ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand WillScot Mobile Mini Holdings Corp. ("WillScot Mobile Mini"), our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto, contained in Part I, Item 1 of this report. The discussion of results of operations in this MD&A is presented on a historical basis, as of or for the three months ended March 31, 2023 or prior periods.
On September 30, 2022, the Company completed the sale of its former Tank and Pump Solutions ("Tank and Pump") segment. On January 31, 2023, the Company completed the sale of its former United Kingdom ("UK") Storage Solutions segment. This MD&A presents the historical financial results of the former Tank and Pump segment and the former UK Storage Solutions segment as discontinued operations for all periods presented.
The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the US (“GAAP”). We use certain non-GAAP financial metrics to supplement the GAAP reported results to highlight key operational metrics that are used by management to evaluate Company performance. Reconciliations of GAAP financial information to the disclosed non-GAAP measures are provided in the Reconciliation of Non-GAAP Financial Measures section.
Executive Summary and Outlook
We are a leading business services provider specializing in innovative flexible work space and portable storage solutions. We service diverse end markets across all sectors of the economy throughout the United States ("US"), Canada, and Mexico. As of March 31, 2023, our branch network included approximately 240 branch locations and additional drop lots to service our over 85,000 customers. We offer our customers an extensive selection of “Ready to Work” modular space and portable storage solutions with over 154,000 modular space units and over 210,000 portable storage units in our fleet.
We primarily lease, rather than sell, our modular and portable storage units to customers, which results in a highly diversified and predictable reoccurring revenue stream. Over 90% of new lease orders are on our standard lease agreement, pre-negotiated master lease or national account agreements. The initial lease periods vary, and our leases are customarily renewable on a month-to-month basis after their initial term. Our lease revenue is highly predictable due to its reoccurring nature and the underlying stability and diversification of our lease portfolio. Furthermore, given that our customers value flexibility, they consistently extend their leases or renew on a month-to-month basis such that the average effective duration of our lease portfolio, excluding seasonal portable storage units, is approximately 33 months. We complement our core leasing business by selling both new and used units, allowing us to leverage scale, achieve purchasing benefits and redeploy capital employed in our lease fleet.
Our customers operate in a diversified set of end markets, including construction, commercial and industrial, retail and wholesale trade, energy and natural resources, education, government and institutions and healthcare. Core to our operating model is the ability to redeploy standardized assets across end markets. We track several market leading indicators to predict demand, including those related to our two largest end markets, the commercial and industrial sector and the construction sector, which collectively accounted for approximately 88% of our revenues in the three months ended March 31, 2023.
We remain focused on our core priorities of growing leasing revenues by increasing units on rent, both organically and through our acquisition strategy, delivering “Ready to Work” solutions to our customers with value added products and services ("VAPS"), and on continually improving the overall customer experience.
Significant Developments
Customer Relationship Management ("CRM") System
On February 6, 2023, we successfully completed the harmonization of our separate Modular and Storage CRM systems onto a single unified system. With this enhanced platform, we have a combined view of our customers and projects across the entire sales team. Going forward, we will focus on productivity management and building a more targeted and predictive approach to anticipate- and service- customer demand, with continued improvement in engagement and outreach underpinned by our data warehouse.
Divestiture
On January 31, 2023, we completed the sale of our former UK Storage Solutions segment for total cash consideration of $418.1 million. Proceeds from the sale were used to support ongoing reinvestment in our Modular and Storage operating segments in North America and other capital allocation priorities.
Reportable Segments
Following the divestitures of the UK Storage Solutions and Tank and Pump segments, we operate in two reporting segments: Modular Solutions ("Modular") and Storage Solutions ("Storage"). The reporting segments are aligned with how we operate and analyze our business results. During the first quarter of 2023, the ground level office business within the Modular segment was transferred to the Storage segment, and associated revenues, expenses, and operating metrics were transferred to the Storage segment. All periods presented have been retrospectively revised to reflect this adjustment within the Modular and Storage segments. For the twelve months ended December 31, 2022, this resulted in approximately $49.8 million of revenue and $28.5 million of gross profit being transferred from the Modular segment to the Storage segment.
Asset Acquisitions
During the first quarter of 2023, we acquired certain assets and liabilities of two regional and local storage and modular companies, which consisted primarily of approximately 300 storage units and 500 modular units for $79.6 million in cash. The accompanying consolidated financial statements include $70.4 million of rental equipment and $4.5 million of land held for sale as a result of these acquisitions.
Interest Rate Swap Agreements
In January 2023, we entered into two interest rate swap agreements with financial counterparties relating to $750.0 million in aggregate notional amount of variable-rate debt under our ABL Facility (as defined below). Under the terms of the agreements, we receive a floating rate equal to one-month term SOFR and will make payments based on a weighted average fixed interest rate of 3.44% on the notional amount. The swap agreements were designated and qualified as hedges of our exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on the ABL Facility. The swap agreements terminate on June 30, 2027.
Share Repurchases
During the three months ended March 31, 2023, we repurchased 4,589,308 shares of Common Stock for $215.7 million. As of March 31, 2023, $415.1 million of the approved share repurchase pool remained available. Given the predictability of our free cash flow, we believe that repurchases will be a reoccurring capital allocation priority.
Inflation and Supply Chain Issues
Similar to many other organizations, we face inflationary pressures across most of our input costs such as building materials, labor, transportation and fuel. Inflation has contributed to increased capital costs both for new units as well as for refurbishment of our existing units. However, given our scale and our strong rate performance, we believe we have been able to navigate the inflationary environment well and have consistently driven margin improvements during this period of rising costs. Additionally, because we derive the majority of our revenue from leasing our existing lease fleet units to customers and our material purchases to maintain these units consist primarily of general building materials, we have not experienced significant supply chain issues to date.
First Quarter Highlights
For the three months ended March 31, 2023, key drivers of our financial performance included:
•Total revenues increased $114.3 million, or 25.3%. Leasing revenue increased $88.4 million, or 25.1%, delivery and installation revenue increased $21.1 million, or 24.7%, rental unit sales decreased $0.1 million, or 1.2%, and new sales revenue increased $4.9 million, or 84.5%.
Key leasing revenue drivers included:
•Average portable storage units on rent increased 12,304 units, or 8.1%, and average modular space units on rent decreased 1,430 units, or 1.4%.
•Average modular space monthly rental rate increased $163, or 19.7%, to $989 driven by strong pricing performance across both segments. Average modular space monthly rental rates increased by $152, or 17.0%, in the Modular segment and by $174, or 29.7%, in the Storage segment.
•Average portable storage monthly rental rate increased $50, or 30.1%, to $216 driven by increased pricing as a result of our price management tools and processes.
•Average utilization for portable storage units decreased to 78.7% from 83.1% for the same period in 2022 driven by decreased demand in 2023 as compared to the same period in 2022. Average utilization for modular space units decreased 250 basis points ("bps") to 66.0%.
•Modular segment revenue, which represents 61.8% of consolidated revenue for the three months ended March 31, 2023, increased $61.1 million, or 21.2%, to $349.7 million. The increase was driven by our core leasing revenue, which grew $46.0 million, or 20.6%, due to continued growth of pricing and VAPS, and by delivery and installation revenues, which increased $10.5 million, or 19.3%, driven by increased pricing. Rental unit sales increased $0.5 million, or 8.1%, and new unit sales increased $4.1 million, or 85.4%. Modular revenue drivers for the three months ended March 31, 2023 included:
•Modular space average monthly rental rate of $1,046, increased 17.0% year over year representing a continuation of the long-term price optimization and VAPS penetration opportunities across our portfolio.
•Average modular space units on rent increased 1,219, or 1.5%, year over year.
•Average modular space monthly utilization decreased 70 bps to 66.2% for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
•Storage segment revenue, which represents 38.2% of consolidated revenue for the three months ended March 31, 2023, increased $53.2 million, or 32.7%, to $215.8 million. The increase was driven by our core leasing revenue, which grew $42.4 million, or 33.0%, due to increased units on rent and increased pricing, and by delivery and installation revenues, which increased $10.6 million, or 34.0%, driven by increased pricing. Rental unit sales decreased $0.6 million, or 27.3%, and new unit sales increased $0.8 million, or 88.9%. Storage revenue drivers for the three months ended March 31, 2023 included:
•Portable storage average monthly rental rate of $216 increased 30.1% year over year as a result of our price management tools and processes and early benefits from increased VAPS penetration opportunities. Modular space average monthly rental rate of $760 increased 29.7% year over year as a result of price optimization and increased VAPS penetration.
•Average portable storage units on rent increased 12,265, or 8.1%, year over year driven by growth achieved in 2022. Average modular space units on rent decreased 2,649, or 11.6%, year over year.
•Average portable storage monthly utilization decreased 450 bps to 78.7% for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. Average modular space monthly utilization decreased 960 bps to 65.3% for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
•Generated income from continuing operations of $76.3 million for the three months ended March 31, 2023. Discrete costs in the period included $3.9 million of integration costs.
•Generated Adjusted EBITDA from continuing operations of $246.8 million for the three months ended March 31, 2023, representing an increase of $79.0 million, or 47.1%, as compared to the same period in 2022. This increase was driven primarily by increased leasing and delivery and installation gross profit.
•Adjusted EBITDA margin from continuing operations was 43.7% in the first quarter of 2023 and increased 650 bps versus prior year driven by continued expansion of all margin lines. Most significantly, delivery and installation margins increased 1,220 bps versus prior year driven primarily by increased pricing.
•Net cash provided by operating activities increased $3.2 million to $148.8 million despite the divestitures of the Tank and Pump and UK Storage Segments. Net cash used in investing activities, excluding cash used as part of acquisitions and proceeds from the sale of discontinued operations including the settlement of the contingent foreign currency forward contract that we executed relating to the sale of the former UK Storage Solutions segment, decreased by $45.1 million as a result of reduced refurbishment spending and decreased purchases of new fleet as a result of lower utilization.
•Generated Free Cash Flow of $102.9 million for the three months ended March 31, 2023 representing an increase of $48.3 million as compared to the same period in 2022. This Free Cash Flow along with additional net borrowings under the ABL Facility (defined as receipts from borrowings, less repayment of borrowings from the condensed consolidated statement of cash flows) and proceeds of $404.3 million related to the sale of the former UK Storage Solutions segment, net of the settlement of the contingent foreign currency forward contract, were deployed to:
•Acquire two regional and local storage and modular portfolios of approximately 300 storage units and 500 modular units for $79.6 million; and
•Return $215.7 million to shareholders through stock repurchases, reducing outstanding Common Stock by 4,589,308 shares.
•We believe the predictability of our free cash flow allows us to pursue multiple capital allocation priorities opportunistically, including investing in organic opportunities we see in the market, maintaining leverage in our stated range, opportunistically executing accretive acquisitions, and returning capital to shareholders.
Consolidated Results of Operations
Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022
Our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 are presented below.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | 2023 vs. 2022 $ Change |
(in thousands) | 2023 | | 2022 | |
Revenues: | | | | | |
Leasing and services revenue: | | | | | |
Leasing | $ | 439,951 | | | $ | 351,559 | | | $ | 88,392 | |
Delivery and installation | 106,630 | | | 85,539 | | | 21,091 | |
Sales revenue: | | | | | |
New units | 10,657 | | | 5,787 | | | 4,870 | |
Rental units | 8,230 | | | 8,286 | | | (56) | |
Total revenues | 565,468 | | | 451,171 | | | 114,297 | |
Costs: | | | | | |
Costs of leasing and services: | | | | | |
Leasing | 97,515 | | | 80,334 | | | 17,181 | |
Delivery and installation | 75,007 | | | 70,580 | | | 4,427 | |
Costs of sales: | | | | | |
New units | 6,208 | | | 3,756 | | | 2,452 | |
Rental units | 4,454 | | | 4,892 | | | (438) | |
Depreciation of rental equipment | 59,156 | | | 57,548 | | | 1,608 | |
Gross profit | 323,128 | | | 234,061 | | | 89,067 | |
Expenses: | | | | | |
Selling, general and administrative | 150,892 | | | 138,144 | | | 12,748 | |
| | | | | |
Other depreciation and amortization | 17,173 | | | 15,362 | | | 1,811 | |
| | | | | |
| | | | | |
Currency losses, net | 6,775 | | | 137 | | | 6,638 | |
Other income, net | (3,359) | | | (1,283) | | | (2,076) | |
Operating income | 151,647 | | | 81,701 | | | 69,946 | |
Interest expense | 44,866 | | | 30,570 | | | 14,296 | |
| | | | | |
| | | | | |
Income from continuing operations before income tax | 106,781 | | | 51,131 | | | 55,650 | |
Income tax expense from continuing operations | 30,510 | | | 12,083 | | | 18,427 | |
| | | | | |
| | | | | |
Income from continuing operations | $ | 76,271 | | | $ | 39,048 | | | $ | 37,223 | |
| | | | | |
Discontinued operations: | | | | | |
Income from discontinued operations before income tax | 4,003 | | | 15,787 | | | (11,784) | |
Gain on sale of discontinued operations | 176,078 | | | — | | | 176,078 | |
Income tax expense from discontinued operations | 45,468 | | | 3,664 | | | 41,804 | |
Income from discontinued operations | 134,613 | | | 12,123 | | | 122,490 | |
| | | | | |
Net income | $ | 210,884 | | | $ | 51,171 | | | $ | 159,713 | |
Comparison of Three Months Ended March 31, 2023 and 2022
Revenue: Total revenue increased $114.3 million, or 25.3%, to $565.5 million for the three months ended March 31, 2023 from $451.2 million for the three months ended March 31, 2022. Leasing revenue increased $88.4 million, or 25.1%, as compared to the same period in 2022 driven by improved pricing and value added products penetration and an increase of 12,304 average portable storage units on rent. Delivery and installation revenues increased $21.1 million, or 24.7%, due to increased pricing across both of our segments. Rental unit sales decreased $0.1 million, or 1.2%, and new unit sales increased $4.9 million, or 84.5% driven by increased sale opportunities in our Modular segment.
Total average units on rent for the three months ended March 31, 2023 and 2022 were 267,230 and 256,356, respectively, representing an increase of 10,874, or 4.2%. Portable storage average units on rent increased by 12,304 units, or 8.1%, for the three months ended March 31, 2023 driven by strong delivery and unit on rent growth in 2022. The average portable storage unit utilization rate during the three months ended March 31, 2023 was 78.7%, as compared to 83.1% during the same period in 2022. Modular space average units on rent decreased 1,430 units, or 1.4%, for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The average modular space unit utilization rate during the three months ended March 31, 2023 was 66.0% as compared to 68.5% during the same period in 2022.
Modular space average monthly rental rates increased 19.7% to $989 for the three months ended March 31, 2023. Average modular space monthly rental rates increased by $152, or 17.0%, to $1,046 in the Modular segment and by $174, or 29.7%, in the Storage segment. Increases were driven by a continuation of the long-term price optimization and VAPS penetration opportunities across our Modular segment as well as by application of these same price management tools and processes across the Storage segment.
Average portable storage monthly rental rates increased 30.1% to $216 for the three months ended March 31, 2023 driven by our price management tools and processes and early benefits from increased VAPS penetration opportunities on our basic VAPS offerings in the Storage segment, which began in the second quarter of 2022.
Gross Profit: Gross profit increased $89.1 million, or 38.1%, to $323.1 million for the three months ended March 31, 2023 from $234.1 million for the three months ended March 31, 2022. The increase in gross profit was a result of a $71.2 million increase in leasing gross profit, increased delivery and installation gross profit of $16.7 million and increased new and rental unit sales gross profit of $2.8 million. Increases were primarily a result of increased revenues due to favorable average monthly rental rates and delivery and installation pricing across both portable storage and modular space units, as well as due to increased portable storage units on rent. Cost of leasing and services increased by $21.6 million, or 14.3%, for the three months ended March 31, 2023 versus the three months ended March 31, 2022, driven by a $5.7 million, or 27.6%, increase in material costs, a $7.4 million, or 13.9%, increase in labor costs, a $6.6 million, or 11.8%, increase in subcontractor costs, and a $1.9 million, or 9.1%, increase in vehicle, equipment and other costs. Cost of sales increased by $2.0 million, or 23.3%, which is in line with expected costs to deliver increased sales revenues of 35.0% for the three months ended March 31, 2023, resulting in improved sales gross profit margins. The year over year changes in each of these cost components was consistent with historical trends and management's expectations given the respective change in sales volume and inflationary pressures impacting our business. Increase in gross profit were offset partially by increased depreciation of $1.6 million, or 2.8%, as a result of capital investments made over the past twelve months in rental equipment.
Our resulting gross profit percentage was 57.1% and 51.9% for the three months ended March 31, 2023 and 2022, respectively. Our gross profit percentage, excluding the effects of depreciation, was 67.6% and 64.6% for the three months ended March 31, 2023 and 2022, respectively. These increases were driven primarily by continued price optimization within leasing, delivery, and installation revenues and execution of VAPS penetration opportunities that have outpaced increases in cost of leasing and services.
SG&A: Selling, general and administrative ("SG&A") increased $12.7 million, or 9.2%, to $150.9 million for the three months ended March 31, 2023, compared to $138.1 million for the three months ended March 31, 2022. Employee Costs excluding stock compensation increased $2.5 million, or 3.8%, as a result of an increase in indirect labor headcount and annual wage increases. Travel expenses increased $3.5 million, or 66.3%, due to increased travel and training, and real estate costs increased $2.1 million, or 11.2%. Additionally, stock compensation expense increased $1.9 million to $8.2 million for the three months ended March 31, 2023, compared to $6.3 million for the three months ended March 31, 2022.
Other Depreciation and Amortization: Other depreciation and amortization increased $1.8 million to $17.2 million for the three months ended March 31, 2023 compared to $15.4 million for the three months ended March 31, 2022. The increase was driven by increased depreciation as a result of our recent investments in our CRM system and other infrastructure improvements across our branch network.
Currency Losses (Gains), net: Currency losses, net increased by $6.7 million to $6.8 million for the three months ended March 31, 2023 from $0.1 million for the three months ended March 31, 2022. This change was primarily attributable to a loss on the settlement of the contingent foreign currency forward contract to sell £330.0 million upon the closing of the sale of the former UK Storage Solutions segment.
Other Expense (Income), Net: Other income, net was $3.4 million for the three months ended March 31, 2023 compared to $1.3 million for the three months ended March 31, 2022. The increase in other income, net was related to an increase in insurance recoveries during 2023 related to Hurricanes in the Gulf Coast area of the United States.
Interest Expense: Interest expense increased $14.3 million, or 46.7%, to $44.9 million for the three months ended March 31, 2023 from $30.6 million for the three months ended March 31, 2022. The increase in interest expense was a result of higher overall weighted average interest rates as a result of our financing activities. See Note 9 to the condensed consolidated financial statements for further discussion of our debt.
Income Tax Expense: Income tax expense increased $18.4 million to $30.5 million for the three months ended March 31, 2023 compared to $12.1 million for the three months ended March 31, 2022. The increase in expense was driven by
an increase in income from continuing operations before income tax for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Income from Discontinued Operations: Income from discontinued operations increased $122.5 million to $134.6 million for the three months ended March 31, 2023 compared to $12.1 million for the three months ended March 31, 2022. The increase in income from discontinued operations was driven by the gain on sale of the former UK Storage Solutions segment of $176.1 million, partially offset by an increase in income tax expense from discontinued operations.
Business Segment Results
The Company operates in two reportable segments as follows: Modular and Storage. Modular represents the activities of the North American modular business, excluding ground level offices, which were transferred to the Storage segment during the first quarter of 2023. Storage represents the activities of the North American portable storage and ground level office business. As part of the transfer of the ground level offices to Storage, we also adjusted average modular space monthly rental rate in the Storage segment to only include VAPS specifically applicable to ground level offices, which has also been reflected in the total average modular space monthly rental rate.
The following tables and discussion summarize our reportable segment financial information for the three months ended March 31, 2023 and 2022.
Comparison of Three Months Ended March 31, 2023 and 2022
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
(in thousands, except for units on rent and rates) | Modular | | Storage | | Total |
Revenue | $ | 349,670 | | | $ | 215,798 | | | $ | 565,468 | |
Gross profit | $ | 165,335 | | | $ | 157,793 | | | $ | 323,128 | |
Adjusted EBITDA | $ | 136,964 | | | $ | 109,878 | | | $ | 246,842 | |
Capital expenditures for rental equipment | $ | 39,412 | | | $ | 7,345 | | | $ | 46,757 | |
Average modular space units on rent | 81,902 | | | 20,235 | | | 102,137 | |
Average modular space utilization rate | 66.2 | % | | 65.3 | % | | 66.0 | % |
Average modular space monthly rental rate | $ | 1,046 | | | $ | 760 | | | $ | 989 | |
Average portable storage units on rent | 502 | | | 164,591 | | | 165,093 | |
Average portable storage utilization rate | 62.0 | % | | 78.7 | % | | 78.7 | % |
Average portable storage monthly rental rate | $ | 217 | | | $ | 216 | | | $ | 216 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(in thousands, except for units on rent and rates) | Modular | | Storage | | Total |
Revenue | $ | 288,547 | | | $ | 162,624 | | | $ | 451,171 | |
Gross profit | $ | 122,598 | | | $ | 111,463 | | | $ | 234,061 | |
Adjusted EBITDA | $ | 99,586 | | | $ | 68,187 | | | $ | 167,773 | |
Capital expenditures for rental equipment | $ | 57,577 | | | $ | 20,171 | | | $ | 77,748 | |
Average modular space units on rent | $ | 80,683 | | | $ | 22,884 | | | $ | 103,567 | |
Average modular space utilization rate | 66.9 | % | | 74.9 | % | | 68.5 | % |
Average modular space monthly rental rate | $ | 894 | | | $ | 586 | | | $ | 826 | |
Average portable storage units on rent | $ | 463 | | | $ | 152,326 | | | $ | 152,789 | |
Average portable storage utilization rate | 52.6 | % | | 83.2 | % | | 83.1 | % |
Average portable storage monthly rental rate | $ | 160 | | | $ | 166 | | | $ | 166 | |
Modular
Revenue: Total revenue increased $61.1 million, or 21.2%, to $349.7 million for the three months ended March 31, 2023 from $288.6 million for the three months ended March 31, 2022. The increase was primarily the result of a $46.0 million, or 20.6%, increase in leasing revenue, a $10.5 million, or 19.3%, increase in delivery and installation revenue driven by improved pricing, an increase of $0.5 million, or 8.1%, in rental unit sales revenue and a $4.1 million, or 85.4%, increase in new unit sales. Average modular space monthly rental rates increased 17.0% for the three months ended March 31, 2023 to
$1,046 driven by the continuation of the long-term price optimization and VAPS penetration opportunities across our portfolio. Average modular space units on rent increased by 1,219 units, or 1.5%, year over year.
Gross Profit: Gross profit increased $42.7 million, or 34.8%, to $165.3 million for the three months ended March 31, 2023 from $122.6 million for the three months ended March 31, 2022. The increase in gross profit was driven by higher leasing gross profit, which increased $33.7 million, or 20.8%, driven from improved pricing including VAPS. The increase in gross profit from leasing for the three months ended March 31, 2023 was further complemented by a $6.9 million increase in delivery and installation gross profit driven by increased pricing ahead of inflationary costs, a $0.6 million increase in rental unit sales gross profit, and a $1.7 million increase in new sales gross profit, partially offset by a $0.2 million increase in depreciation of rental equipment. Cost of leasing and services increased by $15.8 million, or 14.5%, for the three months ended March 31, 2023 versus the three months ended March 31, 2022, driven by a $5.5 million, or 35.0%, increase in material costs, a $5.3 million, or 14.4%, increase in labor costs, a $4.0 million, or 9.0%, increase in subcontractor costs, and a $1.0 million, or 8.2%, increase in vehicle, equipment and other costs. Cost of sales increased by $2.3 million, or 34.7%, which is in line with expected costs to deliver increased sales revenues of 43.1% for three months ended March 31, 2023, resulting in improved sales gross profit margins. The year over year changes in each of these cost components was consistent with historical trends and management's expectations given the respective change in sales volume and inflationary pressures impacting our business. Increases in gross profit were offset partially by increased depreciation of $0.2 million, or 0.4%, as a result of capital investments made over the past twelve months in rental equipment.
Adjusted EBITDA: Adjusted EBITDA increased $37.3 million, or 37.4%, to $136.9 million for the three months ended March 31, 2023 from $99.6 million for the three months ended March 31, 2022. The increase was primarily driven by higher leasing and delivery and installation gross profit discussed above. SG&A, excluding discrete items, increased $7.2 million, or 9.7%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. Employee Costs increased $3.3 million, or 9.7%, as a result of an increase in indirect labor headcount and annual wage increases. Travel expenses increased $1.7 million, or 52.8% due to increased travel and training, and real estate costs increased $1.1 million, or 8.6%.
Capital Expenditures for Rental Equipment: Purchases of rental equipment and refurbishments decreased $18.2 million, or 31.6%, to $39.4 million for the three months ended March 31, 2023 from $57.6 million for the three months ended March 31, 2022 driven by successful efforts to reduce our refurbishment costs through better unit selection and work scope during 2023.
Storage
Revenue: Total revenue increased $53.2 million, or 32.7%, to $215.8 million for the three months ended March 31, 2023 from $162.6 million for the three months ended March 31, 2022. The increase was primarily the result of a $42.4 million, or 33.0%, increase in leasing revenue and a $10.6 million, or 34.0%, increase in delivery and installation revenue driven by improved pricing. Sales revenues increased $0.2 million, or 6.5%. Average portable storage monthly rental rates increased 30.1% for the three months ended March 31, 2023 to $216 driven by our price management tools and processes and early benefits from increased VAPS penetration opportunities on our basic VAPS offerings, which began in the second quarter of 2022. Average modular space units on rent increased by 12,265 units, or 8.1%, year over year driven by strong delivery and unit on rent growth in 2022. Average modular space monthly rental rates increased 29.7% year-over-year driven primarily by increased pricing on new deliveries; however, average units on rent decreased 11.6% driven by lower demand.
Gross Profit: Gross profit increased by $46.3 million, or 41.5%, to $157.8 million for the three months ended March 31, 2023 compared to $111.5 million for the three months ended March 31, 2022. Gross profit on leasing activity increased by $37.5 million year over year driven by both increased volume and increased pricing as described above. Delivery and installation gross profit increased $9.8 million, or 114.5%, driven by increased pricing ahead of inflationary cost. Sales gross profit increased by $0.5 million to $1.7 million. Increases in gross profit were partially offset by a $1.4 million increase in depreciation of rental equipment. Cost of leasing and services increased by $5.8 million, or 13.9%, for the three months ended March 31, 2023 versus the three months ended March 31, 2022, driven by a $0.2 million, or 4.1%, increase in material costs, a $2.1 million, or 12.8%, increase in labor costs, a $2.5 million, or 22.9%, increase in subcontractor costs, and a $0.9 million, or 10.2%, increase in vehicle, equipment and other costs. Cost of sales decreased by $0.3 million, or 16.1%, driven by improved sales gross profit margins on increased sales revenues of 6.5% for three months ended March 31, 2023. The year over year changes in each of these cost components was consistent with historical trends and management's expectations given the respective change in sales volume and inflationary pressures impacting our business. These increases were offset partially by increased depreciation of $1.4 million, or 18.6%, as a result of capital investments made over the past twelve months in rental equipment.
Adjusted EBITDA: Adjusted EBITDA increased $41.7 million, or 61.1%, to $109.9 million for the three months ended March 31, 2023 from $68.2 million for the three months ended March 31, 2022 and the margin expanded to 50.9% from 41.9% as a result of increased units on rent, favorable pricing on units and on delivery and installation, and increased VAPS penetration. The increase in Adjusted EBITDA was driven primarily by increased leasing gross profit as described above, partially offset by increased SG&A. SG&A, excluding discrete items, increased $5.8 million, or 11.2%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. Employee Costs decreased $0.8 million, or
2.6%, due to reduced variable compensation that offset annual wage increases. Travel expenses increased $1.8 million, or 87.4% due to increased travel and training, and real estate costs increased $1.0 million, or 17.0%.
Capital Expenditures for Rental Equipment: Purchases of rental equipment and refurbishments of $7.3 million were $12.9 million lower than the prior-year quarter driven by a reduction in new container purchases during 2023 given current utilization and the significant investments made in 2022.
Other Non-GAAP Financial Data and Reconciliations
In addition to using GAAP financial measurements, we use certain non-GAAP financial measures to evaluate our operating results. As such, we include in this Quarterly Report on Form 10-Q reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures. Set forth below are definitions and reconciliations to the nearest comparable GAAP measure of certain non-GAAP financial measures used in this Quarterly Report on Form 10-Q along with descriptions of why we believe these measures provide useful information to investors as well as a description of the limitations of these measures. Each of these non-GAAP financial measures has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for analysis of, results reported under GAAP. Our measurements of these metrics may not be comparable to similarly titled measures of other companies.
Adjusted EBITDA
We define EBITDA as net income (loss) plus interest (income) expense, income tax expense (benefit), depreciation and amortization. Our adjusted EBITDA ("Adjusted EBITDA") reflects the following further adjustments to EBITDA to exclude certain non-cash items and the effect of what we consider transactions or events not related to our core business operations:
•Currency (gains) losses, net on monetary assets and liabilities denominated in foreign currencies other than the subsidiaries’ functional currency.
•Goodwill and other impairment charges related to non-cash costs associated with impairment charges to goodwill, other intangibles, rental fleet and property, plant and equipment.
•Restructuring costs, lease impairment expense, and other related charges associated with restructuring plans designed to streamline operations and reduce costs including employee and lease termination costs.
•Transaction costs including legal and professional fees and other transaction specific related costs.
•Costs to integrate acquired companies, including outside professional fees, non-capitalized costs associated with system integrations, non-lease branch and fleet relocation expenses, employee training costs, and other costs required to realize cost or revenue synergies.
•Non-cash charges for stock compensation plans.
•Other expense, including consulting expenses related to certain one-time projects, financing costs not classified as interest expense, and gains and losses on disposals of property, plant, and equipment.
Our Chief Operating Decision Maker ("CODM") evaluates business segment performance utilizing Adjusted EBITDA as shown in the reconciliation of the Company’s consolidated income from continuing operations to Adjusted EBITDA below. Management believes that evaluating segment performance excluding such items is meaningful because it provides insight with respect to the intrinsic and ongoing operating results of the Company and captures the business performance of the segments, inclusive of indirect costs.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider the measure in isolation or as a substitute for net income (loss), cash flow from operations or other methods of analyzing WillScot Mobile Mini’s results as reported under GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs;
•Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;
•Adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•Adjusted EBITDA does not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
•Other companies in our industry may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered as discretionary cash available to reinvest in the growth of our business or as a measure of cash that will be available to meet our obligations.
The following tables provide unaudited reconciliations of Income from continuing operations to Adjusted EBITDA:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Income from continuing operations | $ | 76,271 | | | $ | 39,048 | | | | | |
Income tax expense from continuing operations | 30,510 | | | 12,083 | | | | | |
| | | | | | | |
Interest expense | 44,866 | | | 30,570 | | | | | |
Depreciation and amortization | 76,329 | | | 72,910 | | | | | |
| | | | | | | |
Currency losses, net | 6,775 | | | 137 | | | | | |
Restructuring costs, lease impairment expense and other related charges | 22 | | | 263 | | | | | |
Transaction costs | — | | | 13 | | | | | |
Integration costs | 3,873 | | | 4,087 | | | | | |
Stock compensation expense | 8,150 | | | 6,273 | | | | | |
Other | 46 | | | 2,389 | | | | | |
Adjusted EBITDA from continuing operations | $ | 246,842 | | | $ | 167,773 | | | | | |
Adjusted EBITDA Margin
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue. Management believes that the presentation of Adjusted EBITDA Margin provides useful information to investors regarding the performance of our business. The following table provides unaudited reconciliations of Adjusted EBITDA Margin:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Adjusted EBITDA from continuing operations (A) | $ | 246,842 | | | $ | 167,773 | | | | | |
Revenue (B) | $ | 565,468 | | | $ | 451,171 | | | | | |
Adjusted EBITDA Margin from Continuing Operations (A/B) | 43.7 | % | | 37.2 | % | | | | |
Income from continuing operations (C) | $ | 76,271 | | | $ | 39,048 | | | | | |
Income from Continuing Operations Margin (C/B) | 13.5 | % | | 8.7 | % | | | | |
Net CAPEX
We define Net CAPEX as purchases of rental equipment and refurbishments and purchases of property, plant and equipment (collectively, "Total Capital Expenditures"), less proceeds from the sale of rental equipment and proceeds from the sale of property, plant and equipment (collectively, "Total Proceeds"), which are all included in cash flows from investing activities. Management believes that the presentation of Net CAPEX provides useful information regarding the net capital invested in our rental fleet and property, plant and equipment each year to assist in analyzing the performance of our business. As presented below, Net CAPEX includes amounts for the former Tank and Pump segment through September 30, 2022 and the former UK Storage Solutions segment through January 31, 2023.
The following tables provide unaudited reconciliations of Net CAPEX:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Total purchases of rental equipment and refurbishments | $ | (47,128) | | | $ | (95,236) | | | | | |
Total proceeds from sale of rental equipment | 7,781 | | | 14,554 | | | | | |
Net CAPEX for Rental Equipment | (39,347) | | | (80,682) | | | | | |
Purchase of property, plant and equipment | (6,736) | | | (10,481) | | | | | |
Proceeds from sale of property, plant and equipment | 258 | | | 260 | | | | | |
Net CAPEX | $ | (45,825) | | | $ | (90,903) | | | | | |
Liquidity and Capital Resources
Overview
WillScot Mobile Mini is a holding company that derives its operating cash flow from its operating subsidiaries. Our principal sources of liquidity include cash generated by operating activities from our subsidiaries, borrowings under our ABL Facility, and sales of equity and debt securities. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements over the next twelve months.
We have consistently accessed the debt and equity capital markets both opportunistically and as necessary to support the growth of our business, desired leverage levels, and other capital allocation priorities. We believe we have ample liquidity in the ABL Facility and are generating substantial free cash flow, which together support both organic operations and other capital allocation priorities as they arise.
We continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. In addition, we will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities. There can be no assurance as to the timing of any such issuance or repurchase. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. Availability of financing and the associated terms are inherently dependent on the debt and equity capital markets and subject to change. From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration.
Our revolving credit facility provides an aggregate principal amount of up to $3.7 billion, consisting of: (i) a senior secured asset-based US dollar revolving credit facility in the aggregate principal amount of $3.3 billion (the “US Facility”) and (ii) a $400.0 million senior secured asset-based multicurrency revolving credit facility (the "Multicurrency Facility," and together with the US Facility, the “ABL Facility”). Borrowing availability under the ABL Facility is equal to the lesser of $3.7 billion and the applicable borrowing bases. The borrowing bases are a function of, among other things, the value of the assets in the relevant collateral pool, of which our rental equipment represents the largest component. At March 31, 2023, we had $1.1 billion of available borrowing capacity under the ABL Facility.
Cash Flow Comparison of the Three Months Ended March 31, 2023 and 2022
Significant factors driving our liquidity include cash flows generated from operating activities and capital expenditures. Our ability to fund our capital needs will be affected by our ongoing ability to generate cash from operations and access to capital markets.
The consolidated statements of cash flows include amounts for the former Tank and Pump segment through September 30, 2022 and the former UK Storage Solutions segment through January 31, 2023. See Note 3 to the financial statements for disclosure of significant operating and investing items related to the former Tank and Pump and former UK Storage Solutions segments.
The following summarizes our change in cash and cash equivalents for the periods presented:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2023 | | 2022 |
Net cash provided by operating activities | $ | 148,765 | | | $ | 145,527 | |
Net cash provided by (used in) investing activities | 271,949 | | | (148,360) | |
Net cash (used in) provided by financing activities | (423,087) | | | 1,586 | |
Effect of exchange rate changes on cash and cash equivalents | 517 | | | (131) | |
Net change in cash and cash equivalents | $ | (1,856) | | | $ | (1,378) | |
Cash Flows from Operating Activities
Cash provided by operating activities for the three months ended March 31, 2023 was $148.8 million as compared to $145.5 million for the three months ended March 31, 2022, an increase of $3.2 million. The increase was due to an increase of $37.3 million of net income, adjusted for non-cash items, and a decrease of $34.1 million in the net movements of the operating assets and liabilities.
Cash Flows from Investing Activities
Cash provided by investing activities for the three months ended March 31, 2023 was $271.9 million as compared to cash used in investing activities of $148.4 million for the three months ended March 31, 2022, an increase of $420.3 million in cash provided by investing activities. The increase in cash provided by investing activities was driven by proceeds of $404.0
million from the sale of discontinued operations, a $48.1 million decrease in cash used for the purchase of rental equipment and refurbishments, and a $3.7 million decrease in cash used for the purchase of property, plant and equipment. The increase was partially offset by a $21.0 million increase in cash used in acquisitions, net of cash acquired, a cash payment of $7.7 million for the settlement of the contingent foreign currency forward contract, and a $6.8 million decrease in proceeds from the sale of rental equipment.
Cash Flows from Financing Activities
Cash used in financing activities for the three months ended March 31, 2023 was $423.1 million as compared to cash provided by financing activities of $1.6 million for the three months ended March 31, 2022, a change of $424.7 million. The change was primarily due to a $499.3 million increase in repayments of borrowings and a $137.4 million increase in the repurchase of common stock offset by a $211.3 million increase in receipts from borrowings.
Free Cash Flow
Free Cash Flow is a non-GAAP measure. We define Free Cash Flow as net cash provided by operating activities, less purchases of, and proceeds from, rental equipment and property, plant and equipment, which are all included in cash flows from investing activities. Management believes that the presentation of Free Cash Flow provides useful additional information concerning cash flow available to fund our capital allocation alternatives. The following table provides a reconciliation of net cash provided by operating activities to Free Cash Flow.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Net cash provided by operating activities | $ | 148,765 | | | $ | 145,527 | | | | | |
Purchase of rental equipment and refurbishments | (47,128) | | | (95,236) | | | | | |
Proceeds from sale of rental equipment | 7,781 | | | 14,554 | | | | | |
Purchase of property, plant and equipment | (6,736) | | | (10,481) | | | | | |
Proceeds from the sale of property, plant and equipment | 258 | | | 260 | | | | | |
Free Cash Flow | $ | 102,940 | | | $ | 54,624 | | | | | |
Free Cash Flow for the three months ended March 31, 2023 was $102.9 million as compared to $54.6 million for the three months ended March 31, 2022, an increase of $48.3 million. Free Cash Flow increased year over year principally as a result of the $3.2 million increase in cash provided by operating activities and the $48.1 million decrease in cash used in the purchase of rental equipment and refurbishments, partially offset by the $6.8 million decrease in proceeds from the sale of rental equipment. The $148.8 million in cash provided by operating activities for the three months ended March 31, 2023 was returned to shareholders through repurchases and cancellations of $215.1 million of stock and reinvested into the business to support the purchase of rental equipment, including VAPS, and refurbishments.
Material cash requirements
The Company’s material cash requirements include the following contractual and other obligations:
Debt
The Company has outstanding debt related to its ABL Facility, 2025 Secured Notes, 2028 Secured Notes and finance leases, including interest, totaling $2.9 billion as of March 31, 2023, $13.5 million of which is obligated to be repaid within the next twelve months. Refer to Note 9 for further information regarding outstanding debt.
Operating leases
The Company has commitments for future minimum rental payments relating to operating leases, which are primarily for equipment and office space. As of March 31, 2023, the Company had lease obligations of $260.0 million, with $60.0 million payable within the next twelve months.
In addition to the cash requirements described above, the Company has a share repurchase program authorized by the Board of Directors, which allows the Company to repurchase up to $1.0 billion of outstanding shares of Common Stock and equivalents. This program does not obligate the Company to repurchase any specific amount of shares. As of March 31, 2023, $415.1 million of the approved share repurchase pool remained available.
The Company believes its cash, cash flows generated from ongoing operations, and continued access to its revolving credit facility as well as access to debt markets are sufficient to satisfy its currently anticipated cash requirements over the next twelve months.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. GAAP requires that we make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosure of contingent assets and liabilities. We base these estimates on historical experience and on various other assumptions that we consider reasonable under the circumstances and reevaluate our estimates and judgments as appropriate. The actual results experienced by us may differ materially and adversely from our estimates. For a complete discussion of our significant critical accounting policies, see the “Critical Accounting Policies and Estimates” section in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report on Form 10-K").
There were no significant changes to our critical accounting policies during the three months ended March 31, 2023.
Recently Issued Accounting Standards
Refer to Part I, Item 1, Note 1 of the notes to our financial statements included in this Quarterly Report on Form 10-Q for our assessment of recently issued and adopted accounting standards.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Act of 1934, as amended. The words “estimates,” “expects,” “anticipates,” “believes,” “forecasts,” “plans,” “intends,” “may,” “will,” “should,” “shall,” “outlook,” “guidance” and variations of these words and similar expressions identify forward-looking statements, which are generally not historical in nature and relate to expectations for future financial performance or business strategies or objectives. Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other important factors, many of which are outside our control, which could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Although WillScot Mobile Mini believes that these forward-looking statements are based on reasonable assumptions, it can give no assurance that any such forward-looking statement will materialize. Important factors that may affect actual results or outcomes include, among others:
•various laws and regulations and recent pronouncements related to laws and regulations governing antitrust, climate related disclosures, cybersecurity, privacy, government contracts, anti-corruption and the environment;
•our ability to successfully acquire and integrate new operations;
•the effect of global or local economic conditions in the industries and markets in which the Company operates and any changes therein, including financial market conditions and levels of end market demand;
•risks associated with cybersecurity and IT systems disruptions, including our ability to manage the business in the event a disaster shuts down our management information systems;
•trade policies and changes in trade policies, including the imposition of tariffs, their enforcement and downstream consequences;
•our ability to effectively compete in the modular space and portable storage industries;
•our ability to effectively manage our credit risk, collect on our accounts receivable, or recover our rental equipment;
•fluctuations in interest rates and commodity prices;
•risks associated with labor relations, labor costs and labor disruptions;
•changes in the competitive environment of our customer base as a result of the global, national or local economic climate in which they operate and/or economic or financial disruptions to their industry;
•our ability to adequately protect our intellectual property and other proprietary rights that are material to our business;
•natural disasters and other business disruptions such as pandemics, fires, floods, hurricanes, earthquakes and terrorism;
•our ability to establish and maintain the appropriate physical presence in our markets;
•property, casualty or other losses not covered by our insurance;
•our ability to close our unit sales transactions;
•our ability to maintain an effective system of internal controls and accurately report our financial results;
•evolving public disclosure, financial reporting and corporate governance expectations;
•our ability to achieve our environmental, social and governance goals;
•operational, economic, political and regulatory risks;
•effective management of our rental equipment;
•the effect of changes in state building codes on our ability to remarket our buildings;
•foreign currency exchange rate exposure;
•significant increases in the costs and restrictions on the availability of raw materials and labor;
•fluctuations in fuel costs or a reduction in fuel supplies;
•our reliance on third party manufacturers and suppliers;
•impairment of our goodwill, intangible assets and indefinite-life intangible assets;
•our ability to use our net operating loss carryforwards and other tax attributes;
•our ability to recognize deferred tax assets such as those related to our tax loss carryforwards and, as a result, utilize future tax savings;
•unanticipated changes in tax obligations, adoption of a new tax legislation, or exposure to additional income tax liabilities;
•our ability to access the capital and credit markets or the ability of key counterparties to perform their obligations to us;
•our ability to service our debt and operate our business;
•our ability to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness;
•covenants that limit our operating and financial flexibility;
•our stock price volatility; and
•such other risks and uncertainties described in the periodic reports we file with the SEC from time to time (including our 2022 Annual Report on Form 10-K), which are available through the SEC’s EDGAR system at www.sec.gov and on our website.
Any forward-looking statement speaks only at the date which it is made, and WillScot Mobile Mini undertakes no obligation, and disclaims any obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.