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July 26, 2019, 2:58 p.m. EDT

10-Q: MOBILE MINI INC

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(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.

Overview

Executive Summary

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:

Revenues:

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

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