Business context and reporting period
WillScot Corporation (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended June 30, 2018. It provides modular space and portable storage leasing, sales, delivery and installation services in the U.S., Canada and Mexico. The company reported more than 100 locations, over 77,000 modular space units and nearly 20,000 portable storage units. Results reflect the January 2018 Tyson acquisition and the December 2017 Acton acquisition; the former remote accommodations business is presented as discontinued operations.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and operating statistics.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $140.3 | $110.1 | $275.1 | $209.4 |
| Gross profit / margin | $54.6 / 38.9% | $39.6 / 36.0% | $105.6 / 39.3% | $77.5 / 38.1% |
| Operating income | $5.9 | $11.4 | $10.4 | $16.2 |
| Continuing-operations income (loss) | $0.4 | ($9.7) | ($6.5) | ($22.1) |
| Net income (loss) attributable to WillScot | $0.2 | ($5.9) | ($6.0) | ($16.1) |
| Adjusted EBITDA (non-GAAP) | $41.9 | $26.2 | $77.4 | $48.2 |
Q2 leasing and services revenue rose 38.2%; growth reflected higher rental rates and units on rent, including acquired fleets. On a pro forma basis including Acton and Tyson in both periods, Q2 core leasing and services revenue increased 10.7%, while total revenue increased 2.1%. New- and rental-unit sales declined. Q2 average modular monthly rental rate was $551, up 3.2%; average modular utilization was 70.3%, versus 69.8% a year earlier. SG&A rose to $47.7 million from $31.7 million, including acquisition integration and ModSpace transaction costs. Q2 operating income fell despite higher gross profit; lower interest expense helped improve continuing-operations results. The 2017 comparison also includes discontinued-operation income, unlike 2018.
For the six months, operating cash flow was $18.8 million versus $24.1 million. Investing cash outflow was $77.7 million, including $24.0 million for Tyson and $64.8 million of rental equipment purchases and refurbishments; financing provided $58.0 million. Cash declined $1.0 million to $8.2 million. Rental-equipment net capital expenditures, a company-defined non-GAAP measure, were $52.7 million.
At June 30, total debt carrying value was $686.5 million, including $291.5 million of 7.875% senior secured notes due 2022 and $356.8 million under the U.S. ABL facility; cash was $8.2 million. The ABL had $219.6 million of available capacity. The company reported compliance with debt covenants. Equity totaled $476.6 million and total liabilities were $980.4 million.
Material changes, outlook, risks and unusual items
- Growth and integration: Management attributed much of reported revenue and EBITDA growth to the Acton and Tyson acquisitions as well as organic leasing growth. Acton integration was proceeding to plan; the company had begun exit activities at 90% of overlapping locations and expected them to continue through year-end and into early 2019.
- ModSpace transaction: The company agreed to acquire ModSpace for $1.064 billion cash, 6.46 million Class A shares and warrants for 10 million shares at $15.50. After quarter-end, it said Canadian regulatory clearance was received and expected closing in August 2018. It arranged a larger ABL facility, a $300 million 6.875% secured-note offering, a $200 million unsecured-note offering and an equity offering with approximately $121.9 million net proceeds. These financings were intended to fund the deal and related costs; the debt proceeds were held in escrow pending closing. The filing warns of integration, financing, execution and synergy risks, and a potential $35 million termination fee in specified regulatory circumstances.
- Management outlook: Management described market fundamentals in its largest end markets as favorable and expected modest market growth over the next several years. It cited potential demand from capital spending, infrastructure activity and disaster rebuilding. No specific earnings or revenue guidance was provided.
- Unusual items: Hurricane Harvey insurance proceeds produced $4.8 million of income in the first half, including $1.8 million in Q2. Q2 included $4.1 million of ModSpace transaction costs and $4.8 million of Acton integration costs. The 2018 tax benefit included a $4.2 million discrete state-tax benefit. Adjusted EBITDA excludes selected costs and should not be treated as cash flow available for debt service or investment.
- Controls and other risks: Disclosure controls were deemed ineffective at June 30 because of previously reported material weaknesses in income-tax accounting and reverse-acquisition accounting. Remediation was underway, with completion expected by December 31, 2018. The company also disclosed ordinary-course legal claims, foreign-exchange and operating risks, and potential limits on use of tax-loss carryforwards. Its warrants were delisted from Nasdaq in July 2018 for failure to meet the minimum-holder requirement.
Important facts for investors to verify
- Whether ModSpace closed on the expected timetable and the final cash, equity and debt financing, including resulting leverage and interest expense.
- Whether Acton integration savings materialize and whether acquired-fleet utilization and rental rates improve.
- How much revenue and EBITDA growth is organic versus acquisition-related; review pro forma comparisons and the decline in unit sales.
- Cash conversion, maintenance and growth capital needs, and ABL availability after the ModSpace transaction.
- Progress in remediating the material weaknesses and any effects of tax estimates, NOL limitations or pending tax filings.
- Impact of warrant delisting, potential share dilution and the controlling stockholder’s ownership on liquidity and governance.