UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2018 | |||||
OR | |||||
☐ | 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: | 001-37552 | ||||
WILLSCOT CORPORATION
(formerly known as Double Eagle Acquisition Corp.)
(Exact name of registrant as specified in its charter)
| Delaware | 82-3430194 | |||||||
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |||||||
901 S. Bond Street, #600
Baltimore, Maryland 21231
(Address, including zip code, of principal executive offices)
(410) 931-6000
(Registrant’s 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ | ||||
Non-accelerated filer ☐ | Smaller reporting company ☐ | ||||
Emerging growth company ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No ☒
Shares of Class A common stock, par value $0.0001 per share, outstanding: 100,303,156 shares at November 1, 2018.
Shares of Class B common stock, par value $0.0001 per share, outstanding: 8,024,419 shares at November 1, 2018.
1
WILLSCOT CORPORATION
Quarterly Report on Form 10-Q
Table of Contents
PART I Financial Information | |||||||||||
| Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2018 | |||||||||||
PART II Other Information | |||||||||||
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PART I
ITEM 1. Financial Statements
WillScot Corporation
Condensed Consolidated Balance Sheets
(in thousands, except share data) | September 30, 2018 (unaudited) | December 31, 2017 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Trade receivables, net of allowances for doubtful accounts at September 30, 2018 and December 31, 2017 of $7,913 and $4,845, respectively | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Rental equipment, net | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Total long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Accrued interest | |||||||||||
| Deferred revenue and customer deposits | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred tax liabilities | |||||||||||
| Deferred revenue and customer deposits | |||||||||||
| Other non-current liabilities | |||||||||||
| Long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (see Note 13) | |||||||||||
| Class A common stock: $0.0001 par, 400,000,000 shares authorized at September 30, 2018 and December 31, 2017; 100,303,003 and 84,644,744 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | |||||||||||
| Class B common stock: $0.0001 par, 100,000,000 shares authorized at September 30, 2018 and December 31, 2017; 8,024,419 shares issued and outstanding at both September 30, 2018 and December 31, 2017 | |||||||||||
| Additional paid-in-capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Non-controlling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
3
WillScot Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
(in thousands, except share data) | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Leasing and services revenue: | |||||||||||||||||||||||
| Modular leasing | $ | $ | $ | $ | |||||||||||||||||||
| Modular delivery and installation | |||||||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| New units | |||||||||||||||||||||||
| Rental units | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Costs: | |||||||||||||||||||||||
| Costs of leasing and services: | |||||||||||||||||||||||
| Modular leasing | |||||||||||||||||||||||
| Modular delivery and installation | |||||||||||||||||||||||
| Costs of sales: | |||||||||||||||||||||||
| New units | |||||||||||||||||||||||
| Rental units | |||||||||||||||||||||||
| Depreciation of rental equipment | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Other depreciation and amortization | |||||||||||||||||||||||
| Restructuring costs | |||||||||||||||||||||||
| Currency (gains) losses, net | ( | ( | ( | ||||||||||||||||||||
| Other (income) expense, net | ( | ( | |||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Interest income | ( | ( | |||||||||||||||||||||
| Loss from continuing operations before income tax | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Loss from continuing operations | ( | ( | ( | ( | |||||||||||||||||||
| Income from discontinued operations, net of tax | |||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
| Net loss attributable to non-controlling interest, net of tax | ( | ( | |||||||||||||||||||||
| Total loss attributable to WillScot | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to WillScot – basic and diluted | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Discontinued operations | $ | $ | $ | $ | |||||||||||||||||||
| Net loss per share | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares: | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
| Cash dividends declared per share | $ | $ | $ | $ | |||||||||||||||||||
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
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WillScot Corporation
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Foreign currency translation adjustment, net of income tax expense (benefit) of $80, $698, $(161) and $1,316 for the three and nine months ended September 30, 2018 and 2017, respectively | ( | ||||||||||||||||||||||
| Comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive loss attributable to non-controlling interest | ( | ( | |||||||||||||||||||||
| Total comprehensive loss attributable to WillScot | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
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WillScot Corporation
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Shareholders' Equity | Non Controlling Interest | Total Equity | |||||||||||||||||||||||
| Balance at December 31, 2017 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||
| Adoption of ASU 2018-02 | — | — | — | — | — | ( | — | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Issuance of common stock and contribution of proceeds to WSII | — | — | — | — | ||||||||||||||||||||||||||||
| Acquisition of ModSpace and the effect of the related financing transactions | — | — | — | — | ||||||||||||||||||||||||||||
| Balance at September 30, 2018 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||
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WillScot Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
(in thousands) | 2018 | 2017 | |||||||||
| Operating Activities: | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
| Adjustments for non-cash items: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for doubtful accounts | |||||||||||
| Gain on sale of rental equipment and other property, plant and equipment | ( | ( | |||||||||
| Interest receivable capitalized into notes due from affiliates | ( | ||||||||||
| Amortization of debt discounts and debt issuance costs | |||||||||||
| Share based compensation expense | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| Unrealized currency losses (gains) | ( | ||||||||||
| Changes in operating assets and liabilities, net of effect of businesses acquired: | |||||||||||
| Trade receivables | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid and other assets | ( | ||||||||||
| Accrued interest receivable | ( | ||||||||||
| Accrued interest payable | |||||||||||
| Accounts payable and other accrued liabilities | ( | ||||||||||
| Deferred revenue and customer deposits | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Acquisition of a business - ModSpace | ( | ||||||||||
| Acquisition of a business - Tyson | ( | ||||||||||
| Proceeds from sale of rental equipment | |||||||||||
| Purchase of rental equipment and refurbishments | ( | ( | |||||||||
| Lending on notes due from affiliates | ( | ||||||||||
| Repayments on notes due from affiliates | |||||||||||
| Proceeds from the sale of property, plant and equipment | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Receipts from issuance of common stock | |||||||||||
| Receipts from borrowings | |||||||||||
| Receipts on borrowings from notes due to affiliates | |||||||||||
| Payment of financing costs | ( | ( | |||||||||
| Repayment of borrowings | ( | ( | |||||||||
| Principal payments on capital lease obligations | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net change in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at the beginning of the period | |||||||||||
| Cash and cash equivalents at the end of the period | $ | $ | |||||||||
| Supplemental Cash Flow Information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid, net of refunds received | $ | $ | ( | ||||||||
| Capital expenditures accrued or payable | $ | $ | |||||||||
See the accompanying notes which are an integral part of these condensed consolidated financial statements.
7
WillScot Corporation
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - Summary of Significant Accounting Policies
Organization and Nature of Operations
WillScot Corporation (“WillScot” and, together with its subsidiaries, the “Company”), is a leading provider of modular space and portable storage solutions in the United States (“US”), Canada and Mexico. The Company leases, sells, delivers and installs mobile offices, modular buildings and storage products through an integrated network of branch locations that spans North America.
WillScot, whose Class A common shares are listed on the Nasdaq Capital Market (Nasdaq: WSC), serves as the holding company for the Williams Scotsman family of companies. All of the Company’s assets and operations are owned through Williams Scotsman Holdings Corp. (“WS Holdings”). WillScot operates and owns 91.0 % of WS Holdings, and Sapphire Holding S.à r.l. (“Sapphire”), an affiliate of TDR Capital LLP (“TDR Capital”), owns the remaining 9.0 %.
WillScot was incorporated as a Cayman Islands exempt company under the name, Double Eagle Acquisition Corporation ("Double Eagle"), on June 26, 2015. Prior to November 29, 2017, Double Eagle was a Nasdaq-listed special purpose acquisition company formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination. On November 29, 2017, Double Eagle indirectly acquired Williams Scotsman International, Inc. (“WSII”) from Algeco Scotsman Global S.à r.l., (together with its subsidiaries, the “Algeco Group”), which is majority owned by an investment fund managed by TDR Capital. As part of the transaction (the “Business Combination”), Double Eagle domesticated to Delaware and changed its name to WillScot Corporation. Additional information about the Business Combination and the Company's operations prior thereto is contained in the consolidated financial statements and notes included in WillScot's Annual Report on Form 10-K for the year ended December 31, 2017.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by accounting principles generally accepted in the US (“GAAP”) for complete financial statements. The accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position and the results of operations for the interim periods presented.
The results of consolidated operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes included in WillScot's Annual Report on Form 10-K for the year ended December 31, 2017.
Principles of Consolidation
The condensed consolidated financial statements comprise the financial statements of WillScot and its subsidiaries that it controls due to ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. All intercompany balances and transactions are eliminated. The Business Combination was accounted for as a reverse recapitalization in accordance with Accounting Standard Codification (“ASC”) 805, Business Combinations. Although WillScot was the indirect acquirer of WSII for legal purposes, WSII was considered the acquirer for accounting and financial reporting purposes.
As a result of WSII being the accounting acquirer, the financial reports filed with the US Securities and Exchange Commission (the “SEC”) by the Company subsequent to the Business Combination are prepared “as if” WSII is the predecessor and legal successor to the Company. The historical operations of WSII are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of WSII prior to the Business Combination; (ii) the combined results of WillScot and WSII following the Business Combination on November 29, 2017; (iii) the assets and liabilities of WSII at their historical cost; and (iv) WillScot's equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of WSII in connection with the Business Combination is reflected retroactively to the earliest period presented and is utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction as a reverse capitalization of WSII. WSII’s remote accommodations business, which consisted of Target Logistics Management LLC (“Target Logistics”) and its subsidiaries and Chard Camp Catering Services (“Chard,” and together with Target Logistics, the “Remote Accommodations Business”), was transferred to members of the Algeco Group on November 28, 2017 in a transaction under common control and was not included as part of the Business Combination. The operating results of the Remote Accommodations Business, net of tax, for the three and nine
8
Recently Issued and Adopted Accounting Standards
The Company qualifies as an emerging growth company (“EGC”) as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”). Using exemptions provided under the JOBS Act provided to EGCs, the Company has elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such standards. As such, compliance dates included below pertain to non-issuers, and as permitted, early adoption dates for non-issuers are indicated.
Subject to limited exception, WillScot will cease to be EGC on the earlier (i) the last day of the fiscal year in which WillScot’s annual gross revenues exceed $1.07 billion, (ii) the date on which the Company issues more than $1.0 billion in nonconvertible debt securities during the preceding three-year period, and (iii) the date on which WillScot is deemed to be a large accelerated filer under the SEC’s rules. Based on the recent ModSpace (defined below) acquisition described in Note 2, WillScot anticipates that its 2019 annual gross revenues will exceed $1.07 billion. WillScot also anticipates that, due in part to the amount of Class A common stock issued by WillScot to fund the ModSpace acquisition, WillScot will be deemed to be a large accelerated filer at December 31, 2019 based on the value of its Class A common stock held by non-affiliates at June 30, 2019. WillScot currently foresees remaining an EGC until December 31, 2019, but would lose EGC eligibility immediately if it were to issue additional debt and exceed the debt issuance criteria described above.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which prescribes a single comprehensive model for entities to use in the accounting for revenue arising from contracts with customers. The new guidance will supersede virtually all existing revenue guidance under GAAP and is effective for annual reporting periods beginning after December 15, 2018. Early adoption for non-public entities is permitted starting with annual reporting periods beginning after December 15, 2016. The core principle contemplated by this new standard was that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. In April and May 2016, the FASB also issued clarifying updates to the new standard specifically to address certain core principles including the identification of performance obligations, licensing guidance, the assessment of the collectability criterion, the presentation of taxes collected from customers, non-cash considerations, contract modifications and completed contracts at transition.
The Company is currently finalizing its evaluation of the impact that the updated guidance will have on the Company’s financial statements and related disclosures. As part of the evaluation process, the Company continues to hold regular meetings with key stakeholders from across the organization to discuss the impact of the standard on its existing contracts. The Company plans to adopt Topic 606 using the modified retrospective transition approach.
The Company is utilizing a bottom-up approach to analyze the impact of the standard on its portfolio of contracts by reviewing the Company’s current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to the Company’s existing revenue contracts.
As part of its implementation project, the Company has prepared analyses with respect to revenue stream scoping, performed contract reviews of a representative sample of customer arrangements, developed a gap analysis and evaluated the revised disclosure requirements. The two primary lines of business impacted by the adoption are new and used sales transactions and modular leasing services transactions. The Company has substantially completed its procedures based on the new and used sales and modular leasing service transactions that occurred through the second quarter of 2018 and is not aware of any significant changes based on the work performed to date. The Company has incorporated the recently acquired Modular Space Holdings, Inc. (“ModSpace”) into the project during the third quarter of 2018. As described in Note 2, ModSpace was acquired in August 2018 and the Company has commenced workshops with key stakeholders, detailed contract reviews and a financial statement disclosure gap evaluation specific to revenue streams acquired through the acquisition.
After finalizing its procedures during the fourth quarter of 2018, the Company will conclude on the level of impact that the adoption of ASC 606 will have on the consolidated financial statements, including financial statement disclosures. Specific to disclosures, the Company expects to provide additional detail regarding the disaggregation of revenue and contract balances. The Company is required to adopt the standard as of January 1, 2019 and plans to first present financial statements that reflect the adoption in the first quarter of 2019.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance revises existing practice related to accounting for leases under ASC Topic 840, Leases (“ASC 840”) for both lessees and lessors. The new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes,
9
the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model.
The new standard is effective for non-public entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. However, based on WillScot's expectation that it will cease to be an EGC as of December 31, 2019, the Company plans to adopt the new standard in the fourth quarter of 2019. Adoption of the new standard could be required earlier in 2019 if WillScot loses EGC eligibility earlier than anticipated based on other criteria.
The guidance includes a number of practical expedients that the Company is evaluating and may elect to apply. The adoption of the new standard will require the Company to recognize right-of-use assets and lease liabilities that will be significant to our consolidated balance sheet. The Company will continue to evaluate the impacts of this guidance on its financial position, results of operations, and cash flows. The Company plans to update its systems, processes and internal controls to meet the new reporting and disclosure requirements.
Recently Adopted Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date.
During December 2017, shortly after the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. Per SAB 118, companies must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete. To the extent the accounting for certain income tax effects of the Tax Act is incomplete, companies can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined. As a result of the Tax Act, in 2017, the Company remeasured its net deferred tax liabilities and recognized a provisional net benefit of $28.1 million. In addition, based on information currently available, the Company recorded a provisional income tax expense of $2.4 million in 2017 related to the deemed repatriation of foreign earnings. The Company recorded a minor adjustment in 2018 to the provisional amounts recorded in its financial statements for the year ended December 31, 2017 (see Note 9) and continues to evaluate the provisions of the Tax Act including guidance from the Department of Treasury and Internal Revenue Service. Additionally, the Company filed its US tax return for 2017 during the fourth quarter of 2018 and any changes to the estimates used to the final tax positions for temporary differences, earnings and profits will result in adjustments of the remeasurement amounts for the Tax Act recorded as of December 31, 2017.
The Company continues to evaluate the impact of the Global Low Taxed Intangible Income (“GILTI”) provision of the Tax Act. The Company is required to make an accounting policy election of either (1) treating GILTI as a current period expense when incurred or (2) factoring such amounts into the Company’s measurement of its deferred taxes. The Company has not completed its analysis and has not made a determination of its accounting policy for GILTI.
NOTE 2 - Acquisitions
Tyson Acquisition
On January 3, 2018, the Company acquired all of the issued and outstanding membership interests of Onsite Space LLC (d/b/a Tyson Onsite (“Tyson”)). Tyson provided modular space rental services in the Midwest, primarily in Indiana, Illinois and Missouri. The acquisition date fair value of the consideration transferred consisted of $24.0 million in cash consideration, net of cash acquired. The transaction was funded by borrowings under the ABL Facility (defined in Note 7).
Through September 30, 2018, the Company has recorded adjustments to the Tyson opening balance sheet, which increased rental equipment and accrued liabilities by $0.9 million and $0.1 million, respectively and decreased property, plant and equipment by $0.1 million. The offset of these adjustments was recorded to goodwill as detailed in Note 6. Increases or decreases in the estimated fair values of the net assets acquired may impact the Company’s statements of operations in future periods. The Company expects that the preliminary values assigned to the rental fleet, property, plant and equipment, intangible assets, deferred tax assets and other accrued tax liabilities will be finalized during the fourth quarter of 2018.
Tyson results were immaterial to the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and as a result, the Company is not presenting pro-forma information.
10
Acton Acquisition
On December 20, 2017, the Company acquired 100 % of the issued and outstanding ownership interests of Acton Mobile Holdings LLC (“Acton”) for a cash purchase price of $237.1 million, subject to certain adjustments. Acton owns all of the issued and outstanding membership interests of New Acton Mobile Industries, which provides modular space and portable storage rental services across the US. The acquisition was funded by cash on hand and borrowings under the ABL Facility.
Through September 30, 2018, the Company recorded adjustments to the Acton opening balance sheet, which increased accrued liabilities, deferred revenue, deferred tax assets and receivables by $0.8 million, $0.6 million, $0.8 million, and $2.4 million, respectively, and decreased rental equipment by $2.1 million. The offset of these adjustments was recorded to goodwill as detailed in Note 6. As a result of the timing of the transaction, the purchase price allocation for the rental equipment, intangible assets, property, plant and equipment, deferred tax assets, receivables, and other accrued liabilities acquired and assumed are based on preliminary valuations and are subject to change as the Company obtains additional information during the acquisition measurement period. Increases or decreases in the estimated fair values of the net assets acquired may impact the Company’s statements of operations in future periods. The Company expects that the preliminary values assigned to the rental equipment, intangible assets, property, plant and equipment, deferred tax assets, non-indemnified liabilities, and other accrued tax liabilities will be finalized during the fourth quarter of 2018.
Pro-forma results are presented in aggregate with the ModSpace acquisition below.
ModSpace Acquisition
On August 15, 2018 (the "Closing Date"), the Company acquired ModSpace, a privately-owned provider of office trailers, portable storage units and modular buildings. The acquisition was consummated by merging a special purpose subsidiary of the Company with and into ModSpace, with ModSpace surviving the merger as a subsidiary of WSII. The Company acquired ModSpace to create long-term shareholder value driven by, among other things, economies of scale, cost synergies and revenue opportunities unique to a combination of WillScot's and ModSpace's operations, and other benefits associated with being an industry-leading specialty rental services provider.
The aggregate purchase price for ModSpace was $1.2 billion and consisted of (i) $1.1 billion in cash, (ii) 6,458,229 shares of WillScot's Class A common stock (the "Stock Consideration") with a fair market value of $95.8 million and (iii) warrants to purchase an aggregate of 10,000,000 shares of WillScot’s Class A common stock at an exercise price of $15.50 per share (the "ModSpace Warrants") with a fair market value of $52.3 million, and (iv) a working capital adjustment of $5.7 million. Of the cash consideration, $3.0 million was deposited into an escrow account to fund any post-closing adjustments from differences between the estimated working capital and the actual working capital of ModSpace at closing. The final working capital of ModSpace at closing is still being evaluated by the Company and the sellers' representative in accordance with the terms of the purchase agreement. The acquisition was funded by the net proceeds of WillScot's issuance of 9,200,000 shares of Class A common stock (see Note 8), the net proceeds of WSII’s issuance of $300.0 million in senior secured notes and $200.0 million in senior unsecured notes (see Note 7), and borrowings under the ABL Facility (see Note 7).
The purchase price has been determined to be as follows:
Purchase Price
| (in thousands, except for per share amounts) | Price | ||||
| Cash | $ | ||||
| Stock consideration (a) | |||||
| ModSpace warrants (b) | |||||
| Working capital adjustment (c) | |||||
| Total purchase price | $ | ||||
(a) The fair market value of the 6,458,229 shares issued as consideration was determined using the closing price on August 15, 2018, of $15.78 per share less a discount of 6.0%, based on a lock up agreement executed in connection with the acquisition of ModSpace. | |||||
| (b) Warrants were valued assuming a fair market value of $5.23 as estimated using a Black-Scholes valuation model as of August 15, 2018. | |||||
(c) The estimated working capital adjustment as of the Closing Date was $5.7 million. The working capital amount is subject to post-close adjustments. | |||||
The acquisition date fair value of the stock consideration was estimated using a Black-Scholes valuation model. The estimated fair value of the shares are a level 3 fair value measurement. The fair value of each share is estimated using the Black-Scholes option pricing model with the following assumptions: expected dividend yield, expected stock price volatility, weighted-average risk-free interest rate and average expected term of the lock up period on the shares. The volatility assumption used in the Black-Scholes option-pricing model is derived from the historical daily change in the market price of the Company's common stock, as well as the historical daily changes in the market price of its peer group, based on weighting, as determined by the Company. The risk-free interest rate used in the Black-Scholes model is based on the implied US
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Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a cash dividend on common shares.
| Expected Volatility | % | ||||||||||
| Risk-free rate of interest | % | ||||||||||
| Dividend Yield | % | ||||||||||
| Expected life (years) | |||||||||||
The acquisition date fair value of the warrants was estimated using a Black-Scholes valuation model. The estimated fair value of the warrants is a level 3 fair value measurement. The fair value of each warrant is estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock price volatility, weighted-average risk-free interest rate and weighted-average expected term of the warrants. The volatility assumption used in the Black-Scholes option-pricing model is derived from the historical daily change in the market price of the Company's common stock, as well as the historical daily changes in the market price of its peer group, based on weighting, as determined by the Company. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a cash dividend on common shares.
| Expected Volatility | % | ||||||||||
| Risk-free rate of interest | % | ||||||||||
| Dividend Yield | % | ||||||||||
| Expected life (years) | |||||||||||
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date, August 15, 2018. The Company’s estimated fair value of ModSpace’s assets acquired and liabilities assumed on the acquisition date are determined based on preliminary valuations and analyses. Accordingly, the Company has made provisional estimates for the assets acquired and liabilities assumed. The valuation of intangible assets acquired is based on certain valuation assumptions yet to be finalized, including cash flow projections, discount rates, contributory asset charges and other valuation model inputs. The valuation of tangible long-lived assets acquired is dependent upon, among other things, refinement of the inputs in the valuation model and an analysis of the condition and estimated remaining useful lives of the assets acquired. In addition to finalizing the valuation of acquired assets, the Company is analyzing complex provisions of tax law regarding treatment of tax attributes upon ModSpace's March 2017 emergence from bankruptcy, implications of the Tax Act as well as scheduling the reversal of deferred tax balances thereof. The Company expects its analysis to be substantially complete by the close of the fourth quarter. Due to the provisional nature of the aforementioned items, the Company has not changed its judgment about the realizability of its pre-existing deferred tax assets as a result of the business combination. The provisional amounts reflected are subject to further adjustment, which may affect the fair values ascribed to goodwill, acquired intangible and tangible assets and the related deferred tax balances. Substantial completion of the requisite analyses may result in changes to acquired deferred tax liabilities which thereby may also affect the Company’s judgment about the realizability of its pre-existing deferred tax assets for which any reductions in the valuation allowance will be reflected separate from the business combination as discrete adjustments to income tax expense (benefit) in the period in which it is determined.
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Purchase Price
| (in thousands) | Value | |||||||
| Trade receivables, net (a) | $ | |||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Rental equipment | ||||||||
| Property, plant and equipment | ||||||||
| Intangible assets | ||||||||
| Favorable leases (b) | ||||||||
| Trade name (b) | ||||||||
| Total identifiable assets acquired | $ | |||||||
| Accounts payable | $ | |||||||
| Accrued liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| Deferred revenue and customer deposits | ||||||||
| Total liabilities assumed | $ | |||||||
| Total goodwill (c) | $ | |||||||
| (a) | The fair value of accounts receivable was $81.1 million and the gross contractual amount was $89.7 million. The Company estimated that $8.6 million is uncollectable. | ||||
| (b) | The trade name has an estimated useful life of three years. The favorable lease asset has an estimated useful life of six years. | ||||
| (c) | The goodwill is reflective of ModSpace’s going concern value and operational synergies that the Company expects to achieve that would not be available to other market participants. The goodwill is not deductible for income tax purposes. The goodwill is allocated to the Modular – US and Modular – Other North America segments in the amounts of $203.3 million and $32.5 million, respectively. | ||||
ModSpace has generated $65.5
The pro-forma information below has been prepared using the purchase method of accounting, giving effect to the Acton and ModSpace acquisitions as if they had been completed on January 1, 2017. The pro-forma information is not necessarily indicative of the Company’s results of operations had the acquisitions been completed on the above dates, nor is it necessarily indicative of the Company’s future results. The pro-forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisitions, and also does not reflect additional revenue opportunities following the acquisitions.
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The tables below present unaudited pro-forma consolidated statements of operations information as if ModSpace and Acton had been included in the Company’s consolidated results for the three and nine months ended September 30, 2018 and 2017:
| (in thousands) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||
| WillScot revenues (a) | $ | $ | |||||||||
| ModSpace revenues | |||||||||||
| Pro-forma revenues | $ | $ | |||||||||
| WillScot pretax loss (a) | $ | ( | $ | ( | |||||||
| ModSpace pretax loss | ( | ( | |||||||||
| Pretax loss before pro-forma adjustments | ( | ( | |||||||||
| Pro-forma adjustments to combined pretax loss: | |||||||||||
| Impact of fair value mark-ups/useful life changes on depreciation (b) | ( | ( | |||||||||
| Intangible asset amortization (c) | ( | ( | |||||||||
| Interest expense (d) | ( | ( | |||||||||
| Elimination of ModSpace interest (e) | |||||||||||
| Pro-forma pretax loss (f) | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Pro-forma net loss | $ | ( | $ | ( | |||||||
| (a) | Excludes historic revenues and pre-tax income from discontinued operations. Post-acquisition ModSpace revenues and pre-tax income results are reflected in WillScot's historic revenue amounts. | ||||
| (b) | Depreciation of rental equipment and non-rental depreciation were adjusted for the fair value mark-ups of equipment acquired in the ModSpace acquisition. The useful lives assigned to such equipment is preliminary and did not change significantly from the useful lives used by ModSpace. | ||||
| (c) | Amortization of the trade name acquired in ModSpace acquisition. | ||||
| (d) | In connection with the ModSpace acquisition, the Company drew an incremental $420.0 million on the ABL Facility and issued $300.0 million of secured notes and $200.0 million of unsecured notes. As of September 30, 2018, the weighted-average interest rate for the aforementioned borrowings was 6.54%. Interest expense includes amortization of related deferred financing fees on debt incurred in conjunction with ModSpace acquisition. | ||||
| (e) | Interest on ModSpace historic debt was eliminated. | ||||
(f) | Pro-forma pretax loss includes $6.1 million and $7.2 million, $7.5 million and $14.9 million, $10.7 million and $14.8 million, of restructuring expense, integration costs, and transactions costs incurred by WillScot for the three and nine months ended September 30, 2018, respectively. Additionally, pro-forma pretax loss for the three and nine month ended September also includes $20.5 million of interest expense associated with bridge financing fees incurred in connection with the acquisition of ModSpace. | ||||
(g) | The pro-forma tax rate applied to the ModSpace pretax loss is the same as the William Scotsman effective rate for the period. | ||||
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(in thousands) | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||
| WillScot revenues (a) | $ | $ | |||||||||
| Acton and ModSpace revenues (b) | |||||||||||
| Pro-forma revenues | $ | $ | |||||||||
| WillScot pretax loss (a) | $ | ( | $ | ( | |||||||
| Acton and ModSpace pretax income (loss) (b) | ( | ||||||||||
| Pro-forma pretax loss | ( | ( | |||||||||
| Pro-forma adjustments to combined pretax loss: | |||||||||||
| Impact of fair value mark-ups/useful life changes on depreciation (c) | ( | ( | |||||||||
| Intangible asset amortization (d) | ( | ( | |||||||||
| Interest expense (e) | ( | ( | |||||||||
| Elimination of Acton and ModSpace interest (f) | |||||||||||
| Pro-forma pretax loss | ( | ( | |||||||||
| Income tax benefit (g) | ( | ( | |||||||||
| Pro-forma loss from continuing operations (h) | ( | ( | |||||||||
| Income from discontinued operations | |||||||||||
| Pro-forma net loss | $ | ( | $ | ( | |||||||
| (a) | Excludes historic revenues and pre-tax income from discontinued operations. Includes historic corporate and other SG&A expenses related to Algeco Group costs, which were $7.6 million and $15.7 million for the three and nine months ended September 30, 2017, respectively. Post-acquisition ModSpace revenues and pre-tax income results are reflected in WillScot's historic revenue amounts. | ||||
(b) | Historic Acton revenues were $24.5 million and $71.9 million and historic ModSpace revenues were $126.9 million and $335.4 million, respectively, for the three and nine months ended September 30, 2017. Historic Acton pretax income was $0.9 million and $0.6 million and historic ModSpace pretax income was $5.9 million and pretax loss was $108.9 million, respectively, for the three and nine months ended September 30, 2017. | ||||
(c) | Depreciation of rental equipment and non-rental depreciation were adjusted for the fair value mark-ups of equipment acquired in the Acton and ModSpace acquisitions. The useful lives assigned to such equipment did not change significantly from the useful lives used by Acton and ModSpace. | ||||
(d) | Amortization of the trade names acquired in Acton and ModSpace acquisitions. | ||||
| (e) | In connection with the Acton acquisition, the Company drew $237.1 million on the ABL Facility. As of September 30, 2018, the weighted-average interest rate of ABL borrowings was 4.65%. In connection with the ModSpace acquisition, the Company drew an incremental $420.0 million on the ABL Facility and issued $300.0 million of secured notes and $200.0 million of unsecured notes. The weighted-average interest rate of all ModSpace acquisition borrowings was 6.54%. Interest expense includes amortization of related deferred financing fees on debt incurred in conjunction with ModSpace acquisition. | ||||
(f) | Interest on Acton and ModSpace historic debt was eliminated. Historic Acton interest was $1.4 million and $3.9 million and historic ModSpace interest was $7.5 million and $32.8 million, respectively, for the three and nine months ended, September 30, 2017. | ||||
(g) | The pro-forma tax rate applied to the Acton and ModSpace pretax income (loss) are the same as the WillScot effective rate for the period. | ||||
(h) | Pro-forma pretax loss includes $5.2 million and $6.1 million of Business Combination transactions costs incurred by WillScot for the three and nine months ended September 30, 2017, respectively | ||||
Transaction and Integration Costs
The Company incurred $7.5 million and $14.9 million in integration costs associated with the Tyson, Acton, and ModSpace acquisitions within selling, general and administrative expenses ("SG&A") for the three and nine months ended September 30, 2018, respectively. The Company incurred $10.7 million and $14.8 million in transaction costs related to the ModSpace acquisition for the three and nine months ended September 30, 2018, respectively.
NOTE 3 - Discontinued Operations
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Combination, several lease agreements for rental equipment still exist between the Company and Target Logistics. The lease revenue associated with these agreements is disclosed in Note 16. The Company also had rental unit sales to Target Logistics during the third quarter which is disclosed in Note 16.
As a result of the transactions discussed above, the Remote Accommodations segment has been reported as discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and has no impact on the financial statements in 2018.
Results from Discontinued Operations
Income from discontinued operations, net of tax, for the three and nine months ended September 30, 2017 was as follows:
(in thousands) | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||
Remote accommodations revenue | $ | $ | |||||||||
| Rental unit sales | |||||||||||
| Remote accommodations costs of leasing and services | |||||||||||
| Rental unit cost of sales | |||||||||||
Depreciation of rental equipment | |||||||||||
Gross profit | |||||||||||
Selling, general and administrative expenses | |||||||||||
Other depreciation and amortization | |||||||||||
Restructuring costs | |||||||||||
Other income, net | ( | ( | |||||||||
Operating profit | |||||||||||
Interest expense | |||||||||||
Income from discontinued operations, before income tax | |||||||||||
Income tax expense | |||||||||||
Income from discontinued operations, net of tax | $ | $ | |||||||||
Revenues and costs related to the Remote Accommodations Business for the three and nine months ended September 30, 2017 were as follows: