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May 6, 2020, 5:06 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, 2019, 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 Condition 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 94% of our total revenues for the three months ended March 31, 2020. 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, 2020, our network of locations included 117 Storage Solutions locations, 20 Tank & Pump Solutions locations and 18 combined locations. Our Storage Solutions fleet consisted of approximately 200,500 units and our Tank & Pump Solutions fleet consisted of approximately 12,800 units. During the quarter, we completed the acquisition of a portable storage business which further strengthened our business in Dallas, Texas.

Merger. In March 2020, Mobile Mini entered into a definitive merger agreement (the "Merger Agreement") with WillScot Corporation ("WillScot"). The Merger Agreement provides for the merger of Mobile Mini with and into a newly formed subsidiary of WillScot, with Mobile Mini surviving as a wholly owned subsidiary of WillScot (the "Merger"). At the effective time of the Merger, and subject to the terms and conditions set forth in the Merger Agreement, each outstanding share of the common stock of Mobile Mini shall be converted into the right to receive 2.4050 shares of WillScot Class A common stock. The board of directors of both Mobile Mini and WillScot unanimously approved the Merger and the Merger Agreement and have recommended that their stockholders vote in favor of the adoption of the Merger Agreement. The Merger is subject to customary closing conditions, including receipt of regulatory and stockholder approvals by the Mobile Mini and WillScot stockholders, and is expected to close in the third quarter of 2020.

Business Environment and Outlook, including COVID-19 Considerations. On January 30, 2020 the World Health Organization declared an outbreak of a highly contagious form of an upper respiratory infection caused by COVID-19, a novel coronavirus strain commonly referred to as "coronavirus". In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread, including in the markets in which we operate. The COVID-19 outbreak has had a notable impact on general economic conditions, including but not limited to the temporary closures of many businesses; "shelter in place" and other governmental regulations; and reduced consumer spending due to both job losses and other effects attributable to COVID-19. Mobile Mini has been deemed an essential infrastructure business, which means we continue to supply our products and services. Our business results for the three months ended March 31, 2020 were minimally impacted by the pandemic; however, our business is subject to the general health of the economy and federal and local guidelines and restrictions have significantly curtailed the level of economic activity in affected areas, which include the areas in which we conduct our business. Please see additional information in "Item 1a. Risk Factors".

As an essential business during this pandemic our operations have not been significantly disrupted by the effects of the pandemic and we expect to be able to continue to meet demand. In North America we have implemented work from home policies for many of our employees and introduced practices for our drivers and yard workers to protect their safety and health. We have an adequate near-term supply of parts and supplies to maintain our fleet and do not anticipate any material supply gaps. Further, we anticipate that our significant business partners will continue to provide the services and materials, including software-related services, necessary to manage and operate our business.

Our pipeline of new orders has decreased, and we expect fewer new rentals for the near term. While our level of deactivations has also decreased compared to the prior year, we anticipate the decreased demand for new rentals will result in lower year-over-year and sequential rental revenues across the Company for the near-term, most notably in delivery, pickup and similar revenue, which comprised 24% of our rental revenues for the twelve months ended March 31, 2020.

Our customer end markets are experiencing varying degrees of impact related to COVID-19. Entering 2020, non-residential construction projects for local and national account customers were healthy. Units on rent for projects that were in progress prior to the pandemic, largely remain on rent. However, some projects that were scheduled for commencement in the second and third quarters of 2020 have been delayed and some may be cancelled. Similarly, within our retail end market, projects in progress have continued, however, certain national customers have temporarily postponed remodels. The duration of postponements is uncertain.

In the Tank & Pump Solutions business, industrial softening in the second half of 2019 was exacerbated in the first quarter of 2020 by an oversupply of oil leading to lower oil prices and reduced average refinery capacity utilization. Further, heading into the second quarter, the effects of COVID-19 have resulted in decreased demand for oil. In the near-term we expect continued decreased demand for our products from certain of our customers in this business segment. When supply and demand dynamics normalize, we are well positioned to respond to increased demand.

To mitigate decreased near-term revenues, we have begun to reduce variable costs and overhead where appropriate, including minimizing use of third-party vendors. Depending on levels of demand, management will further enact contingency plans to minimize the impact of reduced revenue on adjusted EBITDA. As we decrease capital expenditures in line with our demand-driven business model, we expect to continue to generate healthy levels of free cash flow.

Mobile Mini's leverage ratio at March 31, 2020 is our lowest leverage ratio since September 30, 2014 and we believe we have ample liquidity to meet foreseeable needs. Access to our line of credit has not been affected by recent events and we have $438 million of available borrowings with no significant debt maturities until 2024. We have also elected to suspend both small acquisitions and share repurchases in the near-term.

Approximately 68% of our consolidated rental revenue during the twelve-month period ended March 31, 2020 was derived from our North America Storage Solutions business, 13% was derived from our U.K. Storage Solutions business and 19% was derived from the Tank & Pump Solutions business. Based on rental revenue for the twelve months ended March 31, 2020, the construction industry represents approximately 36% of our consolidated rental revenue, industrial and commercial customers comprise approximately 26% of our rental revenue and generally operate in industries such as: large processing plants for organic and inorganic chemicals, refineries, distributors and trucking and utility companies. Retail and consumer service customers comprise approximately 22% 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 less than 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.

On January 31, 2020 the U.K. ceased to be a member of the European Union (the "E.U.") (commonly known as "Brexit"), on terms set out in a withdrawal agreement concluded and ratified by the E.U. and U.K. ("Withdrawal Agreement"). The Withdrawal Agreement provides for a transition period until December 31, 2020 ("Transition Period"), during which time the U.K. will continue to be treated as a member of the E.U., in effect, for legal and regulatory purposes. The U.K. and E.U. continue to negotiate the terms of a future trading relationship to come into effect at the end of the Transition Period. The terms of any future trade deal between the U.K. and the E.U. remain highly uncertain and the chances of the U.K. and E.U. failing to reach agreement before the end of the Transition Period cannot be ruled out. In tandem with its negotiations with the E.U., the U.K. is commencing future trade deal negotiations with other key countries, including the U.S. As the future trade deal terms and their impact become clear, we may adjust our U.K. strategy and operations accordingly.

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 March 31, 2020:







                                                                                   Percentage of
                                                                   Number of        Gross Fleet        Percentage of
                                                Rental Fleet         Units          in Dollars             Units
                                               (In thousands)
        Steel storage containers               $       624,731        170,899                  63   %              85   %
        Steel ground level offices                     364,429         28,957                  36                  14
        Other                                            6,122            648                   1                   1
        Storage Solutions rental fleet                 995,282        200,504                 100   %             100   %
        Accumulated depreciation                      (168,564 )
        Storage Solutions rental fleet, net    $       826,718
        


The table below outlines the composition of our Tank & Pump Solutions rental fleet at March 31, 2020:







                                                                                       Percentage of
                                                                       Number of        Gross Fleet        Percentage of
                                                   Rental Fleet          Units          in Dollars             Units
                                                  (In thousands)
        Steel tanks                               $        82,264           3,251                  41   %              26   %
        Roll-off boxes                                     35,576           5,660                  18                  44
        Stainless steel tank trailers                      31,292             661                  15                   5
        Vacuum boxes                                       17,242           1,553                   9                  12
        Dewatering boxes                                   10,233             913                   5                   7
        Pumps and filtration equipment                     15,031             743                   7                   6
        Other                                               9,896             n/a                   5
        Tank & Pump Solutions rental fleet                201,534          12,781                 100   %             100   %
        Accumulated depreciation                          (68,075 )
        Tank & Pump Solutions rental fleet, net   $       133,459
        


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,
                                                     2020                      2019
                                                   (In thousands, except percentages)
        Net income                             $           8,301          $        18,085
        Interest expense                                   9,257                   10,760
        Income tax provision                               6,639                    6,523
        Depreciation and amortization                     17,492                   17,335
        Deferred financing costs write-off                     -                      123
        EBITDA                                            41,689                   52,826
        Share-based compensation expense (1)               2,682                    3,404
        Merger-related expenses (2)                       15,505                        -
        Adjusted EBITDA                        $          59,876          $        56,230
        EBITDA margin                                       28.0    %                35.3   %
        Adjusted EBITDA margin                              40.2                     37.6
        


Reconciliation of net cash provided by operating activities to EBITDA is as follows:







                                                                        Three Months Ended
                                                                            March 31,
                                                                       2020           2019
                                                                          (In thousands)
        Net cash provided by operating activities                    $ 33,223       $  38,783
        Interest paid                                                  12,608          14,276
        Income and franchise taxes paid                                 1,913           2,020
        Share-based compensation expense (1)                           (2,682 )        (3,404 )
        Gain on sale of rental fleet                                    1,444           1,425
        Loss on disposal of property, plant and equipment                 (26 )           (18 )
        Change in certain assets and liabilities, net of effect of
          businesses acquired:
        Receivables                                                    (4,320 )       (17,392 )
        Inventories                                                       154             (76 )
        Other assets                                                   (1,381 )         1,394
        Accounts payable and accrued liabilities                          756          15,818
        EBITDA                                                       $ 41,689       $  52,826
        


(1) Share-based compensation represents non-cash compensation expense associated with the granting of equity instruments. See additional information in Note

(2) For the three months ended March 31, 2020, this amount represents incremental costs related to our proposed merger with WillScot. See additional information in Note 1 "Mobile Mini, Inc. - Organization and Description of Business" to the accompanying condensed consolidated financial statements.

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 acquisitions.

Reconciliation of net cash provided by operating activities to free cash flow is as follows:







                                                                 Three Months Ended
                                                                      March 31,
                                                                2020            2019
                                                                   (In thousands)
        Net cash provided by operating activities             $  33,223       $  38,783
        Additions to rental fleet, excluding acquisitions       (10,051 )       (23,016 )
        Proceeds from sale of rental fleet                        3,474           3,338
        Additions to property, plant and equipment,
          excluding acquisitions                                 (4,174 )        (2,919 )
        Proceeds from sale of property, plant and equipment          15              49
        Net capital expenditures, excluding acquisitions        (10,736 )       (22,548 )
        Free cash flow                                        $  22,487       $  16,235
        


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, 2020
                                                        Calculated in
                                                           Constant
                                                           Currency           As Reported       Difference
                                                                          (In thousands)
        Rental revenues                                 $      140,958       $     140,656     $        302
        Rental, selling and general expenses                   102,457             102,258              199
        Adjusted EBITDA                                         59,986              59,876              110
        








        RESULTS OF OPERATIONS
        Three Months Ended March 31, 2020, Compared to Three Months Ended March 31, 2019
                                                          Percentage of Revenue Three Months
                                Three Months Ended                       Ended
                                     March 31,                         March 31,                       Increase (Decrease)
                                2020          2019           2020                    2019                2020 versus 2019
                                                             (In thousands, except percentages)
        Revenues:
        Rental                $ 140,656     $ 142,172            94.4     %              95.0   %   $     (1,516 )        (1.1 ) %
        Sales                     8,316         7,223             5.6                     4.8              1,093          15.1
        Other                        68           266             0.0                     0.2               (198 )       (74.4 )
        Total revenues          149,040       149,661           100.0                   100.0               (621 )        (0.4 )
        Costs and expenses:
        Rental, selling and
        general
          expenses              102,258        92,234            68.6                    61.6             10,024          10.9
        Cost of sales             5,102         4,602             3.4                     3.1                500          10.9
        Depreciation and
          amortization           17,492        17,335            11.7                    11.6                157           0.9
        Total costs and
        expenses                124,852       114,171            83.8                    76.3             10,681           9.4
        Income from
        operations               24,188        35,490            16.2                    23.7            (11,302 )       (31.8 )
        Other income
        (expense):
        Interest income              12             -               -                       -                 12           n/a
        Interest expense         (9,257 )     (10,760 )          (6.2 )                  (7.2 )            1,503         (14.0 )
        Deferred financing
        costs
          write-off                   -          (123 )             -                    (0.1 )              123           n/a
        Foreign currency
        exchange                     (3 )           1               -                       -                 (4 )         n/a
        Income before
        income tax
          provision              14,940        24,608            10.0                    16.4             (9,668 )
        Income tax
        provision                 6,639         6,523             4.5                     4.4                116
        Net income            $   8,301     $  18,085             5.6     %              12.1   %   $     (9,784 )
                                 Three Months Ended        Percentage of Revenue Three Months Ended
                                     March 31,                            March 31,                          Increase (Decrease)
                                 2020          2019            2020                        2019                2020 versus 2019
                                                                (In thousands, except percentages)
        EBITDA                $   41,689     $  52,826             28.0      %                 35.3   %   $    (11,137 )       (21.1 ) %
        Adjusted EBITDA           59,876        56,230             40.2                        37.6              3,646           6.5
        Free Cash Flow            22,487        16,235             15.1                        10.8              6,252          38.5
        


Total Revenues. The following table depicts revenues by type of business for the three-month periods ended March 31:







                                                                         Increase (Decrease)
                                            2020          2019             2020 versus 2019
                                                    (In thousands, except percentages)
        Rental Revenues:
        North America Storage Solutions   $  96,469     $  93,516     $    2,953         3.2   %
        U.K. Storage Solutions               18,275        19,209           (934 )      (4.9 )
        Total Storage Solutions             114,744       112,725          2,019         1.8
        Tank & Pump Solutions                25,912        29,447         (3,535 )     (12.0 )
        Total Rental Revenues             $ 140,656     $ 142,172     $   (1,516 )      (1.1 )
        U.K. Storage Solutions in
         Constant Currency                $  18,577     $  19,209     $     (632 )      (3.3 )
        Total Storage Solutions in
          Constant Currency                 115,046       112,725          2,321         2.1
        Sales Revenues:
        . . .
        


May 06, 2020

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