Business context and reporting period
WillScot Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019. The company leases, sells, delivers and installs modular space and portable storage solutions in the U.S., Canada and Mexico. It reported more than 120 branches, over 50,000 customers, and a fleet of approximately 130,000 modular units and 26,000 portable storage units. Comparisons with 2018 are affected by the August 2018 ModSpace acquisition, which contributed for only part of the prior-year periods.
Financial and operating performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $272.3 | $218.9 | $793.5 | $494.0 |
| Gross profit / margin | $103.4 / 38.0% | $80.9 / 37.0% | $312.0 / 39.3% | $186.5 / 37.8% |
| Operating income | $30.4 | $0.2 | $78.4 | $10.6 |
| Net income (loss) | $0.8 | $(36.7) | $(22.2) | $(43.2) |
| Net income (loss) attributable to WillScot | $0.5 | $(33.5) | $(20.7) | $(39.5) |
| Adjusted EBITDA (non-GAAP) | $88.4 | $64.6 | $261.6 | $142.0 |
| Cash from operating activities | $39.0 | $(3.2) | $99.1 | $15.6 |
| Free cash flow (non-GAAP) | $1.3 | $(41.9) | $(23.7) | $(76.7) |
Q3 diluted EPS attributable to WillScot was $0.00, versus a loss of $0.37 per share a year earlier; nine-month diluted loss per share was $0.19 versus $0.48. Nine-month interest expense was $95.4 million, and cash interest paid was $94.9 million.
At September 30, cash was $4.0 million, current assets $304.2 million and current liabilities $301.0 million. Total debt carrying value was $1.712 billion, compared with $1.676 billion at December 31, 2018. ABL borrowings had $489.2 million of available capacity; outstanding ABL principal was $917.5 million. The company reported compliance with debt covenants. It redeemed its $200 million, 10% unsecured notes in June, recording a $7.2 million extinguishment loss.
Material changes versus prior periods
- Q3 revenue rose 24.4% year over year, led by leasing and services revenue, which increased 34.3%. The company cited improved pricing and the additional 1.5 months of ModSpace contribution in Q3 2019. New-unit and rental-unit sales fell 45.0% and 20.8%, respectively.
- On a pro forma basis including ModSpace in both periods, Q3 revenue declined 9.4%; management attributed the decrease primarily to large prior-year sales that did not recur. Core modular leasing revenue nevertheless increased 7.9% on that basis.
- Consolidated Q3 average monthly modular-space rent rose 12.3% to $630, while average modular units on rent increased 21.0%. Modular-space utilization declined 60 basis points to 71.2%; portable-storage utilization fell to 63.0% from 68.0%.
- Reported nine-month revenue and Adjusted EBITDA increased substantially, but the periods are not directly comparable because ModSpace was included for a much longer period in 2019. Pro forma nine-month revenue declined 1.6%, while core modular leasing revenue rose 8.6%.
- Nine-month operating cash flow improved to $99.1 million, but Free Cash Flow remained negative at $23.7 million, reflecting increased fleet investment and interest payments. Rental-equipment purchases and refurbishments were $160.9 million, up from $111.5 million.
Outlook, management commentary and risks
Management said market fundamentals in its principal commercial/industrial and construction end markets remained favorable and expected modest market growth over the next several years. It emphasized pricing, units on rent, VAPS penetration, customer experience, and acquisition integration. No specific revenue, earnings or cash-flow guidance was provided.
Management reported approximately $31.2 million of cumulative synergies from the Acton, Tyson and ModSpace integrations; about 70% of the estimated $70 million of annualized cost synergies was in the run rate at quarter-end. Approximately 75% of planned real-estate exits were complete, with remaining exits expected through the first half of 2020. The quarter included $5.5 million of ModSpace integration costs and $2.0 million of restructuring costs.
Key risks disclosed include end-market demand and competition, execution and integration of acquisitions, equipment utilization and maintenance, customer credit and collections, labor and input-cost inflation, tariffs on steel, aluminum and lumber, foreign-exchange exposure, and variable interest rates. A $400 million interest-rate swap hedged part of ABL exposure; management estimated a 100-basis-point rate increase would add approximately $1.1 million to quarterly interest expense. The company reported no material pending legal proceedings and no off-balance-sheet arrangements with a material effect. It planned to adopt ASC 842 in Q4 2019, retroactive to January 1, 2019, and estimated recognition of $135–$145 million of operating lease assets and liabilities.
Important facts for investors to verify
- Whether leasing growth and pricing can continue, particularly given lower pro forma revenue and declining Q3 utilization measures.
- How much of the targeted $70 million in annualized synergies is ultimately realized, and the remaining integration, real-estate exit and restructuring costs.
- Whether operating cash generation can cover fleet investment, interest and debt service; nine-month Free Cash Flow remained negative.
- Debt levels, ABL availability, floating-rate exposure and the effects of refinancing or future borrowing.
- Receivables quality: the allowance for doubtful accounts was $15.1 million, and nine-month bad-debt expense was $11.8 million, up from $5.4 million.
- The impact of ASC 842 adoption and any developments in tariff-related costs, market demand or customer collections.