continued growth of business conducted under several large master service agreements signed in late 2017 and early 2018, as well as increased rates. These agreements were still in early stages in the first twelve months of 2018 and fully implemented mid-year 2019. Downstream revenue in the fourth quarter of 2019 decreased compared to the prior-year quarter due to a decrease in the volume and scope of maintenance projects. Within our upstream segment, healthy year-over-year growth in the first six months of 2019 was offset by a year-over-year decrease in rental revenue for the six months ended December 31, 2019, resulting in a decrease in rental revenue for the twelve months ended December 31, 2019 as compared to the prior year. Rental revenues from our diversified customers were up compared to the prior year as a result of increased project activity during the first nine months of the year.
Sales Revenues. We focus on rental revenues. In general, sales of units from our fleet occur due to a particular customer need, or due to having fleet in excess of demand at a particular location. Storage Solutions sales revenue of $24.9 million for the twelve months ended December 31, 2019 decreased $4.2 million, or 14.3%, compared to the prior year. Tank & Pump Solutions sales revenue of $5.5 million for the twelve months ended December 31, 2019 increased $0.2 million from the prior year.
Costs and Expenses. The following table depicts rental, selling and general costs and costs of sales by type of business for the twelve-month periods ended December 31:
Increase (Decrease) 2019 2018 2019 versus 2018 (In thousands, except percentages) Rental, Selling and General Expenses: North America Storage Solutions $ 239,650 $ 233,764 $ 5,886 2.5 % U.K. Storage Solutions 51,946 53,884 (1,938 ) -3.6 % Total Storage Solutions 291,596 287,648 3,948 1.4 % Tank & Pump Solutions 77,929 76,475 1,454 1.9 % Total Rental, Selling and General Expenses $ 369,525 $ 364,123 $ 5,402 1.5 % U.K. Storage Solutions in Constant Currency $ 54,274 $ 53,884 $ 390 0.7 % Total Storage Solutions in Constant Currency 293,924 287,648 6,276 2.2 % Cost of Sales: North America Storage Solutions $ 10,441 $ 12,263 $ (1,822 ) -14.9 % U.K. Storage Solutions 5,385 7,176 (1,791 ) -25.0 % Total Storage Solutions 15,826 19,439 (3,613 ) -18.6 % Tank & Pump Solutions 2,849 2,998 (149 ) -5.0 % Total Cost of Sales $ 18,675 $ 22,437 $ (3,762 ) -16.8 %
Rental, Selling and General Expenses. Rental, selling and general expenses for the twelve months ended December 31, 2019 of $369.5 million increased $5.4 million, or 1.5%, as compared to the prior year. As a percentage of total revenues, rental, selling and general expenses were 60.3% for the twelve months ended December 31, 2019, which was a decrease from 61.4% in the prior-year period.
Rental, selling and general expenses for the twelve months ended December 31, 2019 included $3.6 million related to the amendment of certain stock award agreements in conjunction with the transition of our Chief Executive Officer ("CEO") to Chairman of the Board of Directors. In addition, we recognized $3.1 million of expense related to incremental costs associated with actual and potential acquisitions and $0.5 million related to departmental realignments. Excluding these $7.2 million of expenses, rental, selling and general expenses decreased $1.8 million, or 0.5% and as a percentage of total revenues decreased to 59.1%. In constant currency, rental, selling and general expenses increased slightly.
Excluding the CEO transition expenses, the incremental costs associated with actual and potential acquisitions and the other costs noted above, Storage Solutions rental, selling and general expenses for the twelve months ended December 31, 2019 decreased $0.9 million in constant currency or 0.3%, from the prior year. The decrease was primarily due to lower short-term variable incentive plan expense, partially offset by higher payroll costs. In addition, decreased transportation costs were offset by an increase in the provision for doubtful accounts.
Rental, selling and general expenses for the Tank & Pump Solutions business increased $1.5 million, or 1.9%, in the twelve months of 2019, as compared to the prior year. Decreased short-term variable incentive plan expense, was more than offset by increased payroll, cross-hire and maintenance costs to support the increased business.
Cost of Sales. Cost of sales is the cost related to our sales revenue only. Within the Storage Solutions business, cost of sales was $15.8 million and $19.4 million for the twelve months ended December 31, 2019 and 2018, respectively. Storage Solutions sales profit was $9.0 million and $9.6 million for the twelve-month periods ended December 31, 2019 and 2018, respectively. Sales profit margin was 36.4% in the twelve months ended December 31, 2019 and 33.0% in the prior year.
Within the Tank & Pump Solutions business, cost of sales was $2.8 million compared to $3.0 million in the twelve-month periods ended December 31, 2019 and 2018, respectively. Tank & Pump Solutions sales profit was $2.7 million and $2.3 million for the twelve-month periods ended December 31, 2019 and 2018, respectively.
Restructuring expenses. The $2.0 million of restructuring expenses recognized in the twelve months ended December 31, 2018, consisted primarily of expense related to the restructuring of our corporate service center, including the severance of an executive, and expense incurred in conjunction with the divestiture of certain assets as discussed earlier in this MD&A. Additionally, in 2018, we recognized expenses related to projects initiated in prior years . . .
Feb 03, 2020
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