WillScot Corporation — Q1 2019 Form 10-Q
Business context and reporting period
WillScot Corporation provides modular space and portable storage solutions in the U.S., Canada and Mexico. This unaudited report covers the three months ended March 31, 2019; comparative figures are for Q1 2018. The August 2018 ModSpace acquisition materially increased the scale of the business, so reported year-over-year growth includes acquired operations and is not directly comparable on an organic basis.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $255.0 million | $134.8 million |
| Gross profit / gross margin | $104.7 million / 41.0% | $50.9 million / 37.8% |
| Operating income | $21.2 million | $4.5 million |
| Net loss | $11.2 million; $10.3 million attributable to WillScot | $6.8 million; $6.2 million attributable to WillScot |
| Adjusted EBITDA (non-GAAP) | $84.5 million | $35.5 million |
| Cash from operating activities | $15.3 million | $4.8 million |
| Free cash flow (non-GAAP) | $(26.6) million | $(19.7) million |
Revenue rose 89.2%, primarily reflecting ModSpace and improved pricing and volumes. On a pro forma basis including ModSpace in both periods, revenue increased 4.5%; pro forma core leasing revenue rose 8.9%. Gross margin improved, while the company remained loss-making. Interest expense increased to $32.0 million from $11.7 million. Cash interest paid was $34.0 million, compared with $4.2 million.
At March 31, 2019, cash was $12.8 million, current assets $302.8 million and current liabilities $276.1 million. Total debt carrying value was $1.711 billion, including $1.990 million current and $1.709 billion long-term. The ABL Facility had $910.5 million outstanding principal and $468.9 million available borrowing capacity. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- ModSpace drove substantial increases in revenue, fleet size, rental units on rent, expenses and debt. Reported average modular space units on rent increased 72.4%; average monthly modular space rent increased 7.7% to $575.
- On a pro forma basis, modular space rental rates increased 13.6%, but average units on rent declined 2.0%, which management attributed partly to integration disruption and severe Q1 weather. Other North America pro forma rental rates and units on rent declined 0.9% and 3.5%, respectively.
- Adjusted EBITDA increased $49.0 million, or 138.0%, with acquisition scale and partial realization of synergies contributing. Free cash flow nevertheless weakened as capital spending, integration and restructuring costs, and interest payments increased.
- Rental equipment purchases and refurbishments were $51.9 million, versus $32.1 million. Investing cash outflow was $41.8 million; financing cash inflow was $30.3 million.
Outlook, management commentary, risks and unusual items
- Management described end-market fundamentals as favorable and expected modest market growth over the next several years. It cited continued rate improvement, customer service and “Ready to Work” offerings as priorities; the filing provides no specific earnings or revenue guidance.
- Management reported $13.7 million of cumulative synergies from the Acton, Tyson and ModSpace acquisitions, including $7.3 million realized in Q1, and said this was slightly ahead of plan. It expects more than $70 million of annual recurring cost savings once integration plans are fully executed. Integration and real-estate consolidation are expected to continue through 2019 and into 2020.
- Q1 included $10.1 million of integration costs, $6.0 million of restructuring costs and $2.3 million of property impairment, primarily related to ModSpace integration and facility exits. A $0.9 million settlement contributed to other income. Q1 2018 included $3.0 million of Hurricane Harvey insurance proceeds.
- Key risks include integration execution, demand and utilization, tariffs on steel, aluminum and lumber, variable-rate debt and interest costs, foreign exchange exposure, credit collection, and possible impairment if operating performance or market assumptions deteriorate. The Canadian reporting unit had less than 1% fair-value headroom over carrying value at December 31, 2018; no impairment indicators were reported at March 31, 2019.
- The company had a $400 million interest-rate swap against variable-rate ABL debt. Management estimated a 100-basis-point interest-rate increase would raise quarter-to-date interest expense by approximately $1.2 million. No material pending legal proceedings were reported, and management said no pending claim was expected to materially affect financial condition, results or cash flows.
Most important facts for investors to verify
- How much of reported growth and EBITDA improvement is sustainable organically versus attributable to ModSpace and other acquisitions.
- Progress against the stated $70 million-plus recurring synergy target, including the timing and cash costs of integration and restructuring.
- Rental-unit utilization and rate trends, particularly the pro forma decline in units on rent and the weaker Other North America indicators.
- Debt service capacity and liquidity, including ABL availability, cash interest burden, variable-rate exposure and the effect of sustained negative free cash flow.
- Whether receivables, capital spending and facility exits develop as expected; trade receivables rose to $229.6 million from $206.5 million during the quarter.
Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results and the company’s stated limitations on those measures.