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MOBILE MINI INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read together with our December 31, 2013 consolidated financial statements and the accompanying notes thereto which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on February 14, 2014. This discussion contains forward-looking statements. Forward-looking statements are based on current expectations and assumptions that involve risks and uncertainties. Our actual results may differ materially from those anticipated in our forward-looking statements. Overview General We are the world's leading provider of portable storage solutions with a total portable storage and office fleet of over 213,000 units at June 30, 2014. As of June 30, 2014, we operated in 135 locations throughout North America and the U.K., maintaining a strong leadership position in virtually all markets served. We offer a wide range of portable storage products in varying lengths and widths with an assortment of differentiated features such as our patented locking systems, premium doors, electrical wiring and shelving. Our portable storage units provide secure, accessible temporary storage for a diversified client base of over 84,000 customers across various industries, including construction, consumer services and retail, industrial, commercial and governmental. Our customers use our products for a wide variety of storage applications, including retail and manufacturing supplies, inventory and maintenance supplies, temporary offices, construction materials and equipment, documents and records and household goods. We derive most of our revenues from the leasing of portable storage containers, security office units and mobile office units. In addition to our leasing business, we also sell new and used portable storage containers, security office units and mobile office units and provide delivery, installation and other ancillary products and services. Our sales revenues represented 10.7% and 7.6% of total revenues for the six months ended June 30, 2013 and 2014, respectively. At June 30, 2014, we operated 115 locations in the U.S., four in Canada and 16 in the U.K. Traditionally, we have entered new markets through the acquisition of smaller local competitors and then implement our business model, which is typically more focused on customer service and marketing than the acquired business or other market competitors. We also enter new markets by migrating idle fleet to new locations. In line with our growth strategy for 2014, we completed four business acquisitions thus far in 2014. In the first quarter of 2014, we expanded our operations through acquisitions in the North Dakota and North Carolina markets. Both of these acquisitions increased our market exposure and were integrated into our existing locations in those areas. In the second quarter of 2014, we expanded our existing operations by integrating an acquisition with operations in Tennessee and Texas with our existing operations in those markets while the other acquisition was in the Danbury, Connecticut metropolitan area which will serve as a new market for us. In the second quarter of 2014, we sold our Belfast, Northern Ireland location, and with utilization rates improving, we closed one location in the U.S. that will be serviced by another nearby location. When we enter a new market, we incur certain costs in developing new infrastructure. For example, advertising and marketing costs are incurred and certain minimum levels of staffing and delivery equipment are put in place regardless of the new market's revenue base. Once we have achieved revenues that are sufficient to cover our fixed expenses, we are able to generate relatively high margins on incremental lease revenues. Therefore, each additional unit rented in excess of the break-even level contributes significantly to increase our profitability and operating leverage. When we refer to our operating leverage in this discussion, we are describing the impact on margins once we either cover our fixed costs or if we incur additional fixed costs in a market. With a new location, we must first fund and absorb the start-up costs for setting up the new location, hiring and developing the management and our marketing and sales strategies. A new location will typically have lower adjusted EBITDA margins in its early years until the location increases the number of units it has on rent. Because this operating leverage creates higher operating margins on incremental lease revenue, which we realize on a location-by-location basis when the location achieves leasing revenues sufficient to cover the location's fixed costs, leasing revenues in excess of the break-even amount produce large increases in profitability. Conversely, absent growth in leasing revenues, the adjusted EBITDA margin at a location would be expected to remain relatively flat on a period-by-period comparative basis if expenses remained the same or would decrease if fixed costs increased. We approach the market through a hybrid sales model consisting of a dedicated sales staff at our field locations as well as at our National Sales Center ("NSC"). The NSC handles inbound calls and digital leads from new customers and leads outbound sales campaigns to new and existing customers. Our sales staff at the NSC work with our local field managers, dispatchers and sales personnel to ensure customers receive integrated first class service from initial call to delivery. Our field location sales staff, NSC and sales management teams conduct sales and marketing on a full-time basis. We believe that balancing local salesperson presence, national account sales teams and the efficiencies of a centralized sales operation at the NSC will continue to allow us to provide high levels of customer service and serve all of our customers in a dedicated efficient manner. 35 -------------------------------------------------------------------------------- Table of Contents The level of non-residential construction activity is an important external factor that we examine to assess market trends and determine the direction of our business. Because of the degree of operating leverage, increases or decreases in non-residential construction activity can have a significant effect on our operating margins and net income. Customers in the construction industry represented approximately 41.0% of our leased units at June 30, 2014, compared to 38.9% for the same period in 2013. In managing our business, we focus on growing leasing revenues, particularly in existing markets where we can take advantage of the high operating leverage inherent in our business model. Our goal is to increase operating margins as we continue to grow leasing revenues. We are a capital-intensive business. Therefore, in addition to focusing on earnings per share ("EPS"), we focus on adjusted EBITDA (as defined below) to measure our operating results and our return on capital employed ("ROCE"). We define ROCE as adjusted EBITDA less depreciation and amortization expense divided by the sum of total assets less non-interest bearing liabilities. We use this measurement to evaluate the profitability we realize from the capital we invest. We calculate adjusted EBITDA by first calculating EBITDA, which we define as net income before discontinued operation, net of tax (if applicable), interest expense, income taxes, depreciation and amortization and debt restructuring or extinguishment expense (if applicable), including any write-off of deferred financing costs. This measure eliminates the effect of financing transactions that we enter into and it provides us with a means to track internally generated cash from which we can fund our interest expense and our lease fleet growth. In comparing EBITDA from year to year, we further adjust EBITDA to exclude non-cash share-based compensation expense and the effect of what we consider transactions or events not related to our core business operations to arrive at what we define as adjusted EBITDA. The U.S. generally accepted accounting principles ("GAAP") financial measure that is most directly comparable to EBITDA is net cash provided by operating activities. Because EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures as defined by the SEC, we include below in this report reconciliations of EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP. We present EBITDA and EBITDA margin because we believe these financial measures provide useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements and because EBITDA provides an overall evaluation of our financial condition. EBITDA margin is calculated by dividing consolidated EBITDA by total revenues. The GAAP financial measure that is most directly comparable to EBITDA margin is operating margin, which represents operating income divided by revenues. More emphasis should not be placed on EBITDA margin than the corresponding GAAP measure. In addition, EBITDA is also a component of certain financial covenants under our Credit Agreement (as defined herein). EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of our profitability or our liquidity. In particular, EBITDA, as defined (and when applicable), does not include: • Discontinued operation, net of tax - to present a comparable basis for continuing operations. • Interest expense - because we borrow money to partially finance our capital expenditures, interest expense is a necessary element of our cost to secure this financing to continue generating additional revenues. • Income taxes - because we operate in jurisdictions subject to income taxation, income tax expense is a necessary element of our costs to operate. • Depreciation and amortization - because we are a leasing company, our business is capital intensive and we hold acquired assets for a period of time before they generate revenues, cash flow and earnings; therefore, depreciation and amortization expense is a necessary element of our business. • Debt restructuring or extinguishment expense - debt restructuring and debt extinguishment expenses, including any write-off of deferred financing costs, are not deducted in our various calculations made under our Credit Agreement and are treated no differently than interest expense. As discussed above, interest expense is a necessary element of our cost to finance a portion of the capital expenditures needed for the growth of our business. When evaluating EBITDA as a performance measure, and excluding the above-noted charges, all of which have material limitations, investors should consider, among other factors, the following: • increasing or decreasing trends in EBITDA; • how EBITDA compares to levels of debt and interest expense; and • whether EBITDA historically has remained at positive levels. Because EBITDA, as defined, excludes some but not all items that affect our cash flow from operating activities, EBITDA may not be comparable to similarly titled performance measures presented by other companies. 36-------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA represents EBITDA plus the sum of certain transactions that are excluded when internally evaluating our operating performance. Management believes adjusted EBITDA is a more meaningful evaluation and comparison of our core business when comparing period-over-period results without regard to transactions that potentially distort the performance of our core business operating results. The table below is a reconciliation of EBITDA to net cash provided by operating activities for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2013 2014 2013 2014 (In thousands) (In thousands) EBITDA $ (6,222 ) $ 31,000 $ 29,549 $ 58,626 Discontinued operation (22 ) - (44 ) - Interest paid (10,829 ) (10,131 ) (13,221 ) (12,291 ) Income and franchise taxes paid (698 ) (689 ) (785 ) (778 ) Share-based compensation expense 3,743 2,977 5,379 7,141 Asset impairment charge, net 39,704 274 39,704 557 Gain on sale of lease fleet units (2,381 ) (784 ) (5,448 ) (2,495 ) Loss on disposal of property, plant and equipment 90 287 62 359 Changes in certain assets and liabilities, net of effect of businesses acquired: Receivables (1,712 ) (2,585 ) (822 ) (1,260 ) Inventories (848 ) (173 ) (1,602 ) 55 Deposits and prepaid expenses 254 (580 ) (417 ) (1,856 ) Other assets and intangibles (103 ) (6 ) (7 ) (11 ) Accounts payable and accrued liabilities 4,441 2,883 (334 ) 1,238 Net cash provided by operating activities $ 25,417 $ 22,473 $ 52,014 $ 49,285 The table below is a reconciliation of net income to EBITDA and adjusted EBITDA, for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, 2013 2014 2013 2014 (In thousands except percentages) (In thousands except percentages) Net (loss) income $ (14,381 ) $ 9,263 $ (2,339 ) $ 16,703 Loss from discontinued operation, net of tax 62 - 139 - Interest expense 7,439 7,097 14,974 14,084 Income tax (benefit) provision (8,126 ) 5,335 (769 ) 9,389 Depreciation and amortization 8,784 9,305 17,544 18,450 EBITDA (6,222 ) 31,000 29,549 58,626 Share-based compensation expense (1) 3,743 2,977 5,379 7,141 Restructuring expenses (2) 343 1,731 718 2,316 Acquisition expenses (3) - 33 - 39 Asset impairment charge, net (4) 40,237 274 40,237 557 Adjusted EBITDA $ 38,101 $ 36,015 $ 75,883 $ 68,679 EBITDA margin (5) (6.4 )% 29.1 % 15.2 % 28.1 % Adjusted EBITDA margin (5) 39.2 % 33.8 % 39.0 % 32.9 % (1) Represents non-cash share-based compensation expense associated with the granting of equity instruments. (2) Restructuring expenses primarily represent expenses incurred in conjunction with the restructuring of our operations. (3) Acquisition expenses represent acquisition activity costs. (4) In 2013, primarily represents the non-cash impairment charges for the write-down on certain assets classified as held for sale. In 2014, represents the additional loss upon completion of sale (offset by gains upon completion of sale) of assets that were written down to fair value in the second quarter of 2013. (5) EBITDA margin and adjusted EBITDA margin are calculated as EBITDA and adjusted EBITDA, respectively, divided by total revenues, expressed as a percentage. 37 -------------------------------------------------------------------------------- Table of Contents In managing our business, we measure our adjusted EBITDA margins from year to year based on the size of the location. We define this margin as adjusted EBITDA divided by our total revenues, expressed as a percentage. We use this comparison, for example, to study internally the effect that increased costs have on our margins. As capital is invested in our established locations, we achieve higher adjusted EBITDA margins on that capital than we achieve on capital invested to establish a new location, because our fixed costs are already in place in connection with the established locations. The fixed costs are those associated with yard and delivery equipment, as well as advertising, sales, marketing and office expenses. Accounting and Operating Overview Our leasing revenues include all rent and ancillary revenues we receive for our portable storage containers and combination storage/office and mobile office units. Our sales revenues include sales of these units to customers. Our other revenues consist principally of charges for the delivery of the units we sell. Our principal operating expenses are (1) cost of sales, (2) leasing, selling and general expenses and (3) depreciation and amortization, primarily depreciation of the portable storage containers and mobile office units in our lease fleet. Cost of sales is the cost of the units that we sold during the reported period and includes both our cost to buy, transport, remanufacture and modify used ocean-going containers and our cost to manufacture portable storage units and other structures. Leasing, selling and general expenses include, among other expenses, payroll and related payroll costs, advertising and other marketing expenses, real property lease expenses, commissions, repair and maintenance costs of our lease fleet and transportation equipment, stock-based compensation expense and corporate expenses for both our leasing and sales activities. Annual repair and maintenance expenses on our leased units have averaged approximately 4.1% of lease revenues over the last three fiscal years and are included in leasing, selling and general expenses. These expenses tend to increase during periods when utilization is increasing. We expense our normal repair and maintenance costs as incurred (including the cost of periodically repainting units). Our principal asset is our container lease fleet, which has historically maintained an appraised value close to its original cost. Our lease fleet primarily consists of remanufactured and modified steel portable storage containers, steel security offices, steel combination offices and wood mobile offices that are leased to customers under short-term operating lease agreements with varying terms. Depreciation is calculated using the straight-line method over the estimated useful life of our units, after the date that we put the unit in service, and are depreciated down to their estimated residual values. Our steel units are depreciated over 30 years with an estimated residual value of 55%. This depreciation policy is supported by our historical lease fleet data, which shows that we have been able to obtain comparable rental rates and sales prices irrespective of the age of our container lease fleet. Wood office units are depreciated over 20 years with an estimated residual value of 50%. Van trailers, which are a small part of our fleet, are depreciated over seven years with an estimated residual value of 20%. Van trailers, which are only added to the fleet as a result of acquisitions of portable storage businesses, are of much lower quality than storage containers and consequently depreciate more rapidly. We have other non-core products that have various other measures of useful lives and residual values. 38-------------------------------------------------------------------------------- Table of Contents The table below summarizes those transactions that effectively changed the net book value of our lease fleet from $979.3 million at December 31, 2013 to $980.4 million at June 30, 2014: Dollars Units (In thousands) Lease fleet at December 31, 2013, net $ 979,276 212,898 Purchases and units acquired through acquisitions, including freight: Containers 8,934 3,257 Steel offices 3,669 260 Non-core units 121 133 Manufactured units: Steel security offices 79 19 Remanufacturing and customization of units purchased or obtained in prior years 4,574 (1) 256 (2) Other (3) 251 (122 ) Cost of sales from lease fleet (9,664 ) (3,604 ) Effect of exchange rate changes 3,812 Change in accumulated depreciation, excluding sales (10,696 ) Lease fleet at June 30, 2014, net $ 980,356 213,097 (1) Does not include any routine maintenance, which is expensed as incurred. (2) These units include the net additional units that were the result of splitting steel containers into two or more shorter units, such as splitting a 40-foot container into two 20-foot units or one 25-foot unit and one 15-foot unit, and include units moved from finished goods to the lease fleet. (3) Includes net transfers to and from property, plant and equipment and net non-sale disposals and recoveries of the lease fleet. The table below outlines the composition of our lease fleet (by book value and unit count) at June 30, 2014: Number of Percentage Book Value Units of Units (In thousands) Steel storage containers $ 604,792 173,242 81 % Offices 544,888 37,603 18 % Van trailers 2,029 2,252 1 % Other 3,911 1,155,620 Accumulated depreciation (175,264 ) Lease fleet, net $ 980,356 213,097 100 % Appraisals on our fleet are conducted on a regular basis by an independent appraiser selected by our lenders. The appraiser does not differentiate in value based upon the age of the container or the length of time it has been in our fleet. The latest orderly liquidation value appraisal in September 2013 was conducted by AccuVal Associates, Incorporated. Based on the values assigned in this appraisal, on which our borrowings under our Credit Agreement are based, our lease fleet net liquidation appraisal value as of June 30, 2014 was approximately $1.1 billion. Our average utilization rate for the second quarter of 2014 was 66.6%, compared to 62.0% in the second quarter of 2013. At June 30, 2014, our utilization rate was 67.3%. Historically, our utilization is somewhat seasonal, with the low normally being realized in the first quarter and the high realized in the fourth quarter of each year. 39 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013 Total revenues for the quarter ended June 30, 2014 increased $9.4 million, or 9.7%, to $106.5 million, compared to $97.1 million for the same period in 2013. Leasing revenues for the quarter ended June 30, 2014 increased $10.0 million, or 11.4%, to $98.0 million, compared to $88.0 million for the same period in 2013. This increase in leasing revenues was driven by increased rates and ancillary revenues. Yield (leasing revenues divided by average units on rent) increased 11.5% and includes a rental rate increase of 7.6% over the prior year. Revenue from the sales of portable storage and office units for the quarter ended June 30, 2014 decreased $0.7 million, or 7.8%, to $8.0 million, compared to the same period in 2013. Leasing revenues, as a percentage of total revenues for the quarters ended June 30, 2014 and 2013 were 92.0% and 90.6%, respectively. Our leasing business continues to be our primary focus and leasing revenues have and continue to be the predominant part of our revenue mix. Cost of sales is the cost related to our sales revenues only. Cost of sales was 67.4% and 63.7% of sales revenues for the quarters ended June 30, 2014 and 2013, respectively. Leasing, selling and general expenses for the quarter ended June 30, 2014 increased by $10.8 million, or 19.0%, to $68.1 million, compared to $57.3 million for the same period in 2013. The increase in leasing, selling and general expenses was primarily related to: (i) investments in repair and maintenance of our lease fleet and delivery equipment and fleet repositioning to high utilization markets increased $4.0 million, (ii) transportation costs increased $1.8 million, (iii) payroll related costs increased $1.6 million due to a companywide incentive compensation change and investments in sales and marketing and (iv) cost of exiting manufacturing in the U.K. and streamlining North America's manufacturing operations increased expenses by approximately $1.0 million. Restructuring expenses for the quarter ended June 30, 2014 was $1.7 million, compared to $0.3 million for the same period in 2013. The 2014 increase primarily relates to the sale of our Belfast, Northern Ireland location that management determined was nonstrategic in addition to other organizational changes made in North America. Asset impairment charge, net for the quarter ended June 30, 2014 was $0.3 million and relates to the additional loss upon completion of sale of certain assets that were written down to fair value in the second quarter of 2013, less recovery of assets sold in excess of the fair value. For the quarter ended June 30, 2013 the asset impairment charge was $40.2 million and primarily relates to the write-down of certain assets we identified to be sold. Net income from continuing operations for the quarter ended June 30, 2014 was $9.3 million, compared to a net loss of $14.3 million for the same period in 2013. Adjusted EBITDA for the quarter ended June 30, 2014 decreased $2.1 million, or 5.5%, to $36.0 million, compared to $38.1 million for the same period in 2013. Adjusted EBITDA margins were 33.8% and 39.2% of total revenues for the three months ended June 30, 2014 and 2013, respectively. Depreciation and amortization expense for the quarter ended June 30, 2014 was $9.3 million, compared to $8.8 million for the same period in 2013. Interest expense for the quarter ended June 30, 2014 decreased $0.3 million, or 4.6%, to $7.1 million, compared to $7.4 million for the same period in 2013. This decrease is primarily attributable to a lower average amount of debt outstanding during the quarter, principally due to the use of operating cash flow to reduce our debt over the last year. As we continue to reduce outstanding debt, the shift between our floating variable interest rate debt and our higher fixed interest rate debt has caused a slight increase in our weighted average interest rates compared to the same period in 2013. The weighted average interest rate on our debt for the three months ended June 30, 2014 was 5.0%, compared to 4.5% for the same period in 2013, excluding amortization of debt issuance and other costs. Including the amortization of debt issuance and other costs, the weighted average interest rate for the three months ended June 30, 2014 was 5.6%, compared to 5.0% for the same period in 2013. Provision (benefit) for income taxes on continuing operations was based on our annual estimated effective tax rate. The tax rate for the quarters ended June 30, 2014 and 2013 was 36.5% and (36.2%), respectively. Our consolidated tax provision includes the expected tax rates for our operations in the U.S., Canada and the U.K. See Note L to the accompanying condensed consolidated financial statements for a further discussion on income taxes. Loss from discontinued operation, net of tax, for the quarter ended June 30, 2013 was $0.1 million and represents our Netherlands operation that was sold in December 2013 and reflected as a discontinued operation. 40-------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013 Total revenues for the six months ended June 30, 2014 increased $14.3 million, or 7.3%, to $208.9 million, compared to $194.6 million for the same period in 2013. Leasing revenues for the six months ended June 30, 2014 increased $19.2 million, or 11.1%, to $192.1 million, compared to $172.9 million for the same period in 2013. This increase in leasing revenues was driven by an increase in the number of units on rent, increased rates and ancillary revenues. Yield (leasing revenues divided by average units on rent) increased 10.1% and includes a rental rate increase of 6.8% over the prior year. Revenue from the sales of portable storage and office units for the six months ended June 30, 2014 decreased $5.0 million, or 24.1%, to $15.8 million, compared to the same period in 2013, primarily due to a sale to the U.K. military in 2013. Leasing revenues, as a percentage of total revenues for the six months ended June 30, 2014 and 2013 were 92.0% and 88.8%, respectively. Our leasing business continues to be our primary focus and leasing revenues have and continue to be the predominant part of our revenue mix. Cost of sales is the cost related to our sales revenues only. Cost of sales was 69.0% and 67.0% of sales revenues for the six months ended June 30, 2014 and 2013, respectively. Leasing, selling and general expenses for the six months ended June 30, 2014 increased by $26.4 million, or 23.9%, to $136.5 million, compared to $110.1 million for the same period in 2013. The increase in leasing, selling and general expenses was primarily related to: (i) investments in repair and maintenance of our lease fleet and delivery equipment and fleet repositioning to high utilization markets increased $9.7 million, (ii) payroll related costs increased $8.2 million, due to higher stock compensation, a one-time vacation accrual adjustment, and a companywide incentive compensation change, (iii) transportation costs increased $3.4 million and (iv) cost of exiting manufacturing in the U.K. and streamlining North America's manufacturing operations increased expenses by approximately $2.1 million. Restructuring expenses for the six months ended June 30, 2014 was $2.3 million, compared to $0.7 million for the same period in 2013. The 2014 increase primarily relates to the sale of our Belfast, Northern Ireland location that management determined was nonstrategic in addition to other organizational changes made in North America. Asset impairment charge, net for the six months ended June 30, 2014 was $0.6 million and relates to the additional loss upon completion of sale of certain assets that were written down to fair value in the second quarter of 2013, less recovery of assets sold in excess of the fair value. For the six months ended June 30, 2013, the asset impairment charge was $40.2 million and primarily relates to the write-down of certain assets we identified to be sold. Net income from continuing operations for the six months ended June 30, 2014 was $16.7 million, compared to net loss of $2.2 million for the same period in 2013. Adjusted EBITDA for the six months ended June 30, 2014 decreased $7.2 million, or 9.5%, to $68.7 million, compared to $75.9 million for the same period in 2013. Adjusted EBITDA margins were 32.9% and 39.0% of total revenues for the six months ended June 30, 2014 and 2013, respectively. Depreciation and amortization expense for the six months ended June 30, 2014 was $18.4 million, compared to $17.5 million for the same period in 2013. Interest expense for the six months ended June 30, 2014 decreased $0.9 million, or 5.9%, to $14.1 million, compared to $15.0 million for the same period in 2013. This decrease is primarily attributable to a lower average amount of debt outstanding during the six month period, principally due to the use of operating cash flow to reduce our debt over the last year. As we continue to reduce outstanding debt, the shift between our floating variable interest rate debt and our higher fixed interest rate debt has caused a slight increase in our weighted average interest rates compared to the same period in 2013. The weighted average interest rate on our debt for the six months ended June 30, 2014 was 4.9%, compared to 4.4% for the same period in 2013, excluding amortization of debt issuance and other costs. Including the amortization of debt issuance and other costs, the weighted average interest rate for the six months ended June 30, 2014 was 5.5%, compared to 4.9% for the same period in 2013. Provision (benefit) for income taxes on continuing operations was based on our annual estimated effective tax rate. The tax rate for the six months ended June 30, 2014 and 2013 was 36.0% and (25.9%), respectively. The increase in the estimated effective tax rate is primarily due to the mix shift in North America's and U.K.'s contribution to pre-tax profit, despite a U.K. income tax rate reduction in July 2013. Our consolidated tax provision includes the expected tax rates for our operations in the U.S., Canada and the U.K. See Note L to the accompanying condensed consolidated financial statements for a further discussion on income taxes. Loss from discontinued operation, net of tax, for the six months ended June 30, 2013 was $0.1 million and represents our Netherlands operation that was sold in December 2013 and reflected as a discontinued operation. 41-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Leasing is a capital-intensive business that requires us to acquire assets before they generate revenues, cash flow and earnings. The assets that we lease have very long useful lives and require relatively little maintenance expenditures. Most of the capital we have deployed in our leasing business historically has been used to expand our operations geographically, to increase the number of units available for lease at our existing locations, and to add to the mix of products we offer. During recent years, our operations have generated annual cash flow that exceeds our pre-tax earnings, particularly due to cash flow from operations and the deferral of income taxes caused by accelerated depreciation of our fixed assets in our tax return filings. Our cash flow from operations has been positive, even after capital net expenditures for the past five years. This positive cash flow trend has continued for the six-month period ended June 30, 2014. During the past five years, our capital expenditures and acquisitions have been funded by our cash flow from operation. For the six months ended June 30, 2014, we generated free cash flow of $49.9 million. In addition to free cash flow, our principal current source of liquidity is our Credit Agreement described below. We define free cash flow as net cash provided by operating activities, minus or plus, net cash used in or provided by investing activities, excluding acquisitions and certain transactions. Free cash flow is a non-GAAP financial measure and is not intended to replace net cash provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP. We present free cash flow because we believe it provides useful information regarding our liquidity and ability to meet our short-term obligations. In particular, free cash flow indicates the amount of cash available after capital expenditures for, among other things, investments in our existing business, debt service obligations, pay authorized quarterly dividends and strategic acquisitions. The table below is a reconciliation of net cash provided by operating activities to free cash flow: Three Months Ended Six Months Ended June 30, June 30, 2013 2014 2013 2014 (In thousands) (In thousands) Net cash provided by operating activities: $ 25,417 $ 22,473 $ 52,014 $ 49,285 Additions to lease fleet, excluding acquisitions (7,970 ) (4,072 ) (14,297 ) (8,150 ) Proceeds from sale of lease fleet units 6,049 6,392 15,929 12,019 Additions to property, plant and equipment (5,374 ) (2,113 ) (9,654 ) (4,741 ) Proceeds from sale of property, plant and equipment 237 543 458 1,451 Net capital expenditures (7,058 ) 750 (7,564 ) 579 Free cash flow $ 18,359 $ 23,223 $ 44,450 $ 49,864 Revolving Credit Facility. We have a $900.0 million ABL Credit Agreement with Deutsche Bank AG New York Branch ("Administrative Agent") and other lenders party thereto (the "Credit Agreement"). The Credit Agreement provides for a five-year revolving credit facility and matures on February 22, 2017. The obligations of us and our subsidiary guarantors under the Credit Agreement are secured by a blanket lien on substantially all of our assets. At June 30, 2014, we had $300.1 million of borrowings outstanding and $593.2 million of additional borrowing availability under the Credit Agreement, based upon borrowing base calculations as of such date. We were in compliance with the terms of the Credit Agreement as of June 30, 2014 and were above the minimum borrowing availability threshold and therefore not subject to any financial maintenance covenants. Amounts borrowed under the Credit Agreement and repaid or prepaid during the term may be reborrowed. Outstanding amounts under the Credit Agreement bear interest at our option at either: (i) LIBOR plus a defined margin, or (ii) the Administrative Agent bank's prime rate plus a margin. The applicable margin for each type of loan is based on an availability-based pricing grid and ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans at each measurement date. As of June 30, 2014, the applicable margins were 2.00% for LIBOR loans and 1.00% for base rate loans. Availability of borrowings under the Credit Agreement is subject to a borrowing base calculation based upon a valuation of our eligible accounts receivable, eligible container fleet (including containers held for sale, work-in-process and raw materials) and machinery and equipment, each multiplied by an applicable advance rate or limit. The lease fleet is appraised at least once annually by a third-party appraisal firm and up to 90% of the Net Orderly Liquidation Value (as defined in the Credit Agreement) is included in the borrowing base to determine how much we may borrow under the Credit Agreement. The Credit Agreement provides for U.K. borrowings, which are, at our option, denominated in either Pounds Sterling or Euros, by our U.K. subsidiary based upon a U.K. borrowing base; Canadian borrowings, which are denominated in Canadian dollars, by our Canadian subsidiary based upon a Canadian borrowing base; and U.S. borrowings, which are denominated in U.S. dollars, based upon a U.S. borrowing base. 42 -------------------------------------------------------------------------------- Table of Contents The Credit Agreement also contains customary negative covenants, including covenants that restrict our ability to, among other things: (i) allow certain liens to attach to the Company or its subsidiary assets; (ii) repurchase or pay dividends or make certain other restricted payments on capital stock and certain other securities, prepay certain indebtedness or make acquisitions or other investments subject to Payment Conditions (as defined in the Credit Agreement); and (iii) incur additional indebtedness or engage in certain other types of financing transactions. Payment Conditions allow restricted payments and acquisitions to occur without financial covenants as long as we have $225.0 million of pro forma excess borrowing availability under the Credit Agreement. We must also comply with specified financial maintenance covenants and affirmative covenants if we fall below $90.0 million of borrowing availability levels. We believe our cash provided by operating activities will provide for our normal capital needs for the next twelve months. If not, we have sufficient borrowings available under our Credit Agreement to meet any additional funding requirements. We monitor the financial strength of our lenders on an ongoing basis using publicly-available information. Based upon that information, we do not presently believe that there is a likelihood that any of our lenders will be unable to honor their respective commitments under the Credit Agreement. Senior Notes. At June 30, 2014, we had outstanding $200.0 million aggregate principal amount of 7.875% senior notes due 2020 (the "Senior Notes"). Interest on the Senior Notes is payable semi-annually in arrears or June 1 and December 1 of each year. Operating Activities. Our operations provided net cash flow of $49.3 million for the six months ended June 30, 2014, compared to $52.0 million during the same period in 2013. The $2.7 million decrease in cash provided by operations is primarily attributable to a change in net income after giving effect to non-cash items partially offset by the change in working capital. We used this net cash flow to fund operations, reduce debt and pay dividends. Investing Activities. Net cash used in investing activities was $15.7 million for the six months ended June 30, 2014, compared to $7.6 million for the same period in 2013. Capital expenditures for our lease fleet were $8.1 million and proceeds from sale of lease fleet units were $12.0 million for the six months ended June 30, 2014, compared to capital expenditures of $14.3 million and proceeds of $15.9 million for the same period in 2013. Capital expenditures for property, plant and equipment, net of proceeds from sales of property, plant and equipment, for the six months ended June 30, 2014 were $3.3 million, compared to $9.2 million for the same period in 2013. The expenditures for property, plant and equipment in 2014 were primarily for upgrades to technology equipment. In 2014, cash used in investing activities also includes $16.3 million for acquisitions. In addition, we financed equipment through capital lease obligations of $7.3 million in 2014. We anticipate our near term investing activities will be primarily focused on investments in transportation and technology equipment as well as some remanufacturing of lease fleet units and adding lease fleet in higher utilization markets. The amount of cash that we use during any period in investing activities is almost entirely within management's discretion. We have no contracts or other arrangements pursuant to which we are required to purchase a fixed or minimum amount of capital goods in connection with any portion of our business. Financing Activities. Net cash used in financing activities during the six months ended June 30, 2014 was $34.1 million, compared to $47.2 million for the same period in 2013. In 2014, reductions to our net borrowings under our Credit Agreement were $19.2 million, compared to $53.1 million for the same period in 2013. In 2014, we paid cash dividends of $15.7 million to our stockholders and we received $2.1 million and $6.4 million from the exercise of employee stock options for the six-month periods ended June 30, 2014 and 2013, respectively. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations primarily consist of our outstanding balance under the Credit Agreement, $200.0 million aggregate principal amount of the Senior Notes and obligations under capital leases. We also have operating lease commitments for: (i) real estate properties for the majority of our locations with remaining lease terms typically ranging from one to five years, (ii) delivery, transportation and yard equipment, typically under a five-year lease with purchase options at the end of the lease term at a stated or fair market value price, and (iii) office related equipment. At June 30, 2014, primarily in connection with securing of our insurance policies, we have provided certain insurance carriers and others with approximately $6.7 million in letters of credit. We currently do not have any obligations under purchase agreements or commitments. We enter into capital lease obligations from time to time, and, at June 30, 2014, we had $15.3 million in outstanding capital lease obligations. 43 -------------------------------------------------------------------------------- Table of Contents OFF-BALANCE SHEET TRANSACTIONS We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. SEASONALITY Demand from certain of our customers is somewhat seasonal. Demand for leases of our portable storage units by large retailers is stronger from September through December because these retailers need to store more inventory for the holiday season. These retailers usually return these leased units to us in December or early in the following year. This seasonality historically has caused lower utilization rates for our lease fleet during the first quarter of each year. EFFECTS OF INFLATION Our results of operations for the periods discussed in this report have not been significantly affected by inflation. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS A comprehensive discussion on our critical accounting policies and management estimates and significant accounting policies are included in Management's Discussion and Analysis of Financial Conditions and Results of Operations and in Note 1 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no significant changes in our critical accounting policies, estimates and judgments during the six-month period ended June 30, 2014. RECENT ACCOUNTING PRONOUNCEMENTS Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the Financial Accounting Standards Board ("FASB") issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. We adopted this guidance in January 2014. The adoption of this amendment did not have a material impact on our consolidated financial statements and related disclosures. Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the FASB issued the accounting guidance on reporting discontinued operations and disclosures of disposals of components of an entity. The new guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for fiscal years beginning after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. We do not expect the adoption of the guidance will have a material impact on our consolidated financial statements and related disclosures. Revenue from Contracts with Customers. In May 2014, FASB issued the accounting standard on revenue from contracts with customers. The standard provides a single model for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services. The standard is effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The revenue recognition standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the impact, if any, of the adoption of the standard to our financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. 44-------------------------------------------------------------------------------- Table of Contents CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This section and other sections of this report contain forward-looking information about our financial results and estimates and our business prospects that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements are expressions of our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "will," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause actual results to differ materially from projected results include, without limitation: • our ability to increase revenue and control operating costs; • an economic slowdown in the U.S. and/or the U.K. that affects any significant portion of our customer base, or the geographic regions where we operate in those countries; • our ability to leverage our information technology systems to service and grow with business demands; • changes in the supply and cost of the raw materials we use in refurbishing or remanufacturing storage units; • competitive developments affecting our industry, including pricing pressures; • the timing, effectiveness and number of new markets we enter; • our ability to manage growth or integrate acquisitions at existing or new locations; • our U.K. operations may divert our resources from other aspects of our business; • our ability to obtain borrowings under our Credit Agreement or additional debt or equity financing on acceptable terms; • our ability to maintain our and secure information technology systems continuously and securely; • our ability to protect our patents and other intellectual property; • currency exchange and interest rate fluctuations; • governmental laws and regulations affecting domestic and foreign operations, including tax obligations, union formation and zoning laws; • changes in generally accepted accounting principles; • changes in local zoning laws affecting either our ability to operate in certain areas or our customer's ability to use our products; • any changes in business, political and economic conditions due to the threat of future terrorist activity in the U.S. and other parts of the world and related U.S. military action overseas; and • increases in costs and expenses, including the cost of raw materials, litigation, compliance obligations, real estate and employment costs. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports filed with the SEC. Our Form 10-K filing for the fiscal year ended December 31, 2013 listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995, as amended. Readers can find them in "Item 1A. Risk Factors" of that filing and under the same heading of this filing. You may obtain a copy of our Form 10-K by requesting it from our Investor Relations Department at (480) 894-6311 or by mail to Mobile Mini, Inc., 7420 S. Kyrene Road, Suite 101, Tempe, Arizona 85283. Our filings with the SEC, including our Form 10-K, may be accessed through Mobile Mini's Web site at www.mobilemini.com, and at the SEC's Web site at www.sec.gov. Material on our Web site is not incorporated into this report, except by express incorporation by reference herein. |