WillScot Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; Q4 ended December 31, 2017. Amounts below are in U.S. dollars. Financial results primarily reflect Williams Scotsman International (WSII), the accounting predecessor in the November 29, 2017 reverse acquisition. The former Remote Accommodations business is presented as discontinued operations.
Business context and significant transactions
WillScot rents modular space and portable storage, provides delivery and installation services, and sells new and used units across the U.S., Canada and Mexico. It reported two continuing segments: Modular–US and Modular–Other North America. In November, the company completed its business combination and established a new $600 million asset-based revolving credit facility (ABL); it issued $300 million of 7.875% senior secured notes and received $418.3 million from a TDR-affiliated private placement. In December, it acquired Acton for $237.1 million, financed with cash and ABL borrowings. Acton contributed only a partial month of results to 2017.
Key financial results
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $445.9 million | $426.6 million | Up 4.5% |
| Gross profit / margin | $165.6 million / 37.1% | $168.2 million / 39.4% | Profit down 1.5%; margin contracted |
| Operating loss | $(58.3) million | $(3.2) million | Includes $60.7 million goodwill impairment |
| Net loss attributable to WillScot | $(147.7) million; $(7.47) per share | $(30.9) million; $(2.13) per share | Continuing-operations loss was $(164.5) million |
| Adjusted EBITDA | $108.8 million | $106.5 million | Up 2.2%; non-GAAP measure |
| Operating cash flow | $(1.4) million | $58.7 million | Down $60.1 million |
| Rental-equipment capital expenditures | $102.2 million | $64.0 million | Higher investment in fleet and growth |
| Cash and debt at year-end | $9.2 million cash; $626.7 million carrying value of debt | $2.4 million cash; $657.6 million debt | Debt carrying value differs from principal-based disclosures |
Q4 revenue was $120.4 million, gross profit $46.8 million and Adjusted EBITDA $31.2 million. Q4 operating loss was $79.9 million and net loss was $125.4 million, largely reflecting the $60.7 million Canadian goodwill impairment and other period-end items. Q4 figures include the impairment; the filing does not attribute the entire quarterly loss to it.
Changes versus prior year
- Modular–US revenue rose 7.5% to $392.9 million. Average modular rental rates increased 7.6% to $538 per month, average modular utilization rose to 73.9% from 72.0%, and average modular units on rent increased 2.2%.
- Modular–Other North America revenue declined 13.4% to $53.7 million and Adjusted EBITDA fell 46.3% to $13.1 million, principally after a large upstream oil-and-gas project ended in 2016. Canadian goodwill was fully impaired.
- Consolidated gross margin declined as weaker Other North America performance and lower rental-unit sale gross profit outweighed U.S. leasing gains. SG&A increased 16.8% to $162.4 million, including transaction and professional fees and public-company costs.
- Interest expense rose 26.0% to $119.3 million, including financing-related fees and costs associated with the transaction and new debt structure. Operating cash flow turned negative; management cites transaction and financing expenses and lower gross profit, among other factors.
Liquidity, outlook, risks and unusual items
- Liquidity and leverage: At year-end the company had $281.1 million of ABL borrowing capacity, subject to borrowing-base availability, and $9.2 million cash. The ABL matures May 2022; the $300 million notes mature December 2022 and bear 7.875% interest. A 100-basis-point increase in rates on variable-rate debt was estimated to add about $3.1 million of annual interest expense. ABL covenants and borrowing-base limits could constrain access to liquidity. Contractual obligations totaled $956.1 million, including debt and interest, leases and capital leases.
- Outlook: Management described market fundamentals in its largest end markets as favorable and expected continued modest market growth over the next several years. It noted that Canadian and Mexican markets appeared to have stabilized, while competitive supply could continue to pressure pricing. No quantified earnings or revenue guidance was provided.
- Strategy and commentary: Priorities include growing rental utilization and yield, expanding value-added products and services, improving customer experience, deploying capital efficiently and pursuing acquisitions. Management reported overall product utilization of 70.6% at year-end. The January 2018 Tyson Onsite acquisition added approximately 1,750 units and was funded with ABL borrowings.
- Tax and other unusual items: The Tax Cuts and Jobs Act produced provisional estimates, including a $28.1 million deferred-tax remeasurement benefit, a $50.5 million valuation allowance related to interest-deduction limitations, and a $2.4 million transition-tax obligation. Accounting remained subject to further information and guidance. The company reported $60.7 million of goodwill impairment, $23.9 million of transaction fees in the Adjusted EBITDA reconciliation, and $9.4 million of Algeco long-term incentive expense.
- Controls: Management concluded disclosure controls were ineffective at December 31, 2017 because of material weaknesses in income-tax accounting and reverse-acquisition accounting. Audit adjustments and disclosures were corrected before issuance. Management planned remediation; the auditor did not express an opinion on internal control over financial reporting.
- Other risks: Key exposures include economic and end-market cyclicality, competition and pricing, fleet utilization and maintenance, acquisition integration, foreign exchange, interest rates, raw-material and labor costs, tax-attribute limitations, insurance and natural disasters. The company reported no material pending legal proceeding and no material environmental matter known to it. Hurricane Harvey and Irma generated insurance claims; coverage and recovery timing remain relevant uncertainties.
Most important facts for investors to verify
- Reconcile reported debt: $626.7 million carrying value, $610 million of principal in the ABL and notes, plus other financing obligations; the filing separately cites $650.5 million total indebtedness excluding deferred financing fees.
- Assess underlying cash generation against Adjusted EBITDA, including the negative 2017 operating cash flow, capital spending and acquisition-related cash needs. Adjusted EBITDA is non-GAAP and is not cash available for debt service or reinvestment.
- Track U.S. leasing-rate and utilization gains against lower portable-storage utilization and continued weakness in Other North America pricing and margins.
- Review the Canadian impairment assumptions and whether market recovery, oil-and-gas demand, pricing and utilization support the remaining asset values.
- Monitor ABL borrowing-base capacity, covenant headroom, debt-service costs, and the integration and returns of Acton and subsequent acquisitions.
- Confirm remediation of the material weaknesses and final accounting for the Tax Act and Acton purchase-price allocation.