(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 six months ended June 30, 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 June 30, 2019, our network of locations included 118 Storage Solutions locations, 20 Tank & Pump Solutions locations and 17 combined locations. Our Storage Solutions fleet consisted of approximately 198,000 units and our Tank & Pump Solutions fleet consisted of approximately 12,700 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 June 30, 2019 was derived from our North American Storage Solutions business, 13% was derived from our U.K. Storage Solutions business and 21% 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 ("Brexit"). 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. In November 2018, the U.K. and the E.U. agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.'s departure, including commitments on citizen rights after Brexit, a financial settlement from the U.K. and a transition period to allow time for a future trade deal to be agreed. After failing to gain the U.K. Parliament's approval for the Withdrawal Agreement, Prime Minister Theresa May stepped down as Conservative Party leader on June 7, 2019 and a new Prime Minister is expected to be in place by the end of July 2019. As a result of these events, the terms of the U.K.'s withdrawal remain highly uncertain. As the Brexit terms and their impact become more clear, we may adjust our U.K. 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 June 30, 2019:
Percentage of Number of Gross Fleet Percentage of Rental Fleet Units in Dollars Units (In thousands) Steel storage containers $ 614,076 168,820 63 % 85 % Steel ground level offices 353,706 28,421 36 14 Other 6,480 731 1 1 Storage Solutions rental fleet 974,262 197,972 100 % 100 % Accumulated depreciation (158,142 ) Storage Solutions rental fleet, net $ 816,120
The table below outlines the composition of our Tank & Pump Solutions rental fleet at June 30, 2019:
Percentage of Number of Gross Fleet Percentage of Rental Fleet Units in Dollars Units (In thousands) Steel tanks $ 80,884 3,261 42 % 26 % Roll-off boxes 35,458 5,705 18 45 Stainless steel tank trailers 28,591 629 15 5 Vacuum boxes 16,892 1,541 9 12 Dewatering boxes 9,205 861 5 7 Pumps and filtration equipment 13,963 728 7 5 Other 9,510 n/a 4 Tank & Pump Solutions rental fleet 194,503 12,725 100 % 100 % Accumulated depreciation (58,927 ) Tank & Pump Solutions rental fleet, net $ 135,576
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 Six Months Ended June 30, June 30, 2019 2018 2019 2018 (In thousands, except percentages) Net income $ 14,058 $ 15,000 $ 32,143 $ 29,855 Interest expense 10,592 10,093 21,352 19,692 Income tax provision 6,450 3,463 12,973 8,412 Depreciation and amortization 18,135 17,192 35,470 34,015 Deferred financing costs write-off - - 123 - EBITDA 49,235 45,748 102,061 91,974 Share-based compensation expense (1) 3,340 3,044 6,744 5,273 Restructuring expenses (2) - 1,195 - 1,306 Chief Executive Officer transition (3) 3,593 - 3,593 - Acquisition-related expenses (4) 739 - 739 - Adjusted EBITDA $ 56,907 $ 49,987 $ 113,137 $ 98,553 EBITDA margin 32.8 % 32.2 % 34.0 % 32.5 % Adjusted EBITDA margin 37.9 35.2 37.7 34.9
Reconciliation of net cash provided by operating activities to EBITDA is as follows:
Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 (In thousands) Net cash provided by operating activities $ 61,769 $ 35,021 $ 100,552 $ 69,952 Interest paid 5,919 5,829 20,195 18,177 Income and franchise taxes paid 1,742 1,287 3,762 1,407 Share-based compensation expense (1)(3) (6,933 ) (3,407 ) (10,337 ) (5,636 ) Gain on sale of rental fleet 1,616 1,727 3,041 3,260 Loss on disposal of property, plant and equipment (84 ) (143 ) (102 ) (477 ) Change in certain assets and liabilities, net of effect of businesses acquired: Receivables (6,147 ) 7,462 (23,539 ) 1,015 Inventories (1,268 ) (272 ) (1,344 ) 795 Other assets (588 ) 2,151 806 (396 ) Accounts payable and accrued liabilities (6,791 ) (3,907 ) 9,027 3,877 EBITDA $ 49,235 $ 45,748 $ 102,061 $ 91,974
(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
(3) Non-cash expense related to the amendment of certain share-based compensation agreements with our Chief Executive Officer who is retiring as an employee of the Company and assuming the position of Chairman of the Board for Mobile Mini as of October 1, 2019. For more information see Note 13 "Share-Based Compensation" to the accompanying condensed consolidated financial statements.
(4) Incremental costs associated with potential acquisitions.
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 Six Months Ended June 30, June 30, 2019 2018 2019 2018 (In thousands) (In thousands) Net cash provided by operating activities $ 61,769 $ 35,021 $ 100,552 $ 69,952 Additions to rental fleet, excluding acquisitions (23,381 ) (23,087 ) (46,397 ) (38,476 ) Proceeds from sale of rental fleet 3,716 3,833 7,054 7,677 Additions to property, plant and equipment, excluding acquisitions (3,516 ) (4,329 ) (6,435 ) (9,081 ) Proceeds from sale of property, plant and equipment 84 288 133 467 Net capital expenditures, excluding acquisitions (23,097 ) (23,295 ) (45,645 ) (39,413 ) Free cash flow $ 38,672 $ 11,726 $ 54,907 $ 30,539
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 June 30, 2019 Calculated in Constant Currency As Reported Difference (In thousands) Rental revenues $ 143,008 $ 141,906 $ 1,102 Rental, selling and general expenses 96,495 95,735 760 Adjusted EBITDA 57,283 56,907 376 Six Months Ended June 30, 2019 Calculated in Constant Currency As Reported Difference (In thousands) Rental revenues $ 286,487 $ 284,078 $ 2,409 Rental, selling and general expenses 189,657 187,969 1,688 Adjusted EBITDA 113,930 113,137 793
RESULTS OF OPERATIONS Three Months Ended June 30, 2019, Compared to Three Months Ended June 30, 2018 Percentage of Revenue Three Three Months Ended Months Ended June 30, June 30, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 141,906 $ 132,887 94.5 % 93.6 % $ 9,019 6.8 % Sales 8,135 8,881 5.4 6.3 (746 ) (8.4 ) Other 140 231 0.1 0.2 (91 ) (39.4 ) Total revenues 150,181 141,999 100.0 100.0 8,182 5.8 Costs and expenses: Rental, selling and general expenses 95,735 89,271 63.7 62.9 6,464 7.2 Cost of sales 5,044 5,764 3.4 4.1 (720 ) (12.5 ) Restructuring expenses - 1,195 n/a 0.8 (1,195 ) n/a Depreciation and amortization 18,135 17,192 12.1 12.1 943 5.5 Total costs and expenses 118,914 113,422 79.2 79.9 5,492 4.8 Income from operations 31,267 28,577 20.8 20.1 2,690 9.4 Other income (expense): Interest expense (10,592 ) (10,093 ) (7.1 ) (7.1 ) (499 ) 4.9 Foreign currency exchange (167 ) (21 ) (0.1 ) - (146 ) n/a Income before income tax provision 20,508 18,463 13.7 13.0 2,045 Income tax provision 6,450 3,463 4.3 2.4 2,987 Net income $ 14,058 $ 15,000 9.4 % 10.6 % $ (942 ) Percentage of Revenue Three Months Three Months Ended Ended June 30, June 30, Increase (Decrease) 2019 2018 2019 2018 2019 versus 2018 (In thousands, except percentages) EBITDA $ 49,235 $ 45,748 32.8 % 32.2 % $ 3,487 7.6 % Adjusted EBITDA 56,907 49,987 37.9 35.2 6,920 13.8 Free Cash Flow 38,672 11,726 25.8 8.3 26,946 229.8
Total Revenues. The following table depicts revenues by type of business for the three-month periods ended June 30:
Storage Solutions Three Months Ended June 30, 2019 2018 Increase (Decrease) 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 110,385 $ 105,790 $ 4,595 4.3 % Sales 6,771 7,350 (579 ) (7.9 ) Other 63 190 (127 ) (66.8 ) Total revenues $ 117,219 $ 113,330 $ 3,889 3.4 Tank & Pump Solutions Three Months Ended June 30, 2019 2018 Increase (Decrease) 2019 versus 2018 (In thousands, except percentages) Revenues: Rental $ 31,521 $ 27,097 $ 4,424 16.3 % Sales 1,364 1,531 (167 ) (10.9 ) Other 77 41 36 87.8 Total revenues $ 32,962 $ 28,669 $ 4,293 15.0
Of the $150.2 million of total revenues for the three months ended June 30, 2019, $117.2 million, or 78.1%, related to the Storage Solutions business and $33.0 million, or 21.9%, related to the Tank & Pump Solutions business. Of the $142.0 million of total revenues for the three-month period ended June 30, 2018, $113.3 million, or 79.8%, related to the Storage Solutions business and $28.7 million, or 20.2%, related to the Tank & Pump Solutions business.
Rental Revenues. Storage Solutions rental revenues increased 4.3% during the three-month period ended June 30, 2019, as compared to the prior-year period. In constant currency, rental revenues increased 5.4%. This increase was driven by a 3.4% increase in year-over-year rental rates, as well as favorable mix and increases in delivery and pickup revenue, offset by a slight decrease in average units on rent.
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 the second quarter of 2019 or 2018, we do expect to continue to develop these revenues. During the second quarter of 2019 we recognized $1.7 million of rental revenue related to managed service arrangements, compared to $1.1 million in the second quarter of 2018.
Excluding revenues and units related to managed service arrangements, yield for the three months ended June 30, 2019 (calculated as rental revenues divided by average units on rent and adjusted to a 28 day period) increased 4.1%, or 5.1% in constant currency, as compared to the prior-year period. The increase was driven by higher rates overall, and in North America favorable mix and increased delivery and pickup revenue.
Rental revenues within the Tank & Pump Solutions business increased $4.4 million, or 16.3%, for the three-month period ended June 30, 2019, as compared to the prior-year period. This increase was driven by an approximately 12.9% increase in fleet on rent for the current quarter and increased year-over-year rental rates, partially offset by mix. 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 . . .
Jul 26, 2019
(c) 1995-2019 Cybernet Data Systems, Inc. All Rights Reserved