WillScot Holdings Corp (WSC) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand WillScot Holdings Corporation's ("WillScot") operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto, contained in Part II, Item 8 of this report. The discussion of results of operations in this MD&A is presented on a historical basis, as of or for the year ended December 31, 2024 or prior periods. On January 31, 2023, the Company completed the sale of its United Kingdom Storage Solutions ("UK Storage Solutions") segment. This MD&A presents the historical financial results of the former UK Storage Solutions segment as discontinued operations for all periods presented. For further discussion regarding our results of operations for the year ended December 31, 2023, as compared to the year ended December 31, 2022, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the US (“GAAP”). We use certain non-GAAP financial metrics to supplement the GAAP reported results to highlight key operational metrics that are used by management to evaluate Company performance. Reconciliations of GAAP financial information to the disclosed non-GAAP measures are provided in the Reconciliation of Non-GAAP Financial Measures section.
Executive Summary
We are a leading business services provider specializing in innovative and flexible turnkey temporary space solutions. We offer our customers an extensive selection of space solutions with over 152,000 modular space units and over 210,000 portable storage units in our fleet. Our diverse product offering includes modular space solutions (modular office complexes, mobile offices, classrooms, blast-resistant modules, clearspan structures and sanitation solutions) and portable storage solutions (portable storage containers and climate-controlled containers and trailers). We also offer our customers a thoughtfully curated selection of solutions with Value-Added Products ("VAPS"), such as workstations, furniture, appliances, media packages, power and solar solutions, telematics, connectivity and data solutions, security and protection products, entrance packages, electrical and lighting products, organization and space optimization assets, perimeter solutions and other items that improve the overall customer experience. We operate a hybrid in-house and outsourced logistics and service infrastructure that provides delivery, site work, installation, disassembly, removal and other services to our customers for an additional fee as part of our leasing and sales operations. We service diverse end markets across all sectors of the economy throughout the United States ("US"), Canada, and Mexico. As of December 31, 2024, our branch network included approximately 260 branch locations and additional drop lots to service our over 85,000 customers.
We primarily lease, rather than sell, our space solutions to customers, which results in a highly diversified and predictable recurring revenue stream. Over 90% of new lease orders are on our standard lease agreement, pre-negotiated master lease or national account agreements. Rental contracts with customers are generally based on a 28-day or monthly rate and billing cycle. The initial lease periods vary, and our leases are customarily renewable on a month-to-month basis after their initial term and continue until cancelled by the customer or us. Given that our customers value flexibility, they consistently extend their leases or renew on a month-to-month basis such that the average effective duration of our consolidated lease portfolio, excluding seasonal portable storage units, is approximately 41 months. We believe our lease revenue is highly predictable due to its recurring nature and the underlying stability and diversification of our lease portfolio. We complement our core leasing business by selling both new and used units, allowing us to leverage scale, achieve purchasing benefits and redeploy capital employed in our lease fleet.
We remain focused on safely and frugally growing lease revenue by increasing volumes, driving VAPS penetration, and optimizing rates. To achieve these objectives, we continue to invest in initiatives to improve customer service and increase the scope of our portfolio of turnkey space solutions. In 2024, we supported these initiatives by:
•Introducing new VAPS, including solar panels and perimeter solutions,
•Introducing new powerful digital marketing, customer service, and sales tools to enhance the digital experience for customers,
•Launching an enhanced customer portal with expanded customer self-service capabilities, and
•Growing our portfolio of new product solutions for our customers, including climate-controlled storage and clearspan structures.
35
For the year ended December 31, 2024, as compared to the year ended December 31, 2023, results and key drivers of our financial performance included:
•Total revenues increased $31.0 million, or 1.3%, to $2,395.7 million for the year ended December 31, 2024. Leasing revenue increased $5.9 million, or 0.3%, driven by increased pricing and VAPS penetration, partially offset by a decrease in total average units on rent of 33,973, or 13.3%. Lower demand was driven largely by reductions in non-residential construction project start activity over the past two years as a result of higher interest rates. Lower demand reduced deliveries resulting in a decrease in delivery and installation revenue of $18.3 million, or 4.2%. New unit sales revenue increased by $26.4 million, or 54.8%, mostly related to sales activity from a modular space manufacturing business acquired in the third quarter of 2023; and rental unit sales revenue increased $16.9 million, or 37.2%.
•Generated income from continuing operations of $28.1 million for the year ended December 31, 2024, representing a decrease of $313.7 million versus the year ended December 31, 2023. The decrease included the $180.0 million termination fee paid to McGrath RentCorp ("McGrath") related to the terminated acquisition of McGrath (see "Termination of Agreement to Acquire McGrath RentCorp" under "Significant Developments" below); a $132.5 million impairment loss on intangible asset as a result of our re-branding; and other discrete costs of $64.8 million, including:
–$42.4 million of legal and professional fees related to the terminated acquisition of McGrath.
–$8.6 million of restructuring expense largely related to employee termination costs as a result of a cost-reduction plan implemented in June 2024 for certain centralized and redundant resources related to task localization and the unification of our go-to market structure.
–$8.2 million of integration costs related to the final systems and field harmonization contemplated under the WillScot and Mobile Mini integration plan, which combined sales and operations teams under a single leadership structure and upgraded our field service and dispatch system to better utilize our operational resources across all product lines.
•Generated Adjusted EBITDA from continuing operations of $1,063.2 million for the year ended December 31, 2024, representing an increase of $1.7 million, or 0.2%, as compared to 2023.
•Net cash provided by operating activities decreased $199.6 million to $561.6 million for the year ended December 31, 2024, primarily due to payments of $225.7 million for the McGrath termination fee and transaction costs from terminated acquisitions.
•Net cash used in investing activities, excluding cash used for acquisitions and proceeds from the sale of discontinued operations, increased $56.5 million to $241.1 million due to an increase in the purchase of rental equipment and refurbishments of $53.9 million as a result of increased new fleet purchases, modular refurbishments, and investments in VAPS for portable storage containers. Climate-controlled containers represented the majority of new fleet purchases.
•Generated Adjusted Free Cash Flow of $553.9 million for the year ended December 31, 2024, representing a decrease of $22.7 million, or 4.1%, as compared to 2023. During the year ended December 31, 2024, we deployed Free Cash Flow to:
–Acquire assets from a regional provider of modular solutions, two regional providers of climate-controlled storage units, a US national provider of premium large clearspan structures, and a US regional provider of perimeter solutions for $121.2 million.
–Repurchase $270.4 million of our Common Stock, reducing outstanding Common Stock by 7.1 million shares.
•We believe the predictability of our Free Cash Flow allows us to pursue multiple capital allocation priorities opportunistically, including investing in organic opportunities we see in the market, maintaining leverage in our stated range, opportunistically executing accretive acquisitions, and returning capital to shareholders via share repurchases and dividend distributions.
In addition to using GAAP financial measurements, to evaluate our operating results, we use Adjusted EBITDA, Adjusted Free Cash Flow, and Net Capex, which are non-GAAP financial measures. As such, we include in this Annual Report on Form 10-K reconciliations to their most directly comparable GAAP financial measures. These reconciliations and descriptions of why we believe these measures provide useful information to investors as well as a description of the limitations of these measures are included in "Reconciliation of non-GAAP Financial Measures."
36
Significant Developments
Termination of Agreement to Acquire McGrath RentCorp
On January 28, 2024, we entered into an agreement and plan of merger (the “Merger Agreement”) with McGrath. On September 17, 2024, the Company and McGrath mutually agreed to terminate the Merger Agreement. In accordance with the terms of the Merger Agreement, the Company paid McGrath a $180.0 million termination fee. During the year ended December 31, 2024, the Company recorded $42.4 million in legal and professional fees related to terminated transactions within selling, general, and administrative (“SG&A”) expense.
Segment Reporting
In January 2024, we completed the unification of our go-to market structure by integrating our modular and storage divisions under a single leadership team organized by metropolitan statistical area ("MSA"), which enables us to consistently deliver our portfolio of solutions to our entire customer base. In connection with this change in operating model, we realigned the composition of our operating segments. As a result, we concluded that we have two operating segments (US and Other North America) that aggregate into one reportable segment.
Restructuring
In June 2024, we implemented a cost-reduction plan for certain centralized and redundant resources related to task localization and the unification of our go-to market structure. During the year ended December 31, 2024, restructuring costs incurred under this plan included employee termination costs of $8.6 million.
Mobile Mini Trade Name Impairment
In 2024, we executed a rebranding under the WillScot brand name and discontinued the use of the Mobile Mini brand name. The Mobile Mini indefinite-lived trade name was tested for impairment, and we recorded an impairment loss on intangible asset of $132.5 million on the consolidated statement of operations. After the impairment charge, the remaining net book value of the Mobile Mini trade name was $31.5 million, which is amortized over the remaining useful life of the asset.
Financing Activities
On June 28, 2024, we completed a private offering of $500.0 million in aggregate principal amount of 6.625% senior secured notes due 2029 (the "2029 Secured Notes") to qualified institutional buyers pursuant to Rule 144A. Proceeds were used to repay approximately $495.0 million of outstanding indebtedness under the ABL Facility and certain fees and expenses.
Asset Acquisitions and Business Combination
During 2024, we acquired certain assets of three regional storage and modular companies, which consisted primarily of approximately 600 cold storage units and 800 modular units, and certain assets of a national provider of clearspan solutions for $84.5 million in cash. As of the acquisition dates, the fair value of rental equipment acquired was $80.7 million.
During 2024, we also acquired certain assets from a US regional provider of perimeter solutions for $36.8 million in cash. As of the acquisition date, goodwill acquired was $25.3 million, intangible assets acquired were $2.5 million, and the fair value of rental equipment acquired was $8.8 million. The preliminary allocation of purchase price, including the valuation of acquired rental equipment and intangible assets, is based on the best estimates of management and is subject to revision as additional information is obtained.
Share Repurchases
In September 2024, our Board of Directors approved a reset of our share repurchase program authorizing us to repurchase up to $1.0 billion of our outstanding shares of Common Stock and equivalents. During the year ended December 31, 2024, we repurchased 7,133,446 shares of Common Stock for $270.4 million. As of December 31, 2024, $821.8 million of the approved share repurchase pool remained available.
Interest Rate Swap Agreements
In January 2024, the Company entered into two interest rate swap agreements with financial counterparties relating to $500.0 million in aggregate notional amount of variable-rate debt under the Company's ABL Facility. Under the terms of the agreements, the Company receives a floating rate equal to one-month term SOFR and makes payments based on a fixed interest rate of 3.70% on the notional amount. The swap agreements were designated and qualified as hedges of the Company's exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on the ABL Facility. The swap agreements terminate on June 30, 2027.
Economic Conditions
In 2024 and 2023, as a result of the decline in non-residential construction starts in the US due to higher interest rates and the impact of these higher rates on lending availability primarily on smaller projects, we experienced a decline in unit activations resulting in lower units on rent. Lower demand in the retail and wholesale trade customer segment also negatively impacted portable storage unit demand. Given the flexibility in our cost structure, we reacted quickly to the lower activity levels and reduced variable costs relative to our forecast.
37
Business Environment and Outlook
Our customers operate in a diversified set of end markets such as construction and infrastructure; commercial and industrial, including retail and wholesale trade; energy and natural resources; and government and institutions, including education and healthcare. We track several market leading indicators to predict demand, including those related to our two largest end markets, the commercial and industrial sector and the construction and infrastructure sector, which collectively accounted for approximately 85% of our revenues in the year ended December 31, 2024. Even in an uncertain macro-economic environment, market catalysts such as increased infrastructure spending, onshoring and reshoring, and idiosyncratic growth levers such as continued penetration of our customer base with our VAPS offerings, long-term pricing tailwinds, cross-selling our portfolio of products, and other commercial best practice sharing within WillScot provide us confidence in our continued organic growth outlook.
Components of Our Consolidated Historical Results of Operations
Revenues
Our revenues consist mainly of leasing and services revenue and sales revenue. We derive our leasing and services revenue primarily from the leasing of space solutions. Included in leasing revenue are VAPS, such as workstations, furniture, appliances, media packages, power and solar solutions, telematics, connectivity and data solutions, security and protections products, entrance packages, electrical and lighting products, organization and space optimization assets, perimeter solutions, and other items our customers use in connection with our products. Delivery and installation revenue includes fees that we charge for the delivery, site work, installation, disassembly, unhooking and removal, and other services to our customers for an additional fee as part of our leasing and sales operations.
The key drivers of changes in our leasing revenue are:
•the average number of units on rent;
•the average monthly rental rate per unit, including VAPS.
The average number of units on rent during a period represents the number of units in use from the time they are leased to a customer until the time they are returned to us. Our average monthly rental rate per unit for a period is equal to the ratio of (i) our rental revenue for that period including VAPS but excluding delivery and installation services and other leasing-related revenues, to (ii) the average number of lease units rented to our customers during that period. We also measure the average utilization rate of our lease units, which is the ratio of (i) the average number of units on rent to (ii) the average total number of units available for lease in our fleet during a period.
In addition to leasing revenue, we also generate revenue from sales of new and used units to our customers, as well as delivery, installation, maintenance, removal services and other incidental items related to accommodation services for our customers. Included in our sales revenue are charges for modifying or customizing sales equipment to customers’ specifications.
Cost of Revenues and Gross Profit
Cost of revenues associated with our leasing business includes payroll and payroll-related costs for branch operations personnel, material and other costs related to the repair, maintenance, storage and transportation of rental equipment. Cost of revenues also includes depreciation expense associated with our rental equipment. Cost of revenues associated with our new unit sales business includes the cost to purchase, assemble, transport and customize units that are sold. Cost of revenues for our rental unit sales consist primarily of the net book value of the unit at date of sale. We define gross profit as the difference between total revenues and cost of revenues.
Selling, General and Administrative Expense
Our SG&A expense includes all costs associated with our selling efforts, including marketing costs, marketing salaries and benefits, as well as the salary, benefits, and commissions of sales personnel. SG&A expense also includes the leasing of facilities we occupy, professional fees and information systems, our overhead costs, such as salaries and other employee costs of management, administrative and corporate personnel, and integration costs associated with acquisitions and business combinations.
Other Depreciation and Amortization
Other depreciation and amortization includes depreciation of our property, plant and equipment, as well as the amortization of our intangible assets.
Termination Fee
On January 28, 2024, we entered into the Merger Agreement with McGrath. On September 17, 2024, the Company and McGrath mutually agreed to terminate the Merger Agreement. In accordance with the terms of the Merger Agreement, we paid McGrath a $180.0 million termination fee during the year ended December 31, 2024.
38
Impairment Loss on Intangible Asset
In 2024, we executed a rebranding under the WillScot brand name and discontinued the use of the Mobile Mini brand name. As a result of this rebranding, we recognized an impairment charge of $132.5 million related to the Mobile Mini trade name during the year ended December 31, 2024.
Restructuring Costs
Restructuring costs include one-time termination benefits related to employee separation costs.
Currency (Gains) Losses, Net
Currency (gains) losses, net includes unrealized and realized (gains) losses on monetary assets and liabilities denominated in foreign currencies other than our functional currency at the reporting date.
Other (Income) Expense, Net
Other (income) expense, net primarily consists of (gain) loss on disposal of non-operational property, plant and equipment, insurance proceeds, (gain) loss on investments, other financing-related costs, and other non-recurring charges.
Interest Expense, Net
Interest expense, net consists of the costs of external debt, including the Company’s ABL credit facility, outstanding notes, and obligations under finance leases, as well as the impact of interest rate swap agreements and interest income from investments.
Income Tax Expense
We are subject to income taxes in the US, Canada, Mexico, and India. Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, and certain non-deductible expenses such as compensation disallowance. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and tax credits. These discrete items may not be consistent from year to year. Income tax expense (benefit), deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid.
Income from Discontinued Operations
Income from discontinued operations was related to the former UK Storage Solutions segment which was sold in January 2023.
39
Consolidated Results of Operations
Certain consolidated results of operations for the years ended December 31, 2024 and 2023 are presented below.
| Years Ended December 31, | 2024 vs. 2023 Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except share data) | 2024 | 2023 | ||||||||||
| Revenues: | ||||||||||||
| Leasing and services revenue: | ||||||||||||
| Leasing | $ | 1,839,875 | $ | 1,833,935 | $ | 5,940 | ||||||
| Delivery and installation | 418,881 | 437,179 | (18,298) | |||||||||
| Sales revenue: | ||||||||||||
| New units | 74,499 | 48,129 | 26,370 | |||||||||
| Rental units | 62,463 | 45,524 | 16,939 | |||||||||
| Total revenues | 2,395,718 | 2,364,767 | 30,951 | |||||||||
| Costs: | ||||||||||||
| Costs of leasing and services: | ||||||||||||
| Leasing | 385,078 | 398,467 | (13,389) | |||||||||
| Delivery and installation | 328,880 | 317,117 | 11,763 | |||||||||
| Costs of sales: | ||||||||||||
| New units | 45,554 | 26,439 | 19,115 | |||||||||
| Rental units | 32,224 | 23,141 | 9,083 | |||||||||
| Depreciation of rental equipment | 302,143 | 265,733 | 36,410 | |||||||||
| Gross profit | 1,301,839 | 1,333,870 | (32,031) | |||||||||
| Other operating expenses: | ||||||||||||
| Selling, general and administrative | 630,705 | 596,090 | 34,615 | |||||||||
| Other depreciation and amortization | 82,829 | 72,921 | 9,908 | |||||||||
| Termination fee | 180,000 | — | 180,000 | |||||||||
| Impairment loss on intangible asset | 132,540 | — | 132,540 | |||||||||
| Restructuring costs | 8,559 | — | 8,559 | |||||||||
| Currency losses, net | 593 | 6,754 | (6,161) | |||||||||
| Other expense (income), net | 2,698 | (15,354) | 18,052 | |||||||||
| Operating income | 263,915 | 673,459 | (409,544) | |||||||||
| Interest expense, net | 227,311 | 205,040 | 22,271 | |||||||||
| Income from continuing operations before income tax | 36,604 | 468,419 | (431,815) | |||||||||
| Income tax expense from continuing operations | 8,475 | 126,575 | (118,100) | |||||||||
| Income from continuing operations | 28,129 | 341,844 | (313,715) | |||||||||
| Discontinued operations: | ||||||||||||
| Income from discontinued operations before income tax | — | 4,003 | (4,003) | |||||||||
| Income tax expense from discontinued operations | — | 45,468 | (45,468) | |||||||||
| Gain on sale of discontinued operations | — | 176,078 | (176,078) | |||||||||
| Income from discontinued operations | — | 134,613 | (134,613) | |||||||||
| Net income | $ | 28,129 | $ | 476,457 | $ | (448,328) | ||||||
| Earnings per share from continuing operations - basic | $ | 0.15 | $ | 1.72 | $ | (1.57) | ||||||
| Earnings per share from continuing operations - diluted | $ | 0.15 | $ | 1.69 | $ | (1.54) | ||||||
| Weighted average shares - basic | 188,101,693 | 198,554,885 | (10,453,192) | |||||||||
| Weighted average shares - diluted | 190,292,256 | 201,849,836 | (11,557,580) |
40
| Cash Flow Data: | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net cash from operating activities | $ | 561,644 | $ | 761,240 | $ | (199,596) | ||||||
| Net cash from investing activities | $ | (362,348) | $ | (350,003) | $ | (12,345) | ||||||
| Net cash from financing activities | $ | (200,119) | $ | (418,935) | $ | 218,816 | ||||||
| Other Financial Data: | ||||||||||||
| Adjusted EBITDA from continuing operations(a) | $ | 1,063,160 | $ | 1,061,465 | $ | 1,695 | ||||||
| Capital expenditures for rental equipment | $ | (280,857) | $ | (226,976) | $ | (53,881) | ||||||
| Net CAPEX(a) | $ | (233,428) | $ | (184,651) | $ | (48,777) | ||||||
| Adjusted Free Cash Flow(a) | $ | 553,937 | $ | 576,589 | $ | (22,652) | ||||||
| Balance Sheet Data (end of year): | ||||||||||||
| Cash and cash equivalents | $ | 9,001 | $ | 10,958 | $ | (1,957) | ||||||
| Rental equipment, net | $ | 3,377,939 | $ | 3,381,315 | $ | (3,376) | ||||||
| Total assets | $ | 6,034,911 | $ | 6,137,915 | $ | (103,004) | ||||||
| Long-term debt | $ | 3,683,502 | $ | 3,538,516 | $ | 144,986 | ||||||
| Total shareholders’ equity | $ | 1,018,593 | $ | 1,261,250 | $ | (242,657) |
(a) WillScot presents Adjusted EBITDA from continuing operations, Net CAPEX, and Adjusted Free Cash Flow, which are measurements not calculated in accordance with GAAP and are defined and reconciled below in the section "Reconciliation of Non-GAAP Financial Measures," because they are key metrics used by management to assess financial performance. Our business is capital intensive, and these additional metrics allow management to further evaluate its operating performance.
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands, except for units on rent and monthly rental rate) (a) | 2024 | 2023 | ||||
| Modular space units on rent (average during the period) | 94,780 | 98,650 | ||||
| Average modular space utilization rate | 61.9 | % | 64.4 | % | ||
| Average modular space monthly rental rate | $ | 1,185 | $ | 1,099 | ||
| Portable storage units on rent (average during the period) | 126,455 | 156,558 | ||||
| Average portable storage utilization rate | 60.0 | % | 73.4 | % | ||
| Average portable storage monthly rental rate | $ | 266 | $ | 235 |
(a) In 2024, we reclassified approximately 2,000 units that were previously reported as modular space units on rent to portable storage units on rent as these units are generally used in a dry storage application. Additionally, based on our segment realignment, we have conformed our VAPS presentation to include all VAPS not specific to portable storage orders as modular space VAPS and recalculated average monthly rental rates. This treatment is consistent with prior treatment in our previous Modular Segment. All historical product operating key performance indicators have been recast to be presented on a comparable basis for all periods.
Comparison of Years Ended December 31, 2024 and 2023
Revenue: Total revenue increased $31.0 million, or 1.3%, to $2,395.7 million for the year ended December 31, 2024 from $2,364.8 million for the year ended December 31, 2023. Leasing revenue increased $5.9 million, or 0.3%, as compared to 2023 driven by improved pricing and VAPS penetration and the addition of climate-controlled storage containers to our portfolio, partially offset by a decrease in total average units on rent of 33,973, or 13.3%. Total VAPS revenue, which is included in leasing revenue, increased $5.7 million, or 1.5%, to $397.6 million for the year ended December 31, 2024 from $391.9 million for the year ended December 31, 2023. New unit sales revenue increased $26.4 million, or 54.8%, mostly related to sales activity from a modular space manufacturing business we acquired in the third quarter of 2023, and rental unit sales revenue increased $16.9 million, or 37.2%, primarily driven by a single large project in the second quarter and increased overall rental unit sales activity. Partially offsetting these revenue increases, delivery and installation revenue decreased $18.3 million, or 4.2%, due to decreased delivery activity.
Total average units on rent for the years ended December 31, 2024 and 2023 were 221,235 and 255,208, respectively. Modular space average units on rent decreased 3,870 units, or 3.9%, and portable storage average units on rent decreased 30,103 units, or 19.2%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The average modular space unit utilization rate during the year ended December 31, 2024 was 61.9%, as compared to 64.4% during 2023. The average portable storage unit utilization rate during the year ended December 31, 2024 was 60.0%, as compared to 73.4% during 2023. Lower demand was driven largely by reductions in non-residential construction project start activity over the past two years as a result of higher interest rates. Lower demand in the retail and wholesale trade customer segment also negatively impacted portable storage unit demand.
Modular space average monthly rental rates increased $86, or 7.8%, to $1,185 for the year ended December 31, 2024. Increases were driven by a continuation of the long-term price optimization and VAPS penetration opportunities. Average portable storage monthly rental rates of $266 represented an increase of $31, or 13.2%, compared to the year ended December 31, 2023, as a result of our price management tools and processes, benefits from increased VAPS penetration
41
opportunities, and higher rental rates on the climate-controlled containers acquired in 2024 and the third and fourth quarters of 2023.
Gross Profit: Gross profit decreased $32.0 million, or 2.4%, to $1,301.8 million for the year ended December 31, 2024 from $1,333.9 million for the year ended December 31, 2023. The decrease in gross profit was a result of a $36.4 million increase in depreciation of rental equipment and a $30.1 million decrease in delivery and installation gross profit. These decreases in gross profit were partially offset by a $19.3 million increase in leasing gross profit and increased new and rental unit sale gross profit of $15.1 million. The increase in leasing gross profit was a result of increased revenues due to favorable average monthly rental rates including VAPS across both portable storage and modular space units, which offset lower units on rent. Cost of leasing and services decreased by $1.6 million, or 0.2%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, driven by a $12.6 million, or 12.1%, decrease in materials costs and a $8.0 million, or 3.1%, decrease in subcontractor costs. These decreases were partially offset by an $18.2 million, or 7.1%, increase in labor costs. Cost of sales increased by $28.2 million, or 56.9%, to $77.8 million, which directionally aligns with increased sales revenue of $43.3 million, or 46.2%, for the year ended December 31, 2024.
Our gross profit percentage was 54.3% and 56.4% for the years ended December 31, 2024 and 2023, respectively. This decrease, as referenced above, was mainly driven by lower utilization rates, specifically on portable storage products. Gross profit percentage was also impacted by lower delivery and installation margins and an increase in new and rental unit sales, which generated lower margins.
SG&A Expense: SG&A expense increased $34.6 million, or 5.8%, to $630.7 million for the year ended December 31, 2024, as compared to $596.1 million for the year ended December 31, 2023. Discrete expenses for certain one-time projects, primarily legal and professional fees related to transaction costs from terminated acquisitions, increased $41.8 million. Real estate and occupancy costs increased $14.8 million, or 17.2%, and stock compensation expense increased $1.5 million to $36.0 million for the year ended December 31, 2024, as compared to $34.5 million for the year ended December 31, 2023. These increases were partially offset by a $9.4 million, or 3.7%, decrease in employee costs driven primarily by reduced variable compensation; a $6.6 million, or 8.3%, decrease in service agreements and professional fees; a $4.7 million, or 20.1%, decrease in the provision for credit losses, net of write offs; and a $4.2 million, or 18.3%, decrease in travel costs.
Adjusted EBITDA: Adjusted EBITDA increased $1.7 million, or 0.2%, to $1,063.2 million for the year ended December 31, 2024, from $1,061.5 million for the year ended December 31, 2023. The increase was driven by a $19.3 million increase in leasing gross profit, a $15.1 million increase in new and rental unit sales gross profit, and decreased SG&A expense, excluding discrete costs, of $6.3 million, or 1.2%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase in was partially offset by decreased delivery and installation gross profit of $30.1 million for the year ended December 31, 2024 driven by reduced delivery and return volumes and rates, as well as, insurance recoveries received in 2023 related to a 2022 hurricane.
Other Depreciation and Amortization: Other depreciation and amortization increased $9.9 million, or 13.6%, to $82.8 million for the year ended December 31, 2024, as compared to $72.9 million for the year ended December 31, 2023, primarily related to the amortization of the Mobile Mini trade name in 2024.
Termination Fee: We paid a termination fee of $180.0 million to McGrath related to the termination of the Merger Agreement during the year ended December 31, 2024. This fee was treated as an operating expense.
Impairment Loss on Intangible Asset: Impairment loss on intangible asset was $132.5 million for the year ended December 31, 2024 related to the impairment of the Mobile Mini trade name based on the Company's plan to rebrand under a single WillScot brand name and discontinue the use of the Mobile Mini trade name.
Restructuring Costs: Restructuring costs of $8.6 million for the year ended December 31, 2024 were primarily due to employee termination costs as a result of a cost-reduction plan implemented in June 2024 for certain centralized and redundant resources related to task localization and the unification of our go-to market structure.
Currency Losses, Net: Currency losses, net decreased by $6.2 million to $0.6 million for the year ended December 31, 2024 as compared to $6.8 million for the year ended December 31, 2023. This change was primarily attributable to a $7.7 million loss in 2023 on the settlement of the contingent foreign currency forward contract relating to the sale of the former UK Storage Solutions segment in January 2023.
Other Expense (Income), Net: Other expense, net was $2.7 million for the year ended December 31, 2024 compared to other income, net of $15.4 million for the year ended December 31, 2023. This change was primarily attributable to a gain on sale of fixed assets related to a real estate sale transaction during the year ended December 31, 2023 and insurance recoveries received in 2023 related to Hurricane Ian in the Gulf Coast area of the United States in 2022.
Interest Expense, Net: Interest expense, net increased $22.3 million, or 10.9%, to $227.3 million for the year ended December 31, 2024 from $205.0 million for the year ended December 31, 2023. The increase in interest expense was a result of higher outstanding debt balances, partially offset by lower overall weighted average interest rates as a result two interest rate swap agreements executed in January 2024. See Note 10 to the consolidated financial statements for further discussion of our debt.
42
Income Tax Expense from Continuing Operations: Income tax expense decreased $118.1 million to $8.5 million for the year ended December 31, 2024 as compared to $126.6 million for the year ended December 31, 2023. The decrease in income tax expense was driven by a decrease in income from continuing operations before income tax for the year ended December 31, 2024 as compared to the year ended December 31, 2023.
Income from Discontinued Operations: Income from discontinued operations of $134.6 million for the year ended December 31, 2023 was related to the sale of the former UK Storage Solutions segment in January 2023.
Capital Expenditures for Rental Equipment: Capital expenditures for rental equipment increased $53.9 million, or 23.7%, to $280.9 million for the year ended December 31, 2024 from $227.0 million for the year ended December 31, 2023 as a result of increased modular refurbishment spending, investments in VAPS for portable storage, and new fleet purchases, including additional investment in climate-controlled containers. Net CAPEX increased $48.8 million, or 26.4%, to $233.4 million for the year ended December 31, 2024 from $184.7 million for the year ended December 31, 2023, driven by increased capital expenditures for rental equipment as described above and a $11.4 million decrease in proceeds from the sale of property, plant, and equipment, partially offset by a $12.7 million increase in proceeds from the sale of rental equipment and a $3.8 million decrease in purchases of property, plant and equipment.
Reconciliation of Non-GAAP Financial Measures
In addition to using GAAP financial measurements, we use certain non-GAAP financial measures to evaluate our operating results. As such, we include in this Annual Report on Form 10-K reconciliations of non-GAAP financial measures to their most directly comparable GAAP financial measures. Set forth below are definitions and reconciliations to the nearest comparable GAAP measure of certain non-GAAP financial measures used in this Annual Report on Form 10-K along with descriptions of why we believe these measures provide useful information to investors as well as a description of the limitations of these measures. Each of these non-GAAP financial measures has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for analysis of, results reported under GAAP. Our measurements of these metrics may not be comparable to similarly titled measures of other companies.
Adjusted EBITDA
We define EBITDA as net income (loss) plus interest (income) expense, income tax expense (benefit), depreciation and amortization. Our adjusted EBITDA ("Adjusted EBITDA") reflects the following further adjustments to EBITDA to exclude certain non-cash items and the effect of what we consider transactions or events not related to our core business operations:
•Currency (gains) losses, net on monetary assets and liabilities denominated in foreign currencies other than the subsidiaries’ functional currency.
•Goodwill and other impairment charges related to non-cash costs associated with impairment charges to goodwill, other intangibles, rental fleet and property, plant and equipment.
•Restructuring costs, lease impairment expense, and other related charges associated with restructuring plans designed to streamline operations and reduce costs including employee and lease termination costs.
•Transaction costs including legal and professional fees and other transaction specific related costs.
•Costs to integrate acquired companies, including outside professional fees, non-capitalized costs associated with system integrations, non-lease branch and fleet relocation expenses, employee relocation and training costs, and other costs required to realize cost or revenue synergies.
•Non-cash charges for stock compensation plans.
•Other expense, including consulting expenses related to certain one-time projects, financing costs not classified as interest expense, gains and losses on disposals of property, plant, and equipment, and unrealized gains and losses on investments.
Our Chief Operating Decision Maker ("CODM") evaluates business performance utilizing Adjusted EBITDA as shown in the reconciliation of the Company’s consolidated income from continuing operations to Adjusted EBITDA from continuing operations below. Management believes that evaluating performance excluding such items is meaningful because it provides insight with respect to the intrinsic and ongoing operating results of the Company and captures the business performance, inclusive of indirect costs.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider the measure in isolation or as a substitute for net income (loss), cash flow from operations or other methods of analyzing WillScot’s results as reported under US GAAP. Some of these limitations are:
•Adjusted EBITDA does not reflect changes in, or cash requirements for our working capital needs;
•Adjusted EBITDA does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes;
•Adjusted EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
43
•Adjusted EBITDA does not reflect the impact on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered as discretionary cash available to reinvest in the growth of our business or as a measure of cash that will be available to meet our obligations. The following table provides reconciliations of Income from continuing operations to Adjusted EBITDA from continuing operations:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Income from continuing operations | $ | 28,129 | $ | 341,844 | ||
| Income tax expense from continuing operations | 8,475 | 126,575 | ||||
| Income from continuing operations before income tax | 36,604 | 468,419 | ||||
| Depreciation and amortization | 384,972 | 338,654 | ||||
| Interest expense, net | 227,311 | 205,040 | ||||
| Impairment loss on intangible asset | 132,540 | — | ||||
| Restructuring costs, lease impairment expense and other related charges | 9,435 | 22 | ||||
| Currency losses, net | 593 | 6,754 | ||||
| Transaction costs | 651 | 2,259 | ||||
| Integration costs | 7,521 | 10,366 | ||||
| Impairment loss on long-lived asset | 374 | — | ||||
| Stock compensation expense | 35,966 | 34,486 | ||||
| Termination fee | 180,000 | — | ||||
| Other(a) | 47,193 | (4,535) | ||||
| Adjusted EBITDA from continuing operations | $ | 1,063,160 | $ | 1,061,465 |
(a) Includes $42.4 million in legal and professional fees related to the terminated McGrath transaction for the year ended December 31, 2024.
Net CAPEX
We define Net CAPEX as purchases of rental equipment and refurbishments and purchases of property, plant and equipment (collectively, "Total Capital Expenditures"), less proceeds from the sale of rental equipment and proceeds from the sale of property, plant and equipment (collectively, "Total Proceeds"), which are all included in cash flows from investing activities. Management believes that the presentation of Net CAPEX provides useful information regarding the net capital invested in our rental fleet and property, plant and equipment each year to assist in analyzing the performance of our business. As presented below, Net CAPEX includes amounts for the UK Storage Solutions segment through January 31, 2023.
The following table provides reconciliations of Net CAPEX:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Purchase of rental equipment and refurbishments | $ | (280,857) | $ | (226,976) | ||
| Proceeds from sale of rental equipment | 63,997 | 51,290 | ||||
| Net CAPEX for Rental Equipment | (216,860) | (175,686) | ||||
| Purchase of property, plant and equipment | (18,435) | (22,237) | ||||
| Proceeds from sale of property, plant and equipment | 1,867 | 13,272 | ||||
| Net CAPEX | $ | (233,428) | $ | (184,651) |
Adjusted Free Cash Flow
We define Adjusted Free Cash Flow as net cash provided by operating activities; less purchases of rental equipment and property, plant and equipment and plus proceeds from sale of rental equipment and property, plant and equipment, which are all included in cash flows from investing activities; excluding one-time, nonrecurring payments for the McGrath termination fee and transaction costs from terminated acquisitions. Management believes that the presentation of Adjusted Free Cash Flow provides useful additional information concerning cash flow available to fund our capital allocation alternatives. As
44
presented below, Adjusted Free Cash Flow includes amounts for the UK Storage Solutions segment through January 31, 2023. The following table provides reconciliations of net cash provided by operating activities to Adjusted Free Cash Flow:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Net cash provided by operating activities | $ | 561,644 | $ | 761,240 | ||
| Purchase of rental equipment and refurbishments | (280,857) | (226,976) | ||||
| Proceeds from sale of rental equipment | 63,997 | 51,290 | ||||
| Purchase of property, plant and equipment | (18,435) | (22,237) | ||||
| Proceeds from the sale of property, plant and equipment | 1,867 | 13,272 | ||||
| Cash paid for termination fee | 180,000 | — | ||||
| Cash paid for transaction costs from terminated acquisitions | 45,721 | — | ||||
| Adjusted Free Cash Flow | $ | 553,937 | $ | 576,589 |
Liquidity and Capital Resources
Overview
WillScot is a holding company that derives its operating cash flow from its operating subsidiaries. Our principal sources of liquidity include cash flows generated from operating activities of our subsidiaries, borrowings under our ABL Facility, and sales of debt securities. We have consistently accessed the debt and equity capital markets both opportunistically and as necessary to support the growth of our business, desired leverage levels, and other capital allocation priorities. We believe we have ample liquidity in the ABL Facility and are generating substantial Adjusted Free Cash Flow, which together support both organic operations and other capital allocation priorities as they arise. We believe that our liquidity sources are sufficient to satisfy our anticipated operating, debt service, and capital requirements over the next twelve months and thereafter for the foreseeable future.
We continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. In addition, we continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities. There can be no assurance as to the timing of any such issuance or repurchase. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. Availability of financing and the associated terms are inherently dependent on the debt and equity capital markets and subject to change. From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration.
Our revolving credit facility provides an aggregate principal amount of up to $3.7 billion, consisting of: (i) a senior secured asset-based US dollar revolving credit facility in the aggregate principal amount of $3.3 billion (the “US Facility”) and (ii) a $400.0 million senior secured asset-based multicurrency revolving credit facility (the "Multicurrency Facility," and together with the US Facility, the “ABL Facility”). Borrowing availability under the ABL Facility is equal to the lesser of $3.7 billion and the applicable borrowing bases. The borrowing bases are a function of, among other things, the value of the assets in the relevant collateral pool of which our rental equipment represents the largest component. At December 31, 2024, we had $1.6 billion of available borrowing capacity under the ABL Facility.
Cash Flows
The consolidated statements of cash flows include amounts for the UK Storage Solutions segment through January 31, 2023. See Note 3 to the financial statements for disclosure of significant operating and investing items related to the UK Storage Solutions segment. The following summarizes our change in cash and cash equivalents for the periods presented:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Net cash provided by operating activities | $ | 561,644 | $ | 761,240 | ||
| Net cash used in investing activities | (362,348) | (350,003) | ||||
| Net cash used in financing activities | (200,119) | (418,935) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (1,134) | 882 | ||||
| Net change in cash and cash equivalents | $ | (1,957) | $ | (6,816) |
45
Comparison of the Years Ended December 31, 2024 and 2023
Cash flows from operating activities
Net cash provided by operating activities for the year ended December 31, 2024 was $561.6 million as compared to $761.2 million for the year ended December 31, 2023, a decrease of $199.6 million. The decrease in net cash provided by operating activities was primarily due to the payment of $225.7 million for the McGrath termination fee and transaction costs from terminated acquisitions during the year ended December 31, 2024.
Cash flows from investing activities
Net cash used in investing activities for the year ended December 31, 2024 was $362.3 million as compared to $350.0 million for the year ended December 31, 2023, an increase of $12.3 million. The increase in net cash used in investing activities primarily resulted from an increase in the purchase of rental equipment and refurbishments of $53.9 million due to increased refurbishment spending, investments in VAPS for portable storage, and new fleet purchases, including additional investment in climate-controlled containers during the year ended December 31, 2024. This increase was partially offset by a decrease in net cash used for acquisition and divestiture activity during 2024 of $36.4 million, including a decrease of $440.4 million in cash used in acquisitions, net of cash acquired and a decrease of $404.0 million in proceeds from the sale of the former UK Storage Solutions segment in the year ended December 31, 2023.
Cash flows from financing activities
Net cash used in financing activities for the year ended December 31, 2024 was $200.1 million as compared to $418.9 million for the year ended December 31, 2023, a decrease of $218.8 million. The decrease in net cash used in financing activities was driven by a decrease of $547.7 million in cash used for the repurchase of common stock. The decrease was partially offset by a decrease of $314.8 million in receipts from borrowings, net of repayments of borrowings.
Material cash requirements
The Company’s material cash requirements include the following contractual and other obligations:
Debt
The Company has outstanding debt related to its ABL Facility, 2025 Secured Notes, 2028 Secured Notes, 2029, Secured Notes, 2031 Secured Notes, and finance leases, including interest, totaling $3.7 billion as of December 31, 2024, $549.9 million of which is obligated to be repaid within the next twelve months. We have the intent and believe we have the ability to refinance the $526.5 million carrying value of the 2025 Secured Notes on a long-term basis as demonstrated by our forecasted available capacity under the ABL Facility, among other refinancing alternatives to be considered opportunistically. Refer to Note 10 for further information regarding outstanding debt.
Operating leases
The Company has commitments for future minimum rental payments relating to operating leases, which are primarily for real estate. As of December 31, 2024, the Company had lease obligations of $311.5 million, with $73.8 million payable within the next twelve months.
Other
In addition to the cash requirements described above, the Company has a Share Repurchase program authorized by the Board of Directors, which allows the Company to repurchase up to $1.0 billion of outstanding shares of Common Stock. This program does not obligate the Company to repurchase any specific amount of shares. As of December 31, 2024, $821.8 million of the authorization for future repurchases of our common stock remained available.
Critical Accounting Estimates
The Company's discussion and analysis of its financial condition, results of operations, liquidity and capital resources is based on its consolidated financial statements, which have been prepared in accordance with GAAP. GAAP requires that management make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosure of contingent assets and liabilities. The Company's management bases these estimates on historical experience and on various other assumptions that they consider reasonable under the circumstances and reevaluate their estimates and judgments as appropriate. The actual results experienced by the Company may differ materially and adversely from its estimates. The Company believes that the following critical accounting estimates involve a higher degree of judgment or complexity in the preparation of financial statements:
Revenue Recognition
Leasing Revenue
The Company's lease arrangements can include multiple lease and non-lease components. Examples of lease components include, but are not limited to, the lease of modular space and portable storage units and VAPS. Examples of non-lease components include, but are not limited to, the delivery, installation, and removal services commonly provided in a bundled transaction with the lease components. Arrangement consideration is allocated between lease components and non-lease components based on the relative estimated selling (leasing) price of each deliverable. Selling (leasing) price of the
46
lease component is estimated using an adjusted market approach whereby the Company estimates the price that customers in the market would be willing to pay.
Services Revenue
The Company generally has three non-lease service-related performance obligations in its contracts with customers:
•Delivery and installation of the modular or portable storage unit;
•Other ad hoc services performed during the lease term; and
•Removal services that occur at the end of the lease term.
Consideration is allocated to each of these performance obligations within the contract based upon their estimated relative standalone selling prices using an adjusted market approach.
Purchase Accounting
The Company records assets acquired and liabilities assumed at their respective estimated fair values on the date of acquisition. Goodwill is measured as the excess of the fair value of the consideration transferred over the fair value of the identifiable net assets and is assigned to the Company's reporting units that are expected to benefit from the acquisition.
The Company exercises judgment in the determination of the estimated fair value of intangible assets acquired and their estimated useful lives. The estimated fair value and useful lives of customer relationships is determined based on estimates and judgments regarding discounted future after-tax earnings and cash flows arising from customer relationships. The fair value of trade name intangible assets is determined utilizing the relief-from-royalty method. A royalty rate based on observed market royalties is applied to projected revenue supporting the trade name and discounted to present value.
Actual results may vary from these estimates which may result in adjustments to the fair value of assets acquired and liabilities assumed, including intangibles. The Company may record adjustments to the fair values and corresponding adjustment to goodwill during the measurement period, not to exceed one year from the date of acquisition if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Note 2 to the Consolidated Financial Statements included in Item 8 of Part II of this annual report provides further discussion regarding business combinations and any fair value adjustments to amounts previously reported.
Evaluation of Goodwill Impairment
The Company performs its assessment of goodwill utilizing either a qualitative or quantitative impairment test. The qualitative impairment test assesses company-specific, industry, market and general economic factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or elects not to use the qualitative impairment test, a quantitative impairment test is performed. The quantitative impairment test involves a comparison of the estimated fair value of a reporting unit to its carrying amount. The Company estimates the fair value of a reporting unit by using a discounted cash flow model that calculates fair value as the present value of expected cash flows of the reporting units.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, value of net operating losses, future economic and market conditions and determination of appropriate market comparables. Management bases fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from these estimates and the estimate is inherently sensitive to any material changes to the inputs noted above; these changes could potentially impact the fair value of reporting units.
If the carrying amount of the reporting unit exceeds the calculated fair value of the reporting unit, an impairment charge would be recognized for the excess of carrying value over fair value, not to exceed the amount of goodwill attributable to that reporting unit.
Indefinite-lived Intangible Assets
Intangible assets that are acquired by the Company and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually. After determining the Mobile Mini trade name was no longer indefinite-lived and recording an impairment during the year ended December 31, 2024, the Company’s only remaining indefinite-lived intangible asset is the WillScot trade name. The Company performs its assessment of indefinite-lived intangible assets utilizing either a qualitative or quantitative impairment test. When utilizing a quantitative impairment test, the Company calculates fair value using a relief-from-royalty method. This method is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment charge would be recorded to the extent the recorded indefinite-lived intangible asset exceeds the fair value. The relief-from-royalty method requires the Company to make assumptions regarding future revenue and the appropriate selection of royalty and discount rates. Any material deviation in actual results could affect the calculated fair value of the intangible asset.
47
Rental Equipment
Rental equipment is comprised of modular space and portable storage units held for rent or on rent to customers and VAPS that are in use or available to be used by customers. Rental equipment is measured at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the asset. Costs of improvements and conversions of rental equipment are capitalized when such costs extend the useful life of the equipment. Costs incurred for equipment to meet a particular customer specification are either capitalized and depreciated over the lease term taking into consideration the residual value of the asset or charged to the customer at the beginning of the lease and expensed as incurred. Maintenance and repair costs are expensed as incurred.
Depreciation is computed using the straight-line method over estimated useful lives, as follows:
| Estimated Useful Life | Residual Value | ||
|---|---|---|---|
| Modular space units | 5 - 30 years | 0 - 55% | |
| Portable storage units | 7 - 30 years | 20 - 55% | |
| VAPS and other related rental equipment | 1 - 10 years | 0% |
Allowance for Credit Losses
The Company is exposed to credit losses from trade receivables. The Company assesses each customer’s ability to pay for the products it leases or sells and the services it provides by conducting a credit review. The credit review considers expected billing exposure and timing for payment and the customer’s established credit rating. The Company performs its credit review of new customers at inception of the customer relationship and for existing customers when the customer transacts after a defined period of dormancy. The Company also considers contract terms and conditions, country risk and business strategy in the evaluation.
The Company monitors ongoing credit exposure through an active review of customer balances against established credit limits, contract terms, and due dates. The Company may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. The allowance for credit losses reflects the estimate of the amount of receivables that the Company will be unable to collect based on historical write-off experience and, as applicable, current conditions and reasonable and supportable forecasts that affect collectability. This estimate is sensitive to changing circumstances. Accordingly, the Company may be required to increase or decrease its allowances in future periods in response to changing circumstances, including changes in the economy or in the particular circumstances of individual customers.
Changes in estimates are reflected in the period they become known. If circumstances change in a way that require a change in estimates, such as a change in financial condition of customers or unanticipated changes in the economy, we may accrue additional allowances. There were no changes in the Company's estimates or underlying assumptions relating to the determination of the allowance for credit losses for the year ended December 31, 2024 that would have materially impacted the allowance for credit losses. Refer to Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of this annual report for a summary of activity in the allowance for credit losses.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records deferred tax assets to the extent it believes that it is more likely than not that these assets will be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. Valuation allowances are recorded to reduce the deferred tax assets to an amount that will more likely than not be realized.
When a valuation allowance is established or there is an increase in an allowance in a reporting period, tax expense is generally recorded in the Company’s consolidated statement of operations. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally reduces the Company’s income tax expense.
Deferred tax liabilities are recognized for the income taxes on the undistributed earnings of wholly-owned foreign subsidiaries unless such earnings are indefinitely reinvested, or will only be repatriated when possible to do so at minimal additional tax cost. Income tax relating to items recognized directly in equity is recognized in equity and not in profit (loss) for the year.
In accordance with applicable authoritative guidance, the Company accounts for uncertain income tax positions using a benefit recognition model with a two-step approach; a more-likely-than-not recognition criterion; and a measurement approach that measures the position as the largest amount of tax benefit that is greater than 50% likely of being realized upon
48
ultimate settlement. If it is not more-likely-than-not that the benefit of the tax position will be sustained on its technical merits, no benefit is recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. The Company classifies interest on tax deficiencies and income tax penalties within income tax expense. The evaluation of uncertain tax positions involves judgment in the application of GAAP and complex tax laws.
None of the critical accounting estimates or assumptions noted above have changed materially since the prior year.