e10vq
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-12804
(Exact name of registrant as specific in its charter)
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Delaware
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86-0748362 |
(State or other jurisdiction of
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(IRS Employer Identification No.) |
incorporation or organization) |
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7420 S. Kyrene Road, Suite 101
Tempe, Arizona 85283
(Address of principal executive offices)
(480) 894-6311
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-d of the Exchange Act.
Large accelerated filer
þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Securities Exchange Act of 1934). Yes o No þ
At May 4, 2007, there were outstanding 35,904,040 shares of the issuers common stock.
1
MOBILE MINI, INC.
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED MARCH 31, 2007
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MOBILE MINI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
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December 31, 2006 |
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March 31, 2007 |
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(Note A) |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
1,370 |
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$ |
2,397 |
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Receivables, net of allowance for doubtful accounts of
$5,008 and $5,224 at December 31, 2006 and March 31,
2007, respectively |
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34,953 |
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32,702 |
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Inventories |
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27,863 |
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31,884 |
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Lease fleet, net |
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697,439 |
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721,874 |
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Property, plant and equipment, net |
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43,072 |
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50,132 |
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Deposits and prepaid expenses |
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9,553 |
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10,229 |
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Other assets and intangibles, net |
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9,324 |
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9,020 |
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Goodwill |
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76,456 |
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77,640 |
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Total assets |
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$ |
900,030 |
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$ |
935,878 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Accounts payable |
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$ |
18,928 |
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$ |
20,276 |
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Accrued liabilities |
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39,546 |
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37,384 |
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Line of credit |
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203,729 |
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218,882 |
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Notes payable |
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781 |
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438 |
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Obligations under capital leases |
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35 |
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30 |
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Senior Notes |
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97,500 |
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97,500 |
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Deferred income taxes |
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97,507 |
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105,528 |
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Total liabilities |
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458,026 |
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480,038 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock; $.01 par value, 95,000 shares authorized,
35,898 and 35,902 issued and outstanding at December
31, 2006 and March 31, 2007, respectively |
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359 |
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359 |
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Additional paid-in capital |
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268,456 |
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269,622 |
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Retained earnings |
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169,718 |
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182,415 |
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Accumulated other comprehensive income |
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3,471 |
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3,444 |
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Total stockholders equity |
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442,004 |
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455,840 |
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Total liabilities and stockholders equity |
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$ |
900,030 |
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$ |
935,878 |
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See accompanying notes to the condensed consolidated financial statements.
3
MOBILE MINI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(unaudited)
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Three Months Ended March 31, |
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2006 |
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2007 |
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Revenues: |
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Leasing |
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$ |
51,534 |
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$ |
66,053 |
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Sales |
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4,528 |
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6,654 |
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Other |
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358 |
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313 |
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Total revenues |
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56,420 |
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73,020 |
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Costs and expenses: |
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Cost of sales |
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2,914 |
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4,459 |
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Leasing, selling and general expenses |
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29,996 |
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36,838 |
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Depreciation and amortization |
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3,588 |
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4,891 |
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Total costs and expenses |
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36,498 |
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46,188 |
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Income from operations |
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19,922 |
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26,832 |
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Other income (expense): |
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Interest income |
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51 |
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Interest expense |
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(6,446 |
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(5,953 |
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Income before provision for income taxes |
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13,527 |
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20,887 |
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Provision for income taxes |
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5,323 |
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8,190 |
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Net income |
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$ |
8,204 |
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$ |
12,697 |
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Earnings per share: |
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Basic |
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$ |
0.27 |
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$ |
0.36 |
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Diluted |
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$ |
0.26 |
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$ |
0.35 |
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Weighted average number of common and
common share equivalents outstanding: |
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Basic |
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30,686 |
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35,641 |
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Diluted |
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31,682 |
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36,633 |
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See accompanying notes to the condensed consolidated financial statements.
4
MOBILE MINI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
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Three Months Ended March 31, |
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2006 |
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2007 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
8,204 |
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$ |
12,697 |
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Adjustments to reconcile income to net cash provided by
operating activities: |
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Provision for doubtful accounts |
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541 |
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651 |
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Amortization of deferred financing costs |
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220 |
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199 |
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Share-based compensation expense |
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754 |
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940 |
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Depreciation and amortization |
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3,588 |
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4,891 |
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Gain on sale of lease fleet units |
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(931 |
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(1,294 |
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Loss on disposal of property, plant and equipment |
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29 |
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9 |
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Deferred income taxes |
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5,256 |
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8,052 |
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Changes in certain assets and liabilities net of effect of
business acquired: |
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Receivables |
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936 |
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1,615 |
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Inventories |
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(1,003 |
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(4,005 |
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Deposits and prepaid expenses |
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7 |
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(673 |
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Other assets and intangibles |
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(210 |
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(3 |
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Accounts payable |
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(3,683 |
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(183 |
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Accrued liabilities |
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(3,695 |
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(2,198 |
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Net cash provided by operating activities |
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10,013 |
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20,698 |
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Cash Flows From Investing Activities: |
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Cash paid for business acquired |
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(2,397 |
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Additions to lease fleet, excluding acquisitions |
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(25,941 |
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(27,330 |
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Proceeds from sale of lease fleet units |
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2,782 |
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3,486 |
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Additions to property, plant and equipment |
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(939 |
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(8,368 |
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Proceeds from sale of property, plant and equipment |
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47 |
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64 |
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Net cash used in investing activities |
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(24,051 |
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(34,545 |
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Cash Flows From Financing Activities: |
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Net borrowings under lines of credit |
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15,074 |
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15,153 |
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Deferred financing costs |
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(1,615 |
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Principal payments on notes payable |
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(373 |
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(343 |
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Principal payments on capital lease obligations |
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(4 |
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Issuance of common stock, net |
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120,651 |
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65 |
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Net cash provided by financing activities |
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133,737 |
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14,871 |
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Effect of exchange rate changes on cash |
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7 |
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3 |
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Net increase in cash |
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119,706 |
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1,027 |
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Cash at beginning of period |
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207 |
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1,370 |
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Cash at end of period |
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$ |
119,913 |
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$ |
2,397 |
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Supplemental Disclosure of Cash Flow Information: |
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Interest rate swap changes in value (credited) charged to equity |
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$ |
(164 |
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$ |
118 |
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See accompanying notes to the condensed consolidated financial statements.
5
MOBILE MINI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles applicable to interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion of management, all
adjustments (which include normal and recurring adjustments) necessary to present fairly the
financial position, results of operations, and cash flows for all periods presented have been made.
All significant inter-Company balances and transactions have been eliminated.
The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited
consolidated financial statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete
financial statements.
The results of operations for the three-month period ended March 31, 2007, are not necessarily
indicative of the operating results that may be expected for the entire year ending December 31,
2007. Historically, Mobile Mini experiences some seasonality each year which has caused lower
utilization rates for our lease fleet and a marginal decrease in cash flow during the first half of
the year. These condensed consolidated financial statements should be read in conjunction with our
December 31, 2006, consolidated financial statements and accompanying notes thereto, which are
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC)
on March 1 2007.
NOTE B Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We have adopted this interpretation as of January 1, 2007. The
impact of our adoption is discussed in Note F.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). SFAS No.
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require
any new fair value measurement. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are in the process of
determining the effect, if any, that the adoption of SFAS No. 157 will have on our consolidated
financial statements. Because Statement No. 157 does not require any new fair value measurements
or remeasurements of previously computed fair values, we do not believe the adoption of this
Statement will have a material effect on our results of operations or financial condition.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). Under this Standard, we may elect to report financial
instruments and certain other items at fair value on a contract-by-contract basis with changes in
value reported in earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities
that were previously required to use a different accounting method than the related hedging
contracts when the complex provisions of SFAS No. 133 hedge accounting are not met. SFAS No. 159
is effective for years beginning after November 15, 2007. We are currently evaluating the
potential impact of adopting this Standard.
NOTE C Basic earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted earnings per
common share are determined
6
assuming the potential dilution of the exercise or conversion of options into common stock. The following
table shows the computation of earnings per share for the three-month period ended March 31:
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Three Months Ended |
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March 31, |
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2006 |
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2007 |
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(In thousands except |
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earnings per share data) |
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BASIC: |
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Common stock outstanding,
beginning of period |
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30,521 |
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35,640 |
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Effect of weighting shares: |
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Weighted shares issued during the
period ended March 31, |
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165 |
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1 |
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Weighted average number of shares
outstanding |
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30,686 |
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35,641 |
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Net income available to common shareholders |
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$ |
8,204 |
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$ |
12,697 |
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Earnings per share |
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$ |
0.27 |
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$ |
0.36 |
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DILUTED: |
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Common stock outstanding,
beginning of period |
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30,521 |
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35,640 |
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Effect of weighting shares: |
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Weighted shares issued during the period
ended March 31, |
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165 |
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1 |
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Employee stock options on nonvested
share-awards assumed converted during
the period ended March 31, |
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996 |
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992 |
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Weighted average number of shares
outstanding |
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31,682 |
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36,633 |
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Net income available to common shareholders |
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$ |
8,204 |
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$ |
12,697 |
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Earnings per share |
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$ |
0.26 |
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$ |
0.35 |
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For the three months ended March 31, 2006 and 2007, options to purchase 444,250 and 568,525 shares,
respectively, of the Companys stock were excluded from the calculation of diluted earnings per
share because they were anti-dilutive. Basic weighted average number of common shares outstanding
as of March 31, 2006 and 2007 does not include 96,668 and 256,730 nonvested share-awards,
respectively, as the stock is not vested. For the three months ended March 31, 2007, 1,333
nonvested share-awards were not included in the computation of diluted earnings per share because
the effect would have been anti-dilutive.
NOTE D Share-Based Compensation
At March 31, 2007, the Company had three active share-based employee compensation plans. Stock
option awards under these plans are granted with an exercise price per share equal to the fair
market value of our common stock on the date of grant. Each option must expire no more than 10
years from the date it is granted and, historically, options are granted with vesting over a 4.5
year period.
7
In 2005, we began awarding nonvested shares under the existing share-based compensation plan. Our
nonvested share-awards vest in equal annual installments over either a four-year or five-year
period. The total value of these awards is expensed on a straight-line basis over the service
period of the employees receiving the grants. The service period is the time during which the
employees receiving grants must remain employees for the shares granted to fully vest. In December
2006, we granted to certain of our executive officers nonvested share-awards with vesting subject
to a performance condition. Vesting of these share-awards is dependent upon the officers
fulfilling the service period requirements as well as the Company achieving certain EBITDA targets
in each of the next four years. At the date of grant, the EBITDA targets were not known, and as
such, the measurement date for the nonvested share-awards had not yet occurred. This target was
established by our Board of Directors on February 21, 2007, at which point, the value of each
nonvested share-award was $28.77. We are required to assess the probability that such performance
conditions will be met. The likelihood of the performance condition being met has been deemed
probable by management, and we are recognizing the expense using the accelerated attribution
method. The accelerated attribution method could result in as much as 52% of the total value of
the shares being recognized in the first year of the service period if each of the four future
targets continue to be assessed as probable of being met.
Share-based compensation expense reduced income before income tax expense for the three-month
period ended March 31, 2007, by approximately $0.9 million. It reduced net income for the
three-month period ended March 31, 2007 by approximately $0.7 million. As a result, basic and
diluted earnings per share for the three-month period ended March 31, 2007 were reduced by
approximately $0.02 per share. As of March 31, 2007, the total amount of unrecognized compensation
cost related to nonvested share awards was approximately $6.6 million, which is expected to be
recognized over a weighted-average period of approximately 4.0 years.
The total value of the stock option awards is expensed on a straight-line basis over the service
period of the employees receiving the awards. As of March 31, 2007, total unrecognized compensation
cost related to stock option awards was approximately $6.7 million and the related weighted-average
period over which it is expected to be recognized is approximately 2.3 years.
A summary of stock option activity within the Companys stock-based compensation plans and changes
for the three months ended March 31, 2007 is as follows:
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|
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
|
Shares |
|
|
Average |
|
|
|
(In thousands) |
|
|
Exercise Price |
|
Balance at December 31, 2006 |
|
|
2,609 |
|
|
$ |
15.87 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(5 |
) |
|
|
12.22 |
|
Terminated/expired |
|
|
(22 |
) |
|
|
20.36 |
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
2,582 |
|
|
$ |
15.83 |
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the three months ended March 31, 2007 was $0.1
million.
A summary of nonvested share-awards activity within our share-based compensation plans and changes
is as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
Nonvested at December 31, 2006 |
|
|
259 |
|
|
$ |
27.61 |
|
Awarded |
|
|
|
|
|
|
|
|
Released |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2 |
) |
|
|
28.55 |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2007 |
|
|
257 |
|
|
$ |
27.60 |
|
|
|
|
|
|
|
|
8
A summary of fully-vested stock options and stock options expected to vest, as of March 31, 2007,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
Number of |
|
Weighted |
|
Average |
|
Intrinsic |
|
|
Shares |
|
Average |
|
Remaining |
|
Value |
|
|
(In |
|
Exercise |
|
Contractual |
|
(In |
|
|
thousands) |
|
Price |
|
Term |
|
thousands) |
Outstanding |
|
|
2,582 |
|
|
$ |
15.83 |
|
|
|
6.39 |
|
|
$ |
28,922 |
|
Vested and expected to vest |
|
|
2,387 |
|
|
$ |
15.33 |
|
|
|
6.28 |
|
|
$ |
27,903 |
|
Exercisable |
|
|
1,424 |
|
|
$ |
14.04 |
|
|
|
5.20 |
|
|
$ |
18,296 |
|
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model. The following are the weighted average assumptions used for the
periods noted:
|
|
|
|
|
|
|
Three Months |
|
|
ended |
|
|
March 31, 2006 |
Risk-free interest rate |
|
|
4.72 |
% |
Expected holding period (years) |
|
|
5.2 |
|
Expected stock volatility |
|
|
32.1 |
% |
Expected dividend rate |
|
|
0.0 |
% |
The weighted average fair value of stock options granted during the first quarter 2006 was $10.29.
There were no shares granted during the first quarter of 2007.
NOTE E Inventories are valued at the lower of cost (principally on a standard cost basis which
approximates the first-in, first-out (FIFO) method) or market. Market is the lower of replacement
cost or net realizable value. Inventories primarily consist of raw materials, supplies,
work-in-process and finished goods, all related to the manufacturing, refurbishment and maintenance
of units, primarily for our lease fleet and our units held for sale. Raw materials principally
consist of raw steel, wood, glass, paint, vinyl and other assembly components used in manufacturing
and refurbishing processes. Work-in-process primarily represents units being built at our
manufacturing facility that are either pre-sold or being built to add to our lease fleet upon
completion. Finished portable storage units primarily represents ISO (the International
Organization for Standardization) containers held in inventory until the containers are either sold
as is, refurbished and sold, or units in the process of being refurbished to be compliant with our
lease fleet standards before transferring the units to our lease fleet. There is no certainty when
we purchase the containers whether they will ultimately be sold, refurbished and sold, or
refurbished and moved into our lease fleet. Units that we add to our lease fleet undergo an
extensive refurbishment process that includes installing our proprietary locking system, signage,
painting and sometimes adding our proprietary security doors.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Raw material and supplies |
|
$ |
18,420 |
|
|
$ |
20,958 |
|
Work-in-process |
|
|
3,031 |
|
|
|
4,583 |
|
Finished portable storage units |
|
|
6,412 |
|
|
|
6,343 |
|
|
|
|
|
|
|
|
|
|
$ |
27,863 |
|
|
$ |
31,884 |
|
|
|
|
|
|
|
|
9
NOTE F On January 1, 2007, we adopted the provision of FIN 48, Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 contains a two-step approach
to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.
We file U.S. federal tax returns, U.S. State tax returns, and foreign tax returns. We have
identified our U.S. Federal tax return as our major tax jurisdiction. For the U.S. Federal
return, years 2003 through 2006 are subject to tax examination by the U.S. Internal Revenue
Service. We do not currently have any ongoing tax examinations with the IRS. We believe that our
income tax filing positions and deductions will be sustained on audit and do not anticipate any
adjustments that will result in a material change to our financial position. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, we did not
record a cumulative effect adjustment related to the adoption of FIN 48. We do not anticipate that
the total amount of unrecognized tax benefit related to any particular tax position will change
significantly within the next 12 months.
Our policy for recording interest and penalties associated with audits is to record such items as a
component of income before taxes. Penalties and associated interest costs are recorded in leasing,
selling and general expenses in the Condensed Consolidated Statements
of Income.
NOTE G Property, plant and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided using the straight-line method over the assets estimated useful lives.
Residual values are determined when the property is constructed or acquired and range up to 25%,
depending on the nature of the asset. In the opinion of management, estimated residual values do
not cause carrying values to exceed net realizable value. Normal repairs
and maintenance to property, plant and equipment are expensed as incurred. When property or
equipment is retired or sold, the net book value of the asset, reduced by any proceeds, is charged
to gain or loss on the retirement of fixed assets. Property, plant and equipment consist of the
following at:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Land |
|
$ |
772 |
|
|
$ |
772 |
|
Vehicles and equipment |
|
|
45,734 |
|
|
|
53,745 |
|
Buildings and improvements |
|
|
10,645 |
|
|
|
10,759 |
|
Office fixtures and equipment |
|
|
9,552 |
|
|
|
9,829 |
|
|
|
|
|
|
|
|
|
|
|
66,703 |
|
|
|
75,105 |
|
Less accumulated depreciation |
|
|
(23,631 |
) |
|
|
(24,973 |
) |
|
|
|
|
|
|
|
|
|
$ |
43,072 |
|
|
$ |
50,132 |
|
|
|
|
|
|
|
|
NOTE H - Mobile Mini has a lease fleet primarily consisting of refurbished, modified and
manufactured portable storage and office units that are leased to customers under short-term
operating lease agreements with varying terms. Depreciation is provided using the straight-line
method over our units estimated useful life, 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 25
years with an estimated residual value of 62.5%. 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 to a 20% residual value. Van trailers are only added to the fleet in
connection with acquisitions of portable storage businesses, and then only when van trailers are a
part of the business acquired.
In the opinion of management, estimated residual values do not cause carrying values to exceed net
realizable value. We continue to evaluate these depreciation policies as more information becomes
available from other comparable sources and our own historical experience.
10
Normal repairs and maintenance to the portable storage and mobile office units are expensed as
incurred. As of December 31, 2006, the lease fleet totaled $747.1 million as compared to $774.6
million at March 31, 2007, before accumulated depreciation of $49.7 million and $52.7 million,
respectively.
Lease fleet consists of the following at:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Steel storage containers |
|
$ |
423,766 |
|
|
$ |
427,646 |
|
Offices |
|
|
320,160 |
|
|
|
343,434 |
|
Van trailers |
|
|
2,702 |
|
|
|
2,851 |
|
Other |
|
|
479 |
|
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
747,107 |
|
|
|
774,620 |
|
Accumulated depreciation |
|
|
(49,668 |
) |
|
|
(52,746 |
) |
|
|
|
|
|
|
|
|
|
$ |
697,439 |
|
|
$ |
721,874 |
|
|
|
|
|
|
|
|
11
NOTE I The Financial Accounting Standards Board (FASB) issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which establishes the standards for
companies to report information about operating segments. We have operations in the United States,
Canada, the United Kingdom and The Netherlands. All of our branches operate in their local
currency and although we are exposed to foreign exchange rate fluctuation in other foreign markets
where we lease and sell our products, we do not believe this will have a significant impact on our
results of operations. Currently, our branch operation is the only segment that concentrates on
our core business of leasing. Each branch has similar economic characteristics covering all
products leased or sold, including the same customer base, sales personnel, advertising, yard
facilities, general and administrative costs and the branch management. Managements allocation of
resources, performance evaluations and operating decisions are not dependent on the mix of a
branchs products. We do not attempt to allocate shared revenue nor general, selling and leasing
expenses to the different configurations of portable storage and office products for lease and
sale. The branch operations include the leasing and sales of portable storage units, portable
offices and combination units configured for both storage and office space. We lease to businesses
and consumers in the general geographic area surrounding each branch. The operation includes our
manufacturing facilities, which is responsible for the purchase, manufacturing and refurbishment of
products for leasing and sale, as well as for manufacturing certain delivery equipment.
In managing our business, we focus on earnings per share and on our internal growth rate in leasing
revenue, which we define as growth in lease revenues on a year-over-year basis at our branch
locations in operation for at least one year, without inclusion of same market acquisitions.
Discrete financial data on each of our products is not available and it would be impractical to
collect and maintain financial data in such a manner; therefore, based on the provisions of SFAS
No. 131, reportable segment information is the same as contained in our Condensed Consolidated
Financial Statements.
The tables below represent our revenue and long-lived assets as attributed to geographic locations
(in thousands):
Revenue from external customers:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2007 |
|
United States |
|
$ |
55,986 |
|
|
$ |
67,120 |
|
Other Nations |
|
|
434 |
|
|
|
5,900 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
56,420 |
|
|
$ |
73,020 |
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
United States |
|
$ |
710,155 |
|
|
$ |
732,844 |
|
Other Nations |
|
|
30,356 |
|
|
|
39,162 |
|
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
740,511 |
|
|
$ |
772,006 |
|
|
|
|
|
|
|
|
NOTE J Comprehensive income, net of tax, consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2007 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
8,204 |
|
|
$ |
12,697 |
|
Net unrealized holding gain (loss) on derivatives |
|
|
164 |
|
|
|
(118 |
) |
Foreign currency translation adjustment |
|
|
5 |
|
|
|
91 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
8,373 |
|
|
$ |
12,670 |
|
|
|
|
|
|
|
|
12
The components of accumulated other comprehensive income, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Accumulated net unrealized holding gain on derivatives |
|
$ |
523 |
|
|
$ |
405 |
|
Foreign currency translation adjustment |
|
|
2,948 |
|
|
|
3,039 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
3,471 |
|
|
$ |
3,444 |
|
|
|
|
|
|
|
|
NOTE K
In January 2007, we acquired the portable storage business of the Worcester Leasing Company, Inc.,
operating in Worcester, Vermont. Under the related asset purchase agreement, we paid cash of
approximately $2.4 million and assumed certain liabilities in connection with this transaction. At
March 31, 2007, we operated 55 branches in the United States, one in Canada, six in the United
Kingdom, and one in The Netherlands.
The acquisition was accounted for as a purchase in accordance with SFAS No. 141, Business
Combinations, and the purchased assets and the assumed liabilities were recorded at their estimated
fair values at the date of acquisition.
The aggregate purchase price of the assets and operations acquired consists of the following, in
thousands:
|
|
|
|
|
Cash |
|
$ |
2,393 |
|
Other acquisition costs |
|
|
4 |
|
|
|
|
|
Total |
|
$ |
2,397 |
|
|
|
|
|
The fair value of the assets purchased as been allocated as follows, in thousands:
|
|
|
|
|
Tangible assets |
|
$ |
964 |
|
Intangible assets: |
|
|
|
|
Customer-related |
|
|
228 |
|
Other |
|
|
25 |
|
Goodwill |
|
|
1,218 |
|
Assumed liabilities |
|
|
(38 |
) |
|
|
|
|
Total |
|
$ |
2,397 |
|
|
|
|
|
The purchase price for the acquisition has been allocated to the assets acquired and liabilities
assumed based upon estimated fair values as of the acquisition date and are subject to adjustment
when additional information concerning asset and liability valuations are finalized.
The intangible assets are amortized on an accelerated basis over 11 years.
NOTE L Subsequent Events
On May 7, 2007, we completed a tender offer and purchased over 99% of the $97.5 million principal
amount of our issued and outstanding 9.5% Senior Notes due 2013. On that date we also completed
the offering of our $150.0 principal amount 6.875% Senior Notes due 2015, issued at 99.548% of par
value, through a private placement to institutional investors under Rule 144A promulgated by the
Securities and Exchange Commission under the Securities Act of 1933.
13
We also amended our revolving line of credit to increase the maximum amount we can borrow from $350
million to $425 million under the line of credit and to extend the scheduled maturity date to May
7, 2012. Under the amended agreement, we may further increase the maximum borrowing limit to $500
million without lenders consent.
On May 7, 2007, we closed on all three of the transactions and in the second quarter of 2007 we
will record debt extinquishment expense of approximately $11.1 million in connection with the early
retirement of the 9.5% Senior Notes.
Of the $97.5 million aggregate principal balance outstanding of our 9.5% Notes, approximately $97.1
million was tendered in the tender offer. We anticipate that we will redeem the remaining balance
of approximately $0.4 million by the end of the second quarter in 2007.
On May 7, 2007, we received net proceeds of approximately $146.3 million, after underwriters
discounts and commissions, from our issuance of $150 million of 6.875% Senior Notes. We used these
proceeds to repay $97.1 million of our 9.5% Senior Notes tendered to us in the tender offer, and we
paid accrued interest, fees and the redemption premium of approximately $8.7 million on the 9.5%
Notes. The remaining proceeds of approximately $37.1 million were used to repay borrowings under
the revolving line of credit.
14
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read
together with our December 31, 2006 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 on March 1, 2007. 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 those forward-looking statements
as a result of certain factors, including, but not limited to, those described in the section
entitled Risk Factors (refer to Part II, Item 1A).
The following discussion takes into account our acquisition on April 28, 2006, of the Royal Wolf
Companies. As a result of that acquisition, we added two new locations in California, six
locations in the United Kingdom and a branch in The Netherlands. We also consolidated operations
at the 10 locations in the United States where there was branch overlap as a result of the
acquisition. The results of operations at these acquired locations, as well as the other
acquisitions we concluded in 2006 and 2007, are included in our discussions below.
Overview
General
In 1996, we initiated a strategy of focusing on leasing rather than selling our portable storage
units. We derive most of our revenues from the leasing of portable storage containers and portable
offices. The average North America intended lease term at lease inception is approximately 10
months for portable storage units and approximately 13 months for portable offices. In Europe,
customers do not specify an initial intended lease term other than month-to-month. After the
expiration of the initial intended term, units continue on lease on a month-to-month basis. In
2006, the Company wide over-all lease duration averaged 23 months for portable storage units and 20
months for portable offices. As a result of these long average lease durations, our leasing
business tends to provide us with a recurring revenue stream and minimizes fluctuations in
revenues. However, there is no assurance that we will maintain such lengthy overall lease
durations.
In addition to our leasing business, we also sell portable storage containers and occasionally we
sell portable office units. Since 1996, when we changed our focus to leasing, our sales revenues,
as a percentage of total revenues, have decreased to approximately 10% of revenues. Beginning in
2006, sales revenues increased after being relatively flat for several years, primarily due to our
acquisition of our European operations in April 2006. These entities, which in 2006 derived
approximately 40% of their revenues from container sales, are being transitioned to our leasing
business model.
Over the last nine years, we have grown through internally generated growth and acquisitions which
we use to gain a presence in new markets. Typically, we enter a new market through the acquisition
of the business of a smaller local competitor and then apply our business model, which is usually
much more customer service and marketing focused than the business we are buying or its competitors
in the market. If we cannot find a desirable acquisition opportunity in a market we wish to enter,
we establish a new location from the ground up. As a result, a new branch location will often have
fairly low operating margins during its early years, but as our marketing efforts help us penetrate
the new market and we increase the number of units on rent at the new branch, we take advantage of
operating efficiencies to improve operating margins at the branch and usually reach company average
levels after several years. When we enter a new market, we incur certain costs in developing an
infrastructure. For example, advertising and marketing costs will be incurred and certain minimum
staffing levels and certain minimum levels of delivery equipment will be put in place regardless of
the new markets revenue base. Once we have achieved revenues during any period that are
sufficient to cover our fixed expenses, we generate high margins on incremental lease revenues.
Therefore, each additional unit rented in excess of the break even level contributes significantly
to profitability. Conversely, additional fixed expenses that we incur require us to achieve
additional revenue as compared to the prior period to cover the additional expense.
15
Among the external factors we examine to determine the direction of our business is the level of
non-residential construction activity, especially in areas of the country where we have a
significant presence. Customers in the construction industry represented approximately 40% of our
units on rent at December 31, 2006, and because of the degree of our operating leverage we have,
increases or declines in non-residential construction activity can have a significant effect on our
operating margins and net income. In 2002 and 2003, we saw weakness in the level of revenues from
the non-residential construction sector of our customer base. The lower-than-historical growth
rate in revenues combined with increases in fixed costs depressed our growth in adjusted EBITDA (as
defined below) in those years. Since 2004, the level of non-residential construction activity in
the U.S. rose after two years of steep declines. As a result of the improvement in the
non-residential construction sector and the general improvements in the economy, our adjusted
EBITDA increased during the past three years.
In managing our business, we focus on our internal growth rate in leasing revenue, which we define
as growth in lease revenues on a year-over-year basis at our branch locations in operation for at
least one year, without inclusion of leasing revenue attributed to same-market acquisitions. This
internal growth rate has remained positive every quarter, but in 2002 and 2003 had fallen to single
digits, from over 20% prior to 2002. We achieved an internal growth rate of 19.9% in 2006. With
third party forecasts calling for the level of non-residential construction activity to remain
positive in 2007, but below 2006 levels, we currently expect that our internal growth rate will
further moderate over the next few quarters, but remain well above levels experienced in 2002 and
2003. Our goal is to maintain a high internal growth rate so that revenue growth will exceed
inflationary growth in expenses, and we can continue to take advantage of the operating leverage
inherent in our business model.
We are a capital-intensive business, so in addition to focusing on earnings per share, we focus on
adjusted EBITDA to measure our results. We calculate this number by first calculating EBITDA,
which we define as net income before interest expense, debt restructuring or debt extinguishment
costs (if any during the relevant measurement period), provision for income taxes, and depreciation
and amortization. This measure eliminates the effect of financing transactions that we enter into
on an irregular basis based on capital needs and market opportunities, and this measure 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 typically further adjust EBITDA to
ignore the effect of what we consider non-recurring events not related to our core business
operations to arrive at what we define as adjusted EBITDA. Because EBITDA is a non-GAAP financial
measure, as defined by the SEC, we include in the tables below reconciliations of EBITDA to the
most directly comparable financial measures calculated and presented in accordance with accounting
principles generally accepted in the United States.
We present EBITDA because we believe it provides useful information regarding our ability to meet
our future debt payment requirements, capital expenditures and working capital requirements and
that it provides an overall evaluation of our financial condition. In addition, EBITDA is a
component of certain financial covenants under our revolving credit facility and is used to
determine our available borrowing capacity and the interest rate in effect at any point in time.
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
generally accepted accounting principles in the United States or as a measure of our profitability
or our liquidity. In particular, EBITDA, as defined does not include:
|
|
|
Interest expense because we borrow money to partially finance our capital
expenditures, primarily related to the expansion of our lease fleet, interest expense is a
necessary element of our cost to secure this financing to continue generating additional
revenues. |
|
|
|
|
Debt restructuring or extinquishment expense as defined in our revolving credit
facility, debt restructuring or debt extinguishment expenses are not deducted in our
various calculations made under the 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. |
|
|
|
|
Income taxes EBITDA, as defined, does not reflect income taxes or the requirements
for any tax payments.
|
16
|
|
|
Depreciation and amortization because we are a leasing company, our business is very
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. |
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 a similarly titled performance measure
presented by other companies.
The table below is a reconciliation of EBITDA to net cash provided by operating activities for the
periods ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2007 |
|
|
|
(In thousands) |
|
EBITDA |
|
$ |
23,561 |
|
|
$ |
31,731 |
|
Interest Paid |
|
|
(10,899 |
) |
|
|
(7,976 |
) |
Income and franchise taxes paid |
|
|
(65 |
) |
|
|
(115 |
) |
Share-based compensation expense |
|
|
754 |
|
|
|
940 |
|
Gain on sale of lease fleet units |
|
|
(931 |
) |
|
|
(1,294 |
) |
Loss on disposal of property, plant and equipment |
|
|
29 |
|
|
|
9 |
|
Changes in certain assets and liabilities, net of effect of business acquired: |
|
|
|
|
|
|
|
|
Receivables |
|
|
1,477 |
|
|
|
2,266 |
|
Inventories |
|
|
(1,003 |
) |
|
|
(4,005 |
) |
Deposits and prepaid expenses |
|
|
7 |
|
|
|
(673 |
) |
Other assets and intangibles |
|
|
(210 |
) |
|
|
(3 |
) |
Accounts payable and accrued liabilities |
|
|
(2,707 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
10,013 |
|
|
$ |
20,698 |
|
|
|
|
|
|
|
|
EBITDA is calculated as follows, without further adjustment, for the periods ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2007 |
|
|
|
(In thousands except percentages) |
|
Net income |
|
$ |
8,204 |
|
|
$ |
12,697 |
|
Interest expense |
|
|
6,446 |
|
|
|
5,953 |
|
Provision for income taxes |
|
|
5,323 |
|
|
|
8,190 |
|
Depreciation and amortization |
|
|
3,588 |
|
|
|
4,891 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
23,561 |
|
|
$ |
31,731 |
|
|
|
|
|
|
|
|
EBITDA margin(1) |
|
|
41.8 |
% |
|
|
43.5 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBITDA margin is calculated as EBITDA divided by total revenues expressed as a
percentage. |
17
In managing our business, we routinely compare our EBITDA margins from year to year and based upon
age of branch. We define this margin as 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 branch locations, we achieve
higher EBITDA margins on that capital than we achieve on capital invested to establish a new
branch, because our fixed costs are already in place in connection with the established branches.
The fixed costs are those associated with yard and delivery equipment, as well as advertising,
sales,
marketing and office expenses. With a new market or branch, we must first fund and absorb the
startup costs for setting up the new branch facility, hiring and developing the management and
sales team and developing our marketing and advertising programs. A new branch will have low
EBITDA margins in its early years until the number of units on rent increases. Because of our high
operating margins on incremental lease revenue, which we realize on a branch-by-branch basis when
the branch achieves leasing revenues sufficient to cover the branchs fixed costs, leasing revenues
in excess of the break-even amount produce large increases in profitability. Conversely, absent
significant growth in leasing revenues, the EBITDA margin at a branch will remain relatively flat
on a period-by-period comparative basis.
Accounting and Operating Overview
Our leasing revenues include all rent and ancillary revenues we receive for our portable storage,
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
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, refurbish 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, advertising and other marketing
expenses, commissions and corporate expenses for both our leasing and sales activities. Annual
repair and maintenance expenses on our leased units over the last three fiscal years have averaged
approximately 3.5% of lease revenues and are included in leasing, selling and general expenses. We
expense our normal repair and maintenance costs as incurred (including the cost of periodically
repainting units).
Our principal asset is our lease fleet, which has historically maintained value close to its
original cost. The steel units in our lease fleet (other than van trailers) are depreciated on the
straight-line method over our units estimated useful life of 25 years after the date the unit is
placed in service, with an estimated residual value of 62.5%. The 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. Our wood mobile
office units are depreciated over 20 years to 50% of original cost. Van trailers, which constitute
a small part of our fleet, are depreciated over seven years to a 20% residual value. 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.
The table below summarizes those transactions that increased the net value of our lease fleet from
$697.4 million at December 31, 2006, to $721.9 million at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Units |
|
|
|
(In thousands) |
|
|
|
|
Lease fleet at December 31, 2006, net |
|
$ |
697,439 |
|
|
|
149,615 |
|
Purchases: |
|
|
|
|
|
|
|
|
Container purchases |
|
|
3,827 |
|
|
|
1,266 |
|
Non-core units |
|
|
89 |
|
|
|
228 |
|
Manufactured units: |
|
|
|
|
|
|
|
|
Steel storage containers, combination office units and steel security offices |
|
|
11,457 |
|
|
|
1,213 |
|
Wood mobile offices |
|
|
9,607 |
|
|
|
359 |
|
18
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Units |
|
|
|
(In thousands) |
|
|
|
|
Refurbishment and customization(3): |
|
|
|
|
|
|
|
|
Refurbishment or customization of units purchased or acquired in the current year |
|
|
1,884 |
|
|
|
594 |
(1) |
Refurbishment or customization of 896 units purchased in a prior year |
|
|
2,096 |
|
|
|
29 |
(2) |
Refurbishment or customization of 1,161 units obtained through acquisition in a prior year |
|
|
942 |
|
|
|
39 |
(3) |
Other |
|
|
(197 |
) |
|
|
(227 |
) |
Cost of sales from lease fleet |
|
|
(2,192 |
) |
|
|
(961 |
) |
Depreciation |
|
|
(3,078 |
) |
|
|
|
|
|
|
|
|
|
|
|
Lease fleet at March 31, 2007, net |
|
$ |
721,874 |
|
|
|
152,155 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These units represent the net additional units that were the result of splitting steel containers into one 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. |
|
(2) |
|
Includes units moved from finished goods to lease fleet. |
|
(3) |
|
Does not include any routine maintenance. |
19
The table below outlines the composition of our lease fleet at March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
Lease Fleet |
|
|
Units |
|
|
|
(In thousands) |
|
|
|
|
Steel storage containers |
|
$ |
427,646 |
|
|
|
126,464 |
|
Offices |
|
|
343,434 |
|
|
|
23,615 |
|
Van trailers |
|
|
2,851 |
|
|
|
2,076 |
|
Other |
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,620 |
|
|
|
|
|
Accumulated depreciation |
|
|
(52,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
721,874 |
|
|
|
152,155 |
|
|
|
|
|
|
|
|
Our most recent fair market value and orderly liquidation value appraisals were conducted in
December 2006. At March 31, 2007, based on these appraisal values, the fair market value of our
lease fleet was approximately 115.7% of our lease fleet net book value, and the orderly liquidation
value appraisal, on which our borrowings under our revolving credit facility are based, was
approximately $610.7 million, which equates to 84.6% of the lease fleet net book value. These are
an independent third-party appraisers estimation of value under two sets of assumptions, and there
is no certainty that such values could in fact be achieved if any assumption were to prove
incorrect at the time of an actual sale or liquidation.
Our expansion program and other factors can affect our overall utilization rate. During the last
five fiscal years, our annual utilization levels averaged 80.8%, and ranged from a low of 78.7% in
2003 to a high of 82.9% in 2005. During years in which we enter many additional markets or in
which certain geographic areas are affected by a slowdown in non-residential construction,
utilization rates will tend to be lower. With the addition of fewer markets in 2003 and 2004, and
the improvement in non-residential construction in 2004, we focused on increasing our utilization
rate by balancing inventory between markets and decreasing the number of out-of-service units. Our
average utilization rate increased from 78.7% in 2003 to 82.7% in 2006. Our utilization is
somewhat seasonal, with the low realized in the first quarter and the high realized in the fourth
quarter.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2007, Compared to
Three Months Ended March 31, 2006
Total revenues for the quarter ended March 31, 2007, increased by $16.6 million, or 29.4%, to $73.0
million from $56.4 million for the same period in 2006. Leasing revenues for the quarter increased
by $14.5 million, or 28.2%, to $66.0 million from $51.5 million for the same period in 2006. This
increase resulted from a 0.5% increase in the average rental yield per unit and a 27.6% increase in
the average number of units on lease compared to the 2006 first quarter. The increase in yield
resulted from an increase in average rental rates in North America over the last year and an
increase in revenue for ancillary rental services, such as delivery charges. An increase in the
mix of premium units having higher rental rates being added to our fleet was offset by lower rental
rates on units added through acquisitions, especially in Europe, which on the average were smaller,
were not refurbished and were primarily storage containers rather than portable offices. Our
internal growth rate, which we define as the growth in lease revenues in markets opened for at
least one year, excluding growth arising as a result of additional acquisitions in those markets,
was 15.4% for the three months ended March 31, 2007, as compared to 23.2% for the comparable
three-month period of 2006. Our sales of portable storage and office units for the three months
ended March 31, 2007, increased by 46.9% to $6.7 million from $4.5 million during the same period
in 2006, with the increase being primarily related to sales at our newer locations, both in the
United States and especially in Europe. As a percentage of total revenues, leasing revenues for
the quarter ended March 31, 2007, represented 90.5% as compared to 91.3% for the same period in
2006. Our leasing business continues to be our primary focus and leasing revenues have become the
predominant part of our revenue mix over the past several years. We expect this trend to continue
as we transform our newly-acquired European branches to our leasing business model.
20
Cost of sales are the costs related to our sales revenues only. Cost of sales for the quarter
ended March 31, 2007, increased to 67.0% of sales revenues from 64.3% of sales revenues in the same
period in 2006. Our gross margin was at a higher-than-typical level during both periods. The
slight decrease in the 2007 gross margin results from our European operations, where many of our
units are sold at wholesale.
Leasing, selling and general expenses increased $6.8 million, or 22.8%, to $36.8 million for the
quarter ended March 31, 2007, from $30.0 million for the same period in 2006. Leasing, selling and
general expenses, as a percentage of total revenues, decreased to 50.4% for the quarter ended March
31, 2007, from 53.2% for the same period in 2006. As the markets we entered in the past few years
continue to mature and as their revenues increase to cover our fixed expenses at those locations,
those markets will begin to contribute to higher margins on incremental lease revenues. Each
additional unit on lease in excess of the break-even level contributes significantly to
profitability. Over the next several months, we anticipate our leasing, selling and general
expenses will increase modestly as we add more infrastructure to the seven European and four United
States branches acquired in 2006, to support their transformation to our business model. The major
increases in leasing, selling and general expenses for the quarter ended March 31, 2007, were
primarily payroll and related expenses to support the growth of our leasing activities and our
acquired European operation.
EBITDA increased by $8.1 million, or 34.7%, to $31.7 million for the quarter ended March 31, 2007,
compared to $23.6 million for the same period in 2006.
Depreciation and amortization expenses increased $1.3 million, or 36.3 %, to $4.9 million in the
quarter ended
March 31, 2007, from $3.6 million during the same period in 2006. The increase is primarily due to
the growth in lease fleet over the last year in order to meet increased demand and market
expansion. Since March 31, 2006, our lease fleet cost basis for depreciation increased by
approximately $161.2 million.
Interest expense decreased $0.5 million, or 7.6%, to $5.9 million for the quarter ended March 31,
2007 as compared to $6.4 million for the same period in 2006. Our average debt outstanding for the
three months ended March 31, 2007, compared to the same period in 2006, decreased by 2.7%. Our
average borrowing rate declined during the first quarter of 2007 from the prior year level in part
because we had paid down $52.5 million of our higher interest rate 9.5% Senior Notes and in part
because of a lower LIBOR spread under our revolving line of credit. The weighted average interest
rate on our debt for the three months ended March 31, 2007 was 7.3% compared to 7.8% for the three
months ended March 31, 2006 excluding amortization of debt issuance costs. Taking into account the
amortization of debt issuance costs, the weighted average interest rate was 7.6% in the 2007
quarter and 8.0% in the 2006 quarter.
Provision for income taxes was based on a blended annual effective tax rate of 39.2% in the quarter
ended March 31, 2007, as compared to 39.3% during the same period in 2006. Our 2007 first quarter
consolidated tax provision includes the expected tax rates for our operations in the United States,
Canada, United Kingdom and The Netherlands.
Net income for the three months ended March 31, 2007, was $12.7 million compared to net income of
$8.2 million for the same period in 2006. Our 2007 first quarter net income results were primarily
achieved through our 29.4% increase in revenues and the operating leverage associated with this
growth.
LIQUIDITY AND CAPITAL RESOURCES
Over the past several years, we have financed an increasing portion of our capital needs, most of
which are discretionary and are principally to acquire additional units for the lease fleet,
through working capital and funds generated from operations. Leasing is a capital-intensive
business that requires us to acquire assets before they generate revenues, cash flow and earnings.
The assets which we lease have very long useful lives and require relatively little recurrent
maintenance expenditures. Most of the capital that we deploy into our leasing business has been
used to expand our operations geographically, to increase the number of units available for lease
at our leasing 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
the deferral of income taxes caused by accelerated depreciation that is used for tax accounting.
21
At December 31, 2006, we had a $350.0 million senior secured revolving line of credit with a group
of lenders which was scheduled to mature in February 2011. On May 7, 2007, we amended our
revolving line of credit to increase from
$350 million to $425 million the maximum amount we can borrow under the line of credit and extended
the expiration date to May 7, 2012. We have the right under the credit agreement, at our option and
without lenders consent, to further increase the maximum borrowing limit to $500 million, during
the term of the agreement.
In May 2007, we retired over 99% of our outstanding 9.5% Senior Notes and issued $150 million of
6.875% Senior Notes due 2015. See Note L to our Condensed Consolidated Financial Statements (refer
to Part I, Item 1).
During the past two years, our capital expenditures and acquisitions have been funded by our
operating cash flow, a public offering of our common stock in March 2006 and through borrowings
under our revolving credit facility. Our operating cash flow is, in general, weakest during the
first quarter of each fiscal year, when customers who leased containers for holiday storage return
the units. In addition to cash flow generated by operations, our principal current source of
liquidity is our revolving credit facility. See Note L of the notes to the Condensed Consolidated
Financial Statements included elsewhere in this report for additional information on our current
actions concerning Liquidity and Capital Resources. At March 31, 2006, the majority of net
proceeds from our equity offering in March 2006 were in short-term cash equivalent investments, and
subsequently used to conclude the Royal Wolf acquisition and to redeem $52.5 million principal
amount of our 9.5% Senior Notes. During the three months ended March 31, 2007, we had
net additional borrowings under our credit facility of approximately $15.2 million, as compared to
$15.1 million for the same period in 2006. The additional borrowings were used in conjunction with
cash provided by operating activities to fund the $27.3 million of additions in our lease fleet
during the three months ended March 31, 2007, make the interest payment due of $4.6 million on our
9.5% Notes and complete a $2.4 million acquisition in the first quarter of 2007. As of May 8,
2007, borrowings outstanding under our credit facility were approximately $187.3 million.
Operating Activities. Our operations provided net cash flow of $20.7 million for the three months
ended March 31, 2007, compared to $10.0 million during the same period in 2006. The $10.7 million
increase in cash generated by operations in 2007 is primarily related to a $4.5 million increase in
net income and a $2.8 million increase of deferred income taxes. In both years, cash generated by
operations benefited from a decrease in receivables, but was negatively impacted by reductions in
accrued liabilities. In 2007, change in inventory levels increased by $3.0 million and were offset
by a change in accounts payable of $3.5 million.
Investing Activities. Net cash used in investing activities was $34.5 million for the three months
ended March 31, 2007, compared to $24.1 million for the same period in 2006. Capital expenditures
for acquisition of businesses were $2.4 million for the three months ended March 31, 2007. Capital
expenditures for our lease fleet, net of proceeds from sale of lease fleet units, were $23.8
million for the three months ended March 31, 2007, and $23.2 million for the same period in 2006.
The capital expenditures for our lease fleet are primarily due to continued demand for our
products, requiring us to purchase and refurbish more containers and offices with the growth of our
business. During the past several years, we have increased the customization of our fleet,
enabling us to differentiate our product from our competitors product. Capital expenditures for
property, plant and equipment, net of proceeds from sales of property, plant and equipment, were
$8.3 million for the three months ended March 31, 2007 compared to the $0.9 million for the same
period in 2006. The majority of this increase was expenditures for additions of delivery
equipment, primarily trucks, trailers and forklifts, at our acquired locations, primarily our
European branches. The amount of cash that we use during any period in investing activities is
almost entirely within managements discretion. We have no contracts or other arrangements
pursuant to which we are required to purchase a fixed or minimum amount of goods or services in
connection with any portion of our business.
Financing Activities. Net cash provided by financing activities was $14.9 million during the three
months ended March 31, 2007, compared to $133.7 million for the same period in 2006. The major
financing activity during the three month period ended March 31, 2006 was our public offering of
our common stock, which provided us with approximately $120.3 million in net proceeds. During the
three months ended March 31, 2007 and 2006, we also increased borrowings under our revolving credit
facility which were used, together with cash flow generated from
operations, to fund expansion of the
lease fleet and purchase of delivery equipment.
The interest rate under our $350 million revolving credit facility is based on our ratio of funded
debt to earnings before interest expenses, taxes, depreciation and amortization, debt restructuring
and extinquishment expenses, as defined, and any extraordinary gains or non-cash extraordinary
losses. The borrowing rate under the credit facility at
22
December 31, 2006 was LIBOR plus 1.25% per
annum or the prime rate less 0.25% per annum, whichever we elect. The interest rate spread from
LIBOR and prime rate can change based on our debt ratio measured at the end of each quarter, as
defined in our credit agreement. The interest rate spread, based on our March 31, 2007 quarterly
results remained unchanged.
We have interest rate swap agreements under which we effectively fixed the interest rate payable on
$50.0 million of borrowings under our credit facility so that the rate is based upon a spread from
a fixed rate, rather than a spread from the LIBOR rate. We account for the swap agreements in
accordance with SFAS No. 133 which resulted in a charge to comprehensive income for the three
months ended March 31, 2007, of $0.2 million, net of applicable income tax benefit of $0.1 million.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our contractual obligations primarily consist of our outstanding balance under our revolving credit
facility and our unsecured Senior Notes, together with other unsecured notes payable obligations.
We also have operating lease commitments for: 1) real estate properties for the majority of our
branches, 2) 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 3) other
equipment, primarily office machines.
In connection with the issuance of our insurance policies, we have provided our various insurance
carriers approximately $3.2 million in letters of credit and an agreement under which we are
contingently responsible for $2.5 million to provide credit support for our payment of the
deductibles and/or loss limitation reimbursements under the insurance policies.
We currently do not have any obligations under purchase agreements or commitments. Historically,
we enter into capitalized lease obligations from time to time to purchase delivery, transportation
and yard equipment. Currently, we have two small capital lease commitments related to office
equipment.
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 some 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 inventories for the holiday season. Our retail customers usually return these leased
units to us early in the following year. This causes lower utilization rates for our lease fleet
and a marginal decrease in cash flow during the first quarter of the year. Over the last few
years, we have reduced the percentage of our units we reserve for this seasonal business from the
levels we allocated in earlier years, decreasing our seasonality.
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
The following discussion addresses our most critical accounting policies, some of which require
significant judgment.
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles. The preparation of these consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses during the reporting period. These estimates and assumptions are based upon our
evaluation of historical results and anticipated future events, and these estimates may change as
additional information becomes available. The Securities and Exchange Commission
23
defines critical
accounting policies as those that are, in managements view, most important to our financial
condition and results of operations and those that require significant judgments and estimates.
Management believes that our
most critical accounting policies relate to:
Revenue Recognition. Lease and leasing ancillary revenues and related expenses generated under
portable storage units and office units are recognized on a straight-line basis. Revenues and
expenses from portable storage unit delivery and hauling are recognized when these services are
earned, in accordance with SAB No. 104. We recognize revenues from sales of containers and mobile
office units upon delivery when the risk of loss passes, the price is fixed and determinable and
collectibility is reasonably assured. We sell our products pursuant to sales contracts stating the
fixed sales price with our customers.
Share-Based Compensation. SFAS 123(R) requires companies to recognize the fair-value of
stock-based compensation transactions in the statement of income. The fair value of our
stock-based awards is estimated at the date of grant using the Black-Scholes option pricing model.
The Black-Scholes valuation calculation requires us to estimate key assumptions such as future
stock price volatility, expected terms, risk-free rates and dividend yield. Expected stock price
volatility is based on the historical volatility of our stock. We use historical data to estimate
option exercises and employee terminations within the valuation model. The expected term of
options granted is derived from an analysis of historical exercises and remaining contractual life
of stock options, and represents the period of time that options granted are expected to be
outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of
grant. We have never paid cash dividends, and do not currently intend to pay cash dividends, and
thus have assumed a 0% dividend yield. If our actual experience differs significantly from the
assumptions used to compute our stock-based compensation cost, or if different assumptions had been
used, we may have recorded too much or too little stock-based compensation cost. For stock options
and nonvested share awards subject solely to service conditions, we recognize expense using the
straight-line attribution method. For nonvested share awards subject to service and performance
conditions, we are required to assess the probability that such performance conditions will be met.
If the likelihood of the performance condition being met is deemed probable, we will recognize the
expense using accelerated attribution method. In addition, for both stock options and nonvested
share awards, we are required to estimate the expected forfeiture rate of our stock grants and only
recognize the expense for those shares expected to vest. If the actual forfeiture rate is
materially different from our estimate, our stock-based compensation expense could be materially
different. We had approximately $6.7 million of total unrecognized compensation costs related to
stock options at March 31, 2007 that are expected to be recognized over a weight-average period of
2.3 years. See Note D to the Condensed Consolidated Financial Statements for a further discussion
on stock-based compensation.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We establish and maintain
reserves against estimated losses based upon historical loss experience and evaluation of past-due
accounts agings. Management reviews the level of allowances for doubtful accounts on a regular
basis and adjusts the level of the allowances as needed.
If we were to increase the factors used for our reserve estimates by 25%, it would have the
following approximate effect on our net income and diluted earnings per share as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2006 |
|
2007 |
|
|
(In thousands) |
As Reported: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,204 |
|
|
$ |
12,697 |
|
Diluted earnings per share |
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
As adjusted for change in estimates: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,087 |
|
|
$ |
12,599 |
|
Diluted earnings per share |
|
$ |
0.26 |
|
|
$ |
0.34 |
|
24
If the financial condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Impairment of Goodwill. We assess the impairment of goodwill and other identifiable intangibles on
an annual basis or whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Some factors
we consider important which could trigger an impairment review include the following:
|
|
|
Significant under-performance relative to historical, expected or projected future operating results; |
|
|
|
|
Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; |
|
|
|
|
Our market capitalization relative to net book value; and |
|
|
|
|
Significant negative industry or general economic trends. |
Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, we operate on one reportable
segment, which is comprised of three reporting units with the addition of our European operations.
We perform an annual impairment test on goodwill using the two-step process prescribed in SFAS No.
142. The first step is a screen for potential impairment, while the second step measures the
amount of the impairment, if any. In addition, we will perform impairment tests during any
reporting period in which events or changes in circumstances indicate that an impairment may have
incurred. We performed the required impairment tests for goodwill as of December 31, 2006 and
determined that goodwill is not impaired and it is not necessary to record any impairment losses
related to goodwill. We will continue to perform this test in the future as required by SFAS No.
142.
Impairment Long-Lived Assets. We review property, plant and equipment and intangibles with finite
lives (those assets resulting from acquisitions) for impairment when events or circumstances
indicate these assets might be impaired. We test impairment using historical cash flows and other
relevant facts and circumstances as the primary basis for its estimates of future cash flows. This
process requires the use of estimates and assumptions, which are subject to a high degree of
judgment. If these assumptions change in the future, whether due to new information or other
factors, we may be required to record impairment charges for these assets.
Depreciation Policy. Our depreciation policy for our lease fleet uses the straight-line method
over our units estimated useful life, after the date that we put the unit in service. Our steel
units are depreciated over 25 years with an estimated residual value of 62.5%. Wood offices 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 to a 20% residual value. Van trailers
are only added to the fleet as a result of acquisitions of portable storage businesses.
25
We periodically review our depreciation policy against various factors, including the results of
our lenders independent appraisal of our lease fleet, practices of the larger competitors in our
industry, profit margins we are achieving on sales of depreciated units and lease rates we obtain
on older units. If we were to change our depreciation policy on our steel units from 62.5%
residual value and a 25-year life to a lower or higher residual and a shorter or longer useful
life, such change could have a positive, negative or neutral effect on our earnings, with the
actual effect being determined by the change. For example, a change in our estimates used in our
residual values and useful life would have the following approximate effect on our net income and
diluted earnings per share as reflected in the table below.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
Three Months Ended |
|
|
Salvage |
|
Life In |
|
March 31, |
|
|
Value |
|
Years |
|
2006 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
(In thousands except per |
|
|
|
|
|
|
|
|
|
|
share data) |
As Reported: |
|
|
62.5 |
% |
|
|
25 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
8,204 |
|
|
$ |
12,697 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted for change in
estimates: |
|
|
70 |
% |
|
|
20 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
8,205 |
|
|
$ |
12,697 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted for change in
estimates: |
|
|
50 |
% |
|
|
20 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
7,486 |
|
|
$ |
11,814 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.24 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted for change in
estimates: |
|
|
40 |
% |
|
|
40 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
8,204 |
|
|
$ |
12,697 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted for change in
estimates: |
|
|
30 |
% |
|
|
25 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
7,269 |
|
|
$ |
11,549 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted for change in
estimates: |
|
|
25 |
% |
|
|
25 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
$ |
7,125 |
|
|
$ |
11,372 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
$ |
0.22 |
|
|
$ |
0.31 |
|
Insurance Reserves. Our workers compensation, auto and general liability insurance are
purchased under large deductible programs. Our current per incident deductibles are: workers
compensation $250,000, auto $100,000 and general liability $100,000. We provide for the estimated
expense relating to the deductible portion of the individual claims. However, we generally do not
know the full amount of our exposure to a deductible in connection with any particular claim during
the fiscal period in which the claim is incurred and for which we must make an accrual for the
deductible expense. We make these accruals based on a combination of the claims development
experience of our staff and our insurance companies, and, at year end, the accrual is reviewed and
adjusted, in part, based on an independent actuarial review of historical loss data and using
certain actuarial assumptions followed in the insurance industry. A high degree of judgment is
required in developing these estimates of amounts to be accrued, as well as in connection with the
underlying assumptions. In addition, our assumptions will change as our loss experience is
developed. All of these factors have the potential for significantly impacting the amounts we have
previously reserved
26
in respect of anticipated deductible expenses, and we may be required in the future to
increase or decrease amounts previously accrued.
Our health benefit programs are considered to be self insured products, however, we buy excess
insurance coverage that limits our medical liability exposure. Additionally, our medical program
includes a total aggregate claim exposure and we are currently accruing and reserving to the total
projected losses.
Contingencies. We are a party to various claims and litigations in the normal course of business.
We do not anticipate that the resolution of such matters, known at this time, will have a material
adverse effect on our business or consolidate financial position.
Deferred Taxes. In preparing our consolidated financial statements, we recognize income taxes in
each of the jurisdictions in which we operate. For each jurisdiction, we estimate the actual
amount of taxes currently payable or receivable as well as deferred tax assets and liabilities
attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
A valuation allowance is provided for those deferred tax assets for which it is more likely than
not that the related benefits will not be realized. In determining the amount of the valuation
allowance, we consider estimated future taxable income as well as feasible tax planning strategies
in each jurisdiction. If we determine that we will not realize all or a portion of our deferred
tax assets, we will increase our valuation allowance with a charge to income tax expense or offset
goodwill if the deferred tax asset was acquired in a business combination. Conversely, if we
determine that we will ultimately be able to realize all or a portion of the related benefits for
which a valuation allowance has been provided, all or a portion of the related valuation allowance
will be reduced with a credit to income tax expense except if the valuation allowance was created
in conjunction with a tax asset in a business combination.
We adopted FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, effective January 1, 2007. For discussion of the impact
of adoption of FIN 48, see note F to the Condensed Consolidated Financial Statements included else
where in this report. There have been no other significant changes in our critical accounting
policies, estimates and judgments during the three month period ended March 31, 2007.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We have adopted this interpretation as of January 1, 2007. The
impact of our adoption is discussed in Note F.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS No. 157). SFAS No.
157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require
any new fair value measurement. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are in the process of
determining the effect, if any, that the adoption of SFAS No. 157 will have on our consolidated
financial statements. Because Statement No. 157 does not require any new fair value measurements
or remeasurements of previously computed fair values, we do not believe the adoption of this
Statement will have a material effect on our results of operations or financial condition.
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159). Under this Standard, we may elect to report financial
instruments and certain other items
27
at fair value on a contract-by-contract basis with changes in value reported in earnings. This
election is irrevocable. SFAS No. 159 provides an opportunity to mitigate volatility in reported
earnings that is caused by measuring hedged assets and liabilities that were previously required to
use a different accounting method than the related hedging contracts when the complex provisions of
SFAS No. 133 hedge accounting are not met. SFAS No. 159 is effective for years beginning after
November 15, 2007. We are currently evaluating the potential impact of adopting this Standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Swap Agreement. We seek to reduce earnings and cash flow volatility associated with
changes in interest rates through a financial arrangement intended to provide a hedge against a
portion of the risks associated with such volatility. We continue to have exposure to such risks
to the extent they are not hedged.
Interest rate swap agreements are the only instruments we use to manage interest rate fluctuations
affecting our variable rate debt. At March 31, 2007, we had interest rate swap agreements under
which we pay a fixed rate and receive a variable interest rate on $50.0 million of debt. For the
three months ended March 31, 2007, in accordance with SFAS No. 133, comprehensive income included
$0.2 million charge, net of applicable income tax benefit of $0.1 million, related to the fair
value of our interest rate swap agreements.
Impact of Foreign Currency Rate Changes. We currently have branch operations outside the United
States and we bill those customers primarily in their local currency which is subject to foreign
currency rate changes. Our operations in Canada are billed in the Canadian Dollar, operations in
the United Kingdom are billed in Pound Sterling and operations in The Netherlands are billed in the
Euro. We are exposed to foreign exchange rate fluctuations as the financial results of our
non-United States operations are translated into U.S. Dollars. The impact of foreign currency rate
changes has historically been insignificant with our Canadian operations, but we have more exposure
to volatility with our European operations. In order to help minimize our exchange rate gain and
loss volatility, we finance our European entities through our revolving line of credit which allows
us to also borrow those funds in Pound Sterling denominated debt.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that our disclosure controls and procedures, subject to the limitations as noted
below, were effective during the period and as of the end of the period covered by this report.
Because of inherent limitations, our disclosure controls and procedures may not prevent or detect
misstatements. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the controls system are met. Because of
the inherent limitations in all controls systems, no evaluation of controls can provide absolute
assurance that all controls issues and instances of fraud, if any, have been detected.
Changes in Internal Controls.
There were no changes in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
28
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Our disclosure and analysis in this report contains 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. Among
the factors that could cause actual results to differ materially are the following:
|
|
|
economic slowdown that affects any significant portion of our customer base, including
economic slowdown in areas of limited geographic scope if markets in which we have
significant operations are impacted by such slowdown |
|
|
|
|
our ability to manage our planned growth, both internally and at new branches |
|
|
|
|
our European expansion may divert our resources from other aspects of our business |
|
|
|
|
our ability to obtain additional debt or equity financing on acceptable terms |
|
|
|
|
changes in the supply and price of used ocean-going containers |
|
|
|
|
changes in the supply and cost of the raw materials we use in manufacturing storage units, including steel |
|
|
|
|
competitive developments affecting our industry, including pricing pressures in newer markets |
|
|
|
|
the timing and number of new branches that we open or acquire |
|
|
|
|
our ability to protect our patents and other intellectual property |
|
|
|
|
interest rate fluctuations |
|
|
|
|
governmental laws and regulations affecting domestic and foreign operations, including tax obligations |
|
|
|
|
changes in generally accepted accounting principles |
|
|
|
|
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 |
|
|
|
|
increases in costs and expenses, including cost of raw materials 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 to the Securities
and Exchange Commission. Our Form 10-K filing for the fiscal year ended December 31, 2006, 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. Readers can find them in Item 1A of that filing under the heading
Risk Factors. You may obtain a copy of our Form 10-K by requesting it from the Companys
Investor Relations Department at (480) 894-6311 or by mail to Mobile Mini, Inc., 7420 S. Kyrene
Rd., Suite 101, Tempe, Arizona 85283. Our filings with the SEC, including the Form 10-K, may be
accessed through Mobile Minis website at www.mobilemini.com, and at the SECs website at
http://www.sec.gov. Material on our website is not incorporated in this report, except by
express incorporation by reference herein.
29
ITEM 6. EXHIBITS
Exhibits (filed herewith):
|
|
|
Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer pursuant to Item 601(b)(31)
of Regulation S-K. (Filed herewith). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Item 601(b)(31)
of Regulation S-K. (Filed herewith). |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to item 601(b)(32) of Regulation S-K. (Filed herewith). |
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MOBILE MINI, INC.
|
|
Date: May 9, 2007 |
/s/ Lawrence Trachtenberg
|
|
|
Lawrence Trachtenberg |
|
|
Chief Financial Officer &
Executive Vice President |
|
|
31