WillScot Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; filed November 9, 2018. The filing is by WillScot Corporation, the parent of the Williams Scotsman operating businesses. Amounts below are in U.S. dollars.
Business context and results
WillScot provides modular space and portable storage solutions in the U.S., Canada and Mexico. The quarter includes ModSpace results from its August 15, 2018 acquisition; reported comparisons also reflect the earlier Acton and Tyson acquisitions. The 2017 Remote Accommodations business is presented as discontinued operations, limiting direct comparability.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $218.9 million, up 88.4% from $116.2 million | $494.0 million, up 51.7% from $325.6 million |
| Gross profit / margin | $80.9 million / 37.0%; prior-year margin 35.5% | $186.5 million / 38.8%; prior-year margin 36.4% |
| Operating income | $0.2 million, versus $5.4 million | $10.6 million, versus $21.6 million |
| Net loss attributable to WillScot | $33.5 million, versus $8.4 million | $39.5 million, versus $24.4 million |
| Adjusted EBITDA | $64.6 million, versus $29.4 million | $142.0 million, versus $77.6 million |
Q3 modular leasing and services growth reflected higher unit volumes, acquisitions and improved pricing. Management reported average modular-space rental rates up 3.7% and average units on rent up 81.9% year over year; acquisitions were a major driver. Q3 pro forma revenue, including WillScot, Acton, Tyson and ModSpace for comparable periods, was $300.6 million, up 11.3% year over year. The U.S. segment generated $197.6 million of Q3 revenue and $58.5 million of Adjusted EBITDA; Other North America generated $21.3 million and $6.2 million, respectively.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $15.6 million, compared with $46.9 million. Investing cash outflow was $1.176 billion, including $1.060 billion for ModSpace and $24.0 million for Tyson. Financing cash inflow was $1.161 billion, principally from acquisition-related borrowing and equity issuance.
- Rental-equipment purchases and refurbishments were $111.5 million for nine months; proceeds from rental-equipment sales were $21.6 million. Cash and equivalents were $9.8 million at September 30, 2018.
- Reported debt carrying value was $1.653 billion, including $830.6 million under the U.S. ABL Facility, $293.6 million of 2023 secured notes, $198.9 million of unsecured notes and $291.9 million of 2022 secured notes. The ABL balance included $859.0 million of outstanding principal across facilities.
- The amended ABL Facility had a $1.425 billion line cap and $552.9 million of available borrowing capacity. Its weighted-average borrowing rate was 4.65%. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- ModSpace was acquired for a stated purchase price of approximately $1.2 billion, funded with debt, public equity and acquisition shares and warrants. Purchase-price allocations and the working-capital adjustment remained preliminary.
- Q3 interest expense included $20.5 million of ModSpace-related bridge financing and upfront commitment fees, which management said were not expected to recur. The acquisition financing is expected to increase interest expense in future periods. The $200 million unsecured notes carry 10% cash interest or 11.5% payment-in-kind interest through February 2021; thereafter interest is 12.5% in cash.
- Management said integration was underway, with new contracts moving to WillScot’s platform from November 1, 2018 and full ModSpace IT cutover anticipated in Q1 2019. It expected further savings from integration and branch consolidation through 2019. Acton and Tyson synergies realized were approximately $3.9 million year to date; no specific total-year earnings guidance was provided.
- Management described end-market fundamentals as favorable and expected modest market growth over the next several years. It also noted competitive pricing pressure in Other North America and weaker utilization in some acquired fleets and portable storage.
- Risks include acquisition integration and realizing synergies, leverage and debt service, interest-rate exposure, utilization and pricing, credit and collections, foreign exchange, and possible impairment. ModSpace goodwill allocations were preliminary; management noted a possible impairment risk for Canadian reporting-unit goodwill based on historical impairment activity.
- Disclosure controls were deemed ineffective at September 30, 2018 because of previously reported material weaknesses in income-tax and reverse-acquisition accounting controls. Management expected remediation by December 31, 2018, subject to controls operating effectively for a sufficient period. ModSpace controls were excluded from the quarter-end assessment while being evaluated.
- The filing reported no material pending legal proceedings and no material updates to previously disclosed risk factors. A subsequent-event interest-rate swap covered $400 million of variable-rate debt, fixing the paid rate at 3.06%, and was entered into on November 6, 2018.
Important facts for investors to verify
- Track post-acquisition, comparable revenue and rental-rate, unit-on-rent and utilization trends separately from acquisition-driven growth.
- Confirm progress on ModSpace integration, expected cost savings, and the final purchase-price allocation and working-capital adjustment.
- Monitor debt balances, ABL availability, cash generation after fleet investment, and interest costs, especially on the unsecured notes.
- Review the outcome of the October 1, 2018 goodwill impairment test and subsequent remediation of the disclosed control weaknesses.
- Consider the one-time bridge fees, Hurricane Harvey insurance gain and acquisition-related restructuring, transaction and integration costs when assessing underlying performance; Adjusted EBITDA is a non-GAAP measure and is not operating cash flow.