Business context and reporting period
WillScot Corporation’s Form 10-K reports the fiscal year ended December 31, 2018, including fourth-quarter results. The company rents and sells modular space and portable storage solutions across the U.S., Canada and Mexico. Results include Acton and Tyson after their respective acquisition dates and ModSpace from August 15, 2018; therefore, reported year-over-year growth is materially affected by acquisitions.
In August 2018, WillScot acquired ModSpace for approximately $1.2 billion. The company reported more than 120 branches and served over 50,000 customers. At year-end, approximately 94,223 modular units and 18,161 portable storage units were on rent.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $751.4 million | $445.9 million |
| Gross profit / margin | $289.4 million / 38.5% | $165.6 million / 37.1% |
| Operating income (loss) | $6.3 million | $(58.3) million |
| Net loss | $(53.6) million | $(149.8) million |
| Adjusted EBITDA | $215.5 million | $108.8 million |
| Cash from operating activities | $37.1 million | $(1.4) million |
| Cash and cash equivalents at year-end | $9.0 million | $9.2 million |
Fourth-quarter revenue was $257.4 million, gross profit $102.9 million and Adjusted EBITDA $73.5 million. Fourth-quarter net loss was $10.4 million; operating loss was $4.3 million. The filing provides quarterly operating results but does not provide a clear quarterly cash-flow value.
Revenue rose 68.5% for the year, primarily due to acquisitions and higher leasing volumes. On a pro forma basis treating Acton and ModSpace as acquired from January 1, 2017, revenue increased 8.2% to $1.064 billion and Adjusted EBITDA increased 19.6% to $284.5 million. Management’s pro forma figures are non-GAAP and unaudited.
Rental-equipment net capital expenditures were $130.1 million; net capital expenditures from continuing operations, including property and equipment, were $134.7 million. Adjusted EBITDA less Net CAPEX was $67.7 million, a non-GAAP measure that the company cautions is not discretionary cash flow.
Year-end debt carrying value was $1.676 billion, including current debt and net of certain issuance costs. The company also disclosed approximately $1.719 billion of nominal indebtedness excluding deferred financing fees. This included $879.4 million of ABL borrowings, $300 million of 2022 secured notes, $300 million of 2023 secured notes, $200 million of unsecured notes and $39.5 million of other financing obligations. ABL availability was $532.6 million, subject to borrowing-base limits; cash was $9.0 million. Contractual debt and interest obligations totaled $2.185 billion. Principal maturities include approximately $1.18 billion in 2022 and $500 million in 2023.
Material changes versus the prior comparable period
- Full-year revenue increased $305.5 million, or 68.5%, and Adjusted EBITDA increased $106.7 million, or 98.1%. Acquisitions, including ModSpace, were a major driver; these reported changes are not purely organic.
- Gross margin improved to 38.5% from 37.1%. Average modular rental rates increased, while modular utilization was 71.6% versus 70.3%; portable-storage utilization declined to 68.9% from 71.4%.
- Net loss improved by $96.2 million. The 2017 comparison included a $60.7 million goodwill impairment; 2018 included $15.5 million of restructuring charges, $30.0 million of integration costs and $20.1 million of transaction costs.
- Cash from operations improved by $38.5 million, but investing cash outflow rose to $1.217 billion, principally reflecting $1.083 billion of cash consideration for acquisitions and increased fleet investment. Financing provided $1.180 billion, including acquisition-related debt and equity issuance.
- Debt increased substantially to fund ModSpace. The company also completed a $139.0 million net public equity offering and exchanged a portion of its warrants for shares, recording a $2.1 million non-cash deemed dividend.
Outlook, management commentary, risks and unusual items
Management described market fundamentals as favorable and expected modest market growth over the next several years. It expected over $60 million in annual recurring cost savings from the Acton and ModSpace integrations, with significant realization expected to begin in 2019; further integration, branch consolidation and fleet relocation were expected to continue through 2019 and 2020. The company reported approximately $6.4 million of realized synergies related to Acton and Tyson in 2018. These are expectations, not guarantees.
Management cited organic pricing and product-service growth: pro forma modular-space rates in the U.S. rose 11.9% in 2018, while pro forma average units on rent rose 0.5%. It expected favorable pricing trends to continue in 2019. The filing also notes weaker competitive conditions and historically depressed demand in parts of Canada and Alaska tied to energy markets.
- Leverage and refinancing: Significant debt service, restrictive covenants, borrowing-base variability and large 2022–2023 maturities could constrain investment or liquidity. The ABL facility requires financial tests in specified circumstances; the company reported covenant compliance at year-end.
- Interest-rate exposure: $400 million of ABL borrowings were swapped to a fixed rate through May 2022. A 100-basis-point rate increase was estimated to raise annual interest expense by approximately $4.7 million, after swaps.
- Integration and execution: Synergies may be delayed, cost more than expected or not be fully achieved. Acquired fleet condition, customer retention and successful systems and branch integration are additional risks.
- Goodwill sensitivity: No impairment was recorded in 2018, but Canadian reporting-unit fair value exceeded carrying value by less than 1% at year-end. A 1% increase in the discount rate, with other assumptions unchanged, was estimated to reduce fair value by $30.9 million and cause a partial impairment.
- Tax attributes: The company reported substantial U.S. federal and state net operating loss carryforwards, subject to expiration and potential ownership-change limitations. Tax examinations, interest-deduction limits and deferred-tax-asset valuation remain relevant uncertainties.
- Other exposures: Risks include cyclicality in construction and energy markets, competition and pricing pressure, labor and input costs, foreign exchange, regulation and building-code changes, customer credit, weather and insurance recovery, litigation, cybersecurity, and the principal stockholder’s influence.
Unusual items included $20.5 million of ModSpace bridge-financing and commitment fees recorded in interest expense, $4.8 million of insurance gains related to Hurricane Harvey, and a $1.6 million impairment on branch facilities held for sale. Management said liquidity, including operating cash and ABL availability, should be adequate for obligations over the next 12 months, while cautioning that future cash flows and availability are not assured.
Important facts for investors to verify
- Reconcile the reported debt carrying value with nominal indebtedness and verify borrowing-base availability, covenant headroom, interest costs and refinancing plans for the 2022 and 2023 maturities.
- Track realized versus forecast ModSpace and Acton synergies, integration spending, fleet utilization and organic rental-rate growth; distinguish pro forma results from reported results.
- Review the final ModSpace purchase-price allocation and monitor Canadian goodwill valuation assumptions and impairment sensitivity.
- Assess cash conversion and ongoing fleet-capital requirements against Adjusted EBITDA, which is a non-GAAP measure and excludes capital needs and debt service.
- Check the use and expiration limits of tax attributes, the effect of ownership changes, and progress on tax examinations and deferred-tax-asset realization.
- Monitor dilution and potential stock sales from outstanding warrants and the principal stockholder’s pledged shares; confirm the effects of any related transactions.