(EDGAR Online via COMTEX) -- ITEM 2. 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 our consolidated financial statements and the accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC. This discussion contains forward-looking statements. Forward-looking statements are based on current expectations and assumptions that involve risks and uncertainties. Our actual results may differ materially from those anticipated in our forward-looking statements. The tables and information in this "Management's Discussion and Analysis of Financial Conditions and Results of Operations" section were derived from exact numbers and may have immaterial rounding differences.
We believe we are the world's leading provider of portable storage solutions, maintaining a strong leadership position in virtually all markets served. Our mission is to be the leader in portable storage solutions to customers throughout North America and the U.K. and tank and pump solutions in the U.S. We are committed to providing our customers with superior service and access to a high-quality and diverse fleet. In managing our business, we focus on renting rather than selling our units, with rental revenues representing approximately 95% of our total revenues for the three months ended March 31, 2019. We believe this strategy is highly attractive and provides predictable, recurring revenue. Additionally, our assets have long useful lives and relatively low maintenance costs. We also sell new and used units and provide delivery, and other ancillary products and value-added services.
We operate our portable storage business in North America as "Mobile Mini Storage Solutions" and our tank and pump business as "Mobile Mini Tank + Pump Solutions". As of March 31, 2019, our network of locations included 119 Storage Solutions locations, 20 Tank & Pump Solutions locations and 17 combined locations. Our Storage Solutions fleet consisted of approximately 196,400 units and our Tank & Pump Solutions fleet consisted of approximately 12,800 units.
ABL Refinancing. 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 "New 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 New Credit Agreement extends the maturity of our ABL financing to March 2024 and reduces fees associated with unused credit.
Business Environment and Outlook. Approximately 66% of our consolidated rental revenue during the twelve-month period ended March 31, 2019 was derived from our North American Storage Solutions business, 14% 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. On June 23, 2016, the U.K. voted to leave the European Union (the "E.U.") in a referendum vote that initially had unknown social, geopolitical and economic impacts. Impact assessments have now been published that draw distinctions between a highly disruptive "no-deal" scenario, and a smoother version where an agreement is reached. The withdrawal negotiations between the E.U. and the U.K. Government began in 2017 and concluded in December 2018. A withdrawal agreement setting out the legal mechanics of the U.K.'s departure with a two-year continuity transition period was agreed to, alongside a political statement detailing the parameters for a future trading relationship with the E.U. The U.K. Parliament must agree to these arrangements but it has rejected them three times. The date of the U.K.'s departure from the E.U. was set for March 29, 2019. However, following two requests to extend the negotiating period, the U.K. is now set to leave the E.U. on October 31, 2019, or sooner should the withdrawal agreement be passed by the U.K. Parliament. . The eventual outcome remains uncertain, but as developments and their impact become more clear, we may adjust our strategy and operations accordingly.
Based on our assessment, we expect that the majority of our end markets will continue to drive demand for our products. In particular, construction, which represents approximately 35% of our consolidated rental revenue, is forecasted to continue to show growth. Economic indicators related to our industrial and commercial end-segment are also favorable. Industrial and commercial customers, which comprise approximately 26% of 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 24% of our revenue and include department, drug, grocery and strip mall stores as well as hotels, restaurants, service stations and dry cleaners.
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.
Our principal asset is our rental fleet, which is capitalized at cost and depreciated over the estimated useful life of the unit using the straight-line method. Rental fleet is depreciated whether or not it is out on rent. Capitalized cost of rental fleet includes the price paid to acquire the unit and freight charges to the location when the unit is first placed in service and, when applicable, the cost of manufacturing or remanufacturing, which includes the cost of customizing units. Ordinary repair and maintenance costs are charged to operations as incurred.
The table below outlines the composition of our Storage Solutions rental fleet at March 31, 2019:
Percentage of Number of Gross Fleet Percentage of Rental Fleet Units in Dollars Units (In thousands) Steel storage containers $ 608,025 167,565 63 % 85 % Steel ground level offices 348,591 28,079 36 14 Other 7,421 778 1 1 Storage Solutions rental fleet 964,037 196,422 100 % 100 % Accumulated depreciation (155,948 ) Storage Solutions rental fleet, net $ 808,089
The table below outlines the composition of our Tank & Pump Solutions rental fleet at March 31, 2019:
Percentage of Number of Gross Fleet Percentage of Rental Fleet Units in Dollars Units (In thousands) Steel tanks $ 78,355 3,220 41 % 25 % Roll-off boxes 35,793 5,835 19 46 Stainless steel tank trailers 28,701 634 15 5 Vacuum boxes 16,997 1,560 9 12 Dewatering boxes 8,659 826 5 6 Pumps and filtration equipment 13,934 731 7 6 Other 9,046 n/a 4 Tank & Pump Solutions rental fleet 191,485 12,806 100 % 100 % Accumulated depreciation (55,637 ) Tank & Pump Solutions rental fleet, net $ 135,848
We are a capital-intensive business. Therefore, in addition to focusing on measurements calculated in accordance with GAAP, we focus on EBITDA, adjusted EBITDA and free cash flow to measure our operating results. EBITDA, adjusted EBITDA and the resultant margins, and free cash flow are non-GAAP financial measures. As such, we include in this Quarterly Report on Form 10-Q reconciliations to their most directly comparable GAAP financial measures. We also evaluate our operations on a constant currency basis. These reconciliations and a description of the limitations of these measures are included below.
Non-GAAP Data and Reconciliations
EBITDA and Adjusted EBITDA. EBITDA is defined as net income before discontinued operations, net of tax (if applicable), interest expense, income taxes, depreciation and amortization, and debt restructuring or extinguishment expense (if applicable), including any write-off of deferred financing costs. Adjusted EBITDA further excludes certain non-cash expenses, as well as transactions that management believes are not indicative of our ongoing business. Because EBITDA and adjusted EBITDA, as defined, exclude some but not all items that affect our cash flow from operating activities, they may not be comparable to similarly titled performance measures presented by other companies.
We present EBITDA and adjusted EBITDA because we believe they provide an overall evaluation of our financial condition and useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements. EBITDA and adjusted EBITDA have certain limitations as analytical tools and should not be used as substitutes for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP. EBITDA and adjusted EBITDA margins are calculated as EBITDA and adjusted EBITDA divided by total revenues expressed as a percentage.
Reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and adjusted EBITDA is as follows:
Three Months Ended March 31, 2019 2018 (In thousands, except percentages) Net income $ 18,085 $ 14,855 Interest expense 10,760 9,599 Income tax provision 6,523 4,949 Depreciation and amortization 17,335 16,823 Deferred financing costs write-off 123 - EBITDA 52,826 46,226 Share-based compensation expense (1) 3,404 2,229 Restructuring expenses (2) - 111 Adjusted EBITDA $ 56,230 $ 48,566 EBITDA margin 35.3 % 32.9 % Adjusted EBITDA margin 37.6 34.5
Reconciliation of net cash provided by operating activities to EBITDA is as follows:
Three Months Ended March 31, 2019 2018 (In thousands) Net cash provided by operating activities $ 38,783 $ 34,931 Interest paid 14,276 12,348 Income and franchise taxes paid 2,020 120 Share-based compensation expense (1) (3,404 ) (2,229 ) Gain on sale of rental fleet 1,425 1,533 Loss on disposal of property, plant and equipment (18 ) (334 ) Change in certain assets and liabilities, net of effect of businesses acquired: Receivables (17,392 ) (6,447 ) Inventories (76 ) 1,067 Other assets 1,394 (2,547 ) Accounts payable and accrued liabilities 15,818 7,784 EBITDA $ 52,826 $ 46,226
(1) Share-based compensation represents non-cash compensation expense associated with the granting of equity instruments. See additional information in Note
(2) The Company has undergone restructuring actions to align its business operations. These activities materially change the scope of the business or the manner in which the business is conducted. For more information, see Note
Free Cash Flow. Free cash flow is defined as net cash provided by operating activities, minus or plus, net cash used in or provided by investing activities, excluding acquisitions and certain transactions. Free cash flow is a non-GAAP financial measure and is not intended to replace net cash provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP. We present free cash flow because we believe it provides useful information regarding our liquidity and ability to meet our short-term obligations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in our existing business, debt service obligations, payment of authorized quarterly dividends, repurchase of our common stock and strategic small acquisitions.
Reconciliation of net cash provided by operating activities to free cash flow is as follows:
Three Months Ended March 31, 2019 2018 (In thousands) Net cash provided by operating activities $ 38,783 $ 34,931 Additions to rental fleet, excluding acquisitions (23,016 ) (15,389 ) Proceeds from sale of rental fleet 3,338 3,844 Additions to property, plant and equipment, excluding acquisitions (2,919 ) (4,752 ) Proceeds from sale of property, plant and equipment 49 179 Net capital expenditures, excluding acquisitions (22,548 ) (16,118 ) Free cash flow $ 16,235 $ 18,813
Constant Currency. We calculate the effect of currency fluctuations on current periods by translating the results for our business in the U.K. during the current period using the average exchange rates from the same period in the prior year. We present constant currency information to provide useful information to assess our underlying business excluding the effect of material foreign currency rate fluctuations. The table below shows certain financial information as calculated on a constant currency basis:
Three Months Ended March 31, 2019 Calculated in Constant Currency As Reported Difference (In thousands) Rental revenues $ 143,486 $ 142,172 $ 1,314 Rental, selling and general expenses 93,170 92,234 936 Adjusted EBITDA 56,644 56,230 414
RESULTS OF OPERATIONS Three Months Ended March 31, 2019, Compared to Three Months Ended March 31, 2018 Percentage of Revenue Three Months Ended Three Months Ended March 31, March 31, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 142,172 $ 132,338 95.0 % 94.1 % $ 9,834 7.4 % Sales 7,223 8,103 4.8 5.8 (880 ) (10.9 ) Other 266 213 0.2 0.2 53 24.9 Total revenues 149,661 140,654 100.0 100.0 9,007 6.4 Costs and expenses: Rental, selling and general expenses 92,234 88,998 61.6 63.3 3,236 3.6 Cost of sales 4,602 5,391 3.1 3.8 (789 ) (14.6 ) Restructuring expenses - 111 - 0.1 (111 ) n/a Depreciation and amortization 17,335 16,823 11.6 12.0 512 3.0 Total costs and expenses 114,171 111,323 76.3 79.1 2,848 2.6 Income from operations 35,490 29,331 23.7 20.9 6,159 21.0 Other income (expense): Interest income - 6 - - (6 ) n/a Interest expense (10,760 ) (9,599 ) (7.2 ) (6.8 ) (1,161 ) 12.1 Deferred financing costs write-off (123 ) - (0.1 ) - (123 ) n/a Foreign currency exchange 1 66 - - (65 ) n/a Income before income tax provision 24,608 19,804 16.4 14.1 4,804 Income tax provision 6,523 4,949 4.4 3.5 1,574 Net income $ 18,085 $ 14,855 12.1 % 10.6 % $ 3,230 Percentage of Revenue Three Months Ended Three Months Ended March 31, March 31, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) EBITDA $ 52,826 $ 46,226 35.3 % 32.9 % $ 6,600 14.3 % Adjusted EBITDA 56,230 48,566 37.6 34.5 7,664 15.8 Free Cash Flow 16,235 18,813 10.8 13.4 (2,578 ) (13.7 )
Total Revenues. The following table depicts revenues by type of business for the three-month periods ended March 31:
Storage Solutions Three Months Ended March 31, Increase (Decrease) 2019 2018 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 112,725 $ 106,864 $ 5,861 5.5 % Sales 5,777 6,739 (962 ) (14.3 ) Other 225 169 56 33.1 Total revenues $ 118,727 $ 113,772 $ 4,955 4.4
Tank & Pump Solutions Three Months Ended March 31, Increase (Decrease) 2019 2018 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 29,447 $ 25,474 $ 3,973 15.6 % Sales 1,446 1,364 82 6.0 Other 41 44 (3 ) (6.8 ) Total revenues $ 30,934 $ 26,882 $ 4,052 15.1
Of the $149.7 million of total revenues for the three months ended March 31, 2019, $118.7 million, or 79.3%, related to the Storage Solutions business and $30.9 million, or 20.7%, related to the Tank & Pump Solutions business. Of the $140.7 million of total revenues for the three-month period ended March 31, 2018, $113.8 million, or 80.9%, related to the Storage Solutions business and $26.9 million, or 19.1%, related to the Tank & Pump Solutions business.
Rental Revenues. Storage Solutions rental revenues increased 5.5% during the three-month period ended March 31, 2019, as compared to the prior-year period. In constant currency, rental revenues increased 6.7%. This increase was driven by a 2.6% increase in year-over-year rental rates and a 0.9% increase in units on rent, as well as favorable mix and increases in delivery and pickup revenue. Yield (calculated as rental revenues divided by average units on rent and adjusted to a 28 day period) increased 2.3%, or 3.5% in constant currency as compared to the prior-year period, due to increased rates, favorable mix and increased delivery and pickup revenue.
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 rental services for our customers increases loyalty while generating additional revenue, without additional investment in fleet. While these revenues were not material for the first quarter of 2019 or 2018, we do expect to continue to develop these revenues. During the first quarter of 2019 we recognized $2.4 million of rental revenue related to managed service arrangements. For the three months ended March 31, 2019, the calculation of yield excludes revenues and units related to these services.
Rental revenues within the Tank & Pump Solutions business increased $4.0 million, or 15.6%, for the three-month period ended March 31, 2019, as compared to the prior-year period. This increase was driven by an approximately 15.0% increase in fleet on rent for the current quarter and increased year-over-year rental rates. Additionally, delivery, pickup and similar revenue increased due to growth in areas such as equipment monitoring and other trucking services. In the downstream segment, increased year-over-year rental revenue 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 quarter of 2018. Increased demand in our upstream business, combined with a shortage of available equipment overall, has contributed to our ability to drive meaningful rate increases in this customer segment, resulting in healthy year-over-year rental revenue increases.
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 $5.8 million for the quarter ended March 31, 2019 decreased $1.0 million, or 14.3%, compared to the prior-year period. Tank & Pump Solutions sales revenue of $1.4 million for the quarter ended March 31, 2019 increased slightly from the prior-year period.
Costs and expenses. The following table depicts costs and expenses by type of business for the three-month periods ended March 31:
Storage Solutions Three Months Ended March 31, Increase (Decrease) 2019 2018 2019 versus 2018 (In thousands, except percentages) . . .
Apr 23, 2019
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