Table of Contents
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2020
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 number001-32845
(Exact Name of Registrant as Specified in its Charter)
Delaware | 32-0163571 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
39 East Union Street
Pasadena, CA 91103
(Address of Principal Executive Offices)
(626)584-9722
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Trading | ||||
Title of Each Class | Symbol(s) | Name of Each Exchange On Which Registered | ||
| ||||
Common Stock, $0.0001 par value | GFN | NASDAQ Global Market | ||
9.00% Series C Cumulative Redeemable Perpetual Preferred Stock (Liquidation Preference $100 per share) | GFNCP | NASDAQ Global Market | ||
8.125% Senior Notes due 2021 | GFNSL | NASDAQ Global Market |
Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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-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, anon-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-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 Rule12b-2 of the Exchange Act):
Yes ☐ | No ☒ |
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 30,625,781 shares outstanding as of April 30, 2020.
Table of Contents
GENERAL FINANCE CORPORATION
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | 3 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||
Item 3. | 42 | |||||
Item 4. | 42 | |||||
PART II. | OTHER INFORMATION | |||||
Item 1. | 43 | |||||
Item 1A. | 43 | |||||
Item 2. | 43 | |||||
Item 3. | 43 | |||||
Item 4. | 43 | |||||
Item 5. | 43 | |||||
Item 6. | 43 | |||||
45 |
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
June 30, 2019 | March 31, 2020 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 10,359 | $ | 11,743 | ||||
Trade and other receivables, net of allowance for doubtful accounts of $5,490 and $5,508 at June 30, 2019 and March 31, 2020, respectively | 56,204 | 47,003 | ||||||
Inventories | 29,077 | 25,509 | ||||||
Prepaid expenses and other | 9,823 | 10,953 | ||||||
Property, plant and equipment, net | 22,895 | 24,501 | ||||||
Lease fleet, net | 456,822 | 449,726 | ||||||
Operating lease assets | — | 63,759 | ||||||
Goodwill | 111,323 | 108,592 | ||||||
Other intangible assets, net | 21,809 | 19,666 | ||||||
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Total assets | $ | 718,312 | $ | 761,452 | ||||
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Liabilities | ||||||||
Trade payables and accrued liabilities | $ | 48,460 | $ | 41,295 | ||||
Income taxes payable | 506 | 696 | ||||||
Unearned revenue and advance payments | 22,671 | 24,358 | ||||||
Operating lease liabilities | — | 64,395 | ||||||
Senior and other debt, net | 411,141 | 378,297 | ||||||
Fair value of bifurcated derivatives in Convertible Note | 19,782 | 26,147 | ||||||
Deferred tax liabilities | 38,711 | 46,725 | ||||||
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Total liabilities | 541,271 | 581,913 | ||||||
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Commitments and contingencies (Note 9) | — | — | ||||||
Equity | ||||||||
Cumulative preferred stock, $.0001 par value: 1,000,000 shares authorized; 400,100 shares issued and outstanding (in series) and liquidation value of $40,722 at June 30, 2019 and $40,712 at March 31, 2020 | 40,100 | 40,100 | ||||||
Common stock, $.0001 par value: 100,000,000 shares authorized; 30,471,406 shares issued and outstanding at June 30, 2019 and 30,625,781 at March 31, 2020 | 3 | 3 | ||||||
Additionalpaid-in capital | 183,933 | 183,282 | ||||||
Accumulated other comprehensive loss | (18,755 | ) | (23,373 | ) | ||||
Accumulated deficit | (28,744 | ) | (20,977 | ) | ||||
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Total General Finance Corporation stockholders’ equity | 176,537 | 179,035 | ||||||
Equity of noncontrolling interests | 504 | 504 | ||||||
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Total equity | 177,041 | 179,539 | ||||||
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Total liabilities and equity | $ | 718,312 | $ | 761,452 | ||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
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2019 | 2020 | 2019 | 2020 | |||||||||||||
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Revenues | ||||||||||||||||
Sales: | ||||||||||||||||
Lease inventories and fleet | $ | 25,204 | $ | 29,702 | $ | 92,653 | $ | 88,234 | ||||||||
Manufactured units | 1,432 | 2,524 | 7,941 | 6,280 | ||||||||||||
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26,636 | 32,226 | 100,594 | 94,514 | |||||||||||||
Leasing | 59,573 | 57,744 | 181,400 | 177,462 | ||||||||||||
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86,209 | 89,970 | 281,994 | 271,976 | |||||||||||||
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Costs and expenses | ||||||||||||||||
Cost of sales: | ||||||||||||||||
Lease inventories and fleet (exclusive of the items shown separately below) | 18,100 | 21,444 | 68,210 | 63,260 | ||||||||||||
Manufactured units | 1,231 | 1,977 | 6,600 | 5,441 | ||||||||||||
Direct costs of leasing operations | 22,923 | 22,968 | 68,851 | 68,587 | ||||||||||||
Selling and general expenses | 20,647 | 20,695 | 60,310 | 61,833 | ||||||||||||
Depreciation and amortization | 10,897 | 8,613 | 31,952 | 26,633 | ||||||||||||
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Operating income | 12,411 | 14,273 | 46,071 | 46,222 | ||||||||||||
Interest income | 27 | 153 | 108 | 519 | ||||||||||||
Interest expense | (10,207 | ) | (5,981 | ) | (27,700 | ) | (20,235 | ) | ||||||||
Change in valuation of bifurcated derivatives in Convertible Note (Note 5) | (1,131 | ) | (11,259 | ) | (22,829 | ) | (6,365 | ) | ||||||||
Foreign exchange and other | (3 | ) | (2,096 | ) | (3,296 | ) | (2,405 | ) | ||||||||
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(11,314 | ) | (19,183 | ) | (53,717 | ) | (28,486 | ) | |||||||||
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Income (loss) before provision for income taxes | 1,097 | (4,910 | ) | (7,646 | ) | 17,736 | ||||||||||
Provision for income taxes | 1,429 | 3,715 | 5,056 | 9,969 | ||||||||||||
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Net income (loss) | (332 | ) | (8,625 | ) | (12,702 | ) | 7,767 | |||||||||
Preferred stock dividends | (922 | ) | (922 | ) | (2,766 | ) | (2,766 | ) | ||||||||
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Net income (loss) attributable to common stockholders | $ | (1,254 | ) | $ | (9,547 | ) | $ | (15,468 | ) | $ | 5,001 | |||||
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Net income (loss) per common share: | ||||||||||||||||
Basic | $ | (0.04 | ) | $ | (0.32 | ) | $ | (0.53 | ) | $ | 0.17 | |||||
Diluted | (0.04 | ) | (0.32 | ) | (0.53 | ) | 0.16 | |||||||||
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Weighted average shares outstanding: | ||||||||||||||||
Basic | 29,975,295 | 30,294,868 | 29,084,947 | 30,250,904 | ||||||||||||
Diluted | 29,975,295 | 30,294,868 | 29,084,947 | 31,452,877 | ||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(In thousands, except share and per share data)
(Unaudited)
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
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2019 | 2020 | 2019 | 2020 | |||||||||||||
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Net income (loss) | $ | (332 | ) | $ | (8,625 | ) | $ | (12,702 | ) | $ | 7,767 | |||||
Other comprehensive income (loss): | ||||||||||||||||
Change in fair value change of interest rate swap, net of income tax effect of $7 and $94 and $178 and $194 in the quarter and nine months ended March 31, 2019 and 2020, respectively | (135 | ) | (219 | ) | (170 | ) | (256 | ) | ||||||||
Cumulative translation adjustment | 416 | (4,296 | ) | (26 | ) | (4,362 | ) | |||||||||
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Total comprehensive income (loss) | (51 | ) | (13,140 | ) | (12,898 | ) | 3,149 | |||||||||
Allocated to noncontrolling interests | — | — | — | — | ||||||||||||
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Comprehensive income (loss) allocable to General Finance Corporation stockholders | $ | (51 | ) | $ | (13,140 | ) | $ | (12,898 | ) | $ | 3,149 | |||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and share data)
(Unaudited)
Cumulative | Additional | Accumulated Other | Total General Finance | Equity of | ||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In Capital | Comprehensive Income (Loss) | Accumulated Deficit | Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
Balance at June 30, 2018 | $ | 40,100 | $ | 3 | $ | 139,547 | $ | (17,091) | $ | (21,278) | $ | 141,281 | $ | 504 | $ | 141,785 | ||||||||||||||||
Share-based compensation | — | — | 678 | — | — | 678 | — | 678 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 101,369 shares of common stock on exercises of stock options | — | — | 634 | — | — | 634 | — | 634 | ||||||||||||||||||||||||
Vesting of restricted stock units into 66,073 shares of common stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Forced conversion of Convertible Note into 3,058,824 shares of common stock (Note 5) | — | — | 44,506 | — | — | 44,506 | — | 44,506 | ||||||||||||||||||||||||
Net loss | — | — | — | — | (8,164) | (8,164) | — | (8,164) | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | (14) | — | (14) | — | (14) | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | 341 | — | 341 | — | 341 | ||||||||||||||||||||||||
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Total comprehensive loss | — | — | — | — | — | (7,837) | — | (7,837) | ||||||||||||||||||||||||
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Balance at September 30, 2018 | $ | 40,100 | $ | 3 | $ | 184,443 | $ | (16,764) | $ | (29,442) | $ | 178,340 | $ | 504 | $ | 178,844 | ||||||||||||||||
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Share-based compensation | — | — | 663 | — | — | 663 | — | 663 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 41,094 shares of common stock on exercises of stock options | — | — | 222 | — | — | 222 | — | 222 | ||||||||||||||||||||||||
Grant of 24,855 shares of restricted stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net loss | — | — | — | — | (4,206) | (4,206) | — | (4,206) | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | (21) | — | (21) | — | (21) | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | (783) | — | (783) | — | (783) | ||||||||||||||||||||||||
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Total comprehensive loss | — | — | — | — | — | (5,010) | — | (5,010) | ||||||||||||||||||||||||
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Balance at December 31, 2018 | $ | 40,100 | $ | 3 | $ | 184,406 | $ | (17,568 | ) | $ | (33,648 | ) | $ | 173,293 | $ | 504 | $ | 173,797 | ||||||||||||||
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Share-based compensation | — | — | 655 | — | — | 655 | — | 655 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 500 shares of common stock on exercises of stock options | — | — | 2 | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Grant of 31,000 shares of restricted stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Vesting of restricted stock units into 66,073 shares of common stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net loss | — | — | — | — | (332) | (332) | — | (332) | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | (135) | — | (135) | — | (135) | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | 416 | — | 416 | — | 416 | ||||||||||||||||||||||||
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Total comprehensive loss | — | — | — | — | — | (51) | — | (51) | ||||||||||||||||||||||||
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Balance at March 31, 2019 | $ | 40,100 | $ | 3 | $ | 184,141 | $ | (17,287 | ) | $ | (33,980 | ) | $ | 172,977 | $ | 504 | $ | 173,481 | ||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share and share data)
(Unaudited)
Cumulative | Additional | Accumulated Other | Total General Finance | Equity of | ||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-In Capital | Comprehensive Income (Loss) | Accumulated Deficit | Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||
Balance at June 30, 2019 | $ | 40,100 | $ | 3 | $ | 183,933 | $ | (18,755) | $ | (28,744) | $ | 176,537 | $ | 504 | $ | 177,041 | ||||||||||||||||
Share-based compensation | — | — | 683 | — | — | 683 | — | 683 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 47,500 shares of common stock on exercises of stock options | — | — | 85 | — | — | 85 | — | 85 | ||||||||||||||||||||||||
Forfeiture of 1,000 shares of restricted stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Vesting of restricted stock units into 55,957 shares of common stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | — | — | — | — | 5,951 | 5,951 | — | 5,951 | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | (458) | — | (458) | — | (458) | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | (1,794) | — | (1,794) | — | (1,794) | ||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | 3,699 | — | 3,699 | ||||||||||||||||||||||||
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Balance at September 30, 2019 | $ | 40,100 | $ | 3 | $ | 183,779 | $ | (21,007) | $ | (22,793) | $ | 180,082 | $ | 504 | $ | 180,586 | ||||||||||||||||
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Share-based compensation | — | — | 685 | — | — | 685 | — | 685 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 2,500 shares of common stock on exercises of stock options | — | — | 13 | — | — | 13 | — | 13 | ||||||||||||||||||||||||
Grant of 27,985 shares of restricted stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | — | — | — | — | 10,441 | 10,441 | — | 10,441 | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | 421 | — | 421 | — | 421 | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | 1,728 | — | 1,728 | — | 1,728 | ||||||||||||||||||||||||
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Total comprehensive income | — | — | — | — | — | 12,590 | — | 12,590 | ||||||||||||||||||||||||
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Balance at December 31, 2019 | $ | 40,100 | $ | 3 | $ | 183,555 | $ | (18,858) | $ | (12,352) | $ | 192,448 | $ | 504 | $ | 192,952 | ||||||||||||||||
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Share-based compensation | — | — | 647 | — | — | 647 | — | 647 | ||||||||||||||||||||||||
Preferred stock dividends | — | — | (922) | — | — | (922) | — | (922) | ||||||||||||||||||||||||
Issuance of 1,000 shares of common stock on exercises of stock options | — | — | 2 | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Grant of 17,000 shares of restricted stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Vesting of restricted stock units into 3,433 shares of common stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Net loss | — | — | — | — | (8,625) | (8,625) | — | (8,625) | ||||||||||||||||||||||||
Fair value change in derivative, net of related tax effect | — | — | — | (219) | — | (219) | — | (219) | ||||||||||||||||||||||||
Cumulative translation adjustment | — | — | — | (4,296) | — | (4,296) | — | (4,296) | ||||||||||||||||||||||||
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Total comprehensive loss | — | — | — | — | — | (13,140) | — | (13,140) | ||||||||||||||||||||||||
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Balance at March 31, 2020 | $ | 40,100 | $ | 3 | $ | 183,282 | $ | (23,373) | $ | (20,977) | $ | 179,035 | $ | 504 | $ | 179,539 | ||||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Table of Contents
GENERAL FINANCE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except shares)
(Unaudited)
Nine Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
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Net cash provided by operating activities (Note 10) | $ | 27,980 | $ | 53,120 | ||||
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Cash flows from investing activities: | ||||||||
Business acquisitions, net of cash acquired | (17,077) | (2,239) | ||||||
Proceeds from sales of property, plant and equipment | 244 | 416 | ||||||
Purchases of property, plant and equipment | (5,855) | (7,045) | ||||||
Proceeds from sales of lease fleet | 20,635 | 22,556 | ||||||
Purchases of lease fleet | (53,681) | (43,640) | ||||||
Other intangible assets | (105) | (124) | ||||||
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Net cash used in investing activities | (55,839) | (30,076) | ||||||
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Cash flows from financing activities: | ||||||||
Repayments of equipment financing activities, net | (342) | (496) | ||||||
Repayment of Bison Capital Senior Term Note | (63,311) | — | ||||||
Proceeds from (repayments of) senior and other debt borrowings, net | 79,938 | (17,338) | ||||||
Deferred financing costs | (427) | (80) | ||||||
Proceeds from issuances of common stock | 858 | 100 | ||||||
Preferred stock dividends | (2,766) | (2,766) | ||||||
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Net cash provided by (used in) financing activities | 13,950 | (20,580) | ||||||
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Net increase (decrease) in cash | (13,909) | 2,464 | ||||||
Cash and equivalents at beginning of period | 21,617 | 10,359 | ||||||
The effect of foreign currency translation on cash | (894) | (1,080) | ||||||
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Cash and equivalents at end of period | $ | 6,814 | $ | 11,743 | ||||
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Non-cash investing and financing activities:
The Company includednon-cash holdback and other adjustment amounts totaling $1,734 and $263 as part of the consideration for business acquisitions during the nine months ended March 31, 2019 and 2020, respectively (see Note 4).
On September 10, 2018, the Company forced the conversion of the aggregate $26,000 principal balance of the Bison Capital Convertible Note into 3,058,824 shares of GFN common stock (see Note 5).
The accompanying notes are an integral part of these condensed consolidated financial statements.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Business Operations
General Finance Corporation (“GFN”) was incorporated in Delaware in October 2005. References to the “Company” in these Notes are to GFN and its consolidated subsidiaries. These subsidiaries include GFN U.S. Australasia Holdings, Inc., a Delaware corporation (“GFN U.S.”); GFN Insurance Corporation, an Arizona corporation (“GFNI”); GFN North America Leasing Corporation, a Delaware corporation (“GFNNA Leasing”); GFN North America Corp., a Delaware corporation (“GFNNA”); GFN Realty Company, LLC, a Delaware limited liability company (“GFNRC”); GFN Manufacturing Corporation, a Delaware corporation (“GFNMC”), and its subsidiary, Southern Frac, LLC, a Texas limited liability company (collectively “Southern Frac”);Pac-Van, Inc., an Indiana corporation, and its Canadian subsidiary, PV Acquisition Corp., an Alberta corporation (collectively“Pac-Van”); and Lone Star Tank Rental Inc., a Delaware corporation (“Lone Star”); GFN Asia Pacific Holdings Pty Ltd, an Australian corporation (“GFNAPH”), and its subsidiaries, Royal Wolf Holdings Pty Ltd, an Australian corporation, which was dissolved in June 2019 (“RWH”), Royal Wolf Trading Australia Pty Limited, an Australian corporation, and Royalwolf Trading New Zealand Limited, a New Zealand Corporation (collectively, “Royal Wolf”).
The Company does business in three distinct, but related industries, mobile storage, modular space and liquid containment (which are collectively referred to as the “portable services industry”), in two geographic areas; the Asia-Pacific (orPan-Pacific) area, consisting of Royal Wolf (which leases and sells storage containers, portable container buildings and freight containers in Australia and New Zealand) and North America, consisting ofPac-Van (which leases and sells storage, office and portable liquid storage tank containers, modular buildings and mobile offices) and Lone Star (which leases portable liquid storage tank containers and containment products, as well as provides certain fluid management services, to the oil and gas industry in the Permian and Eagle Ford basins of Texas), which are combined to form our North American leasing operations, and Southern Frac (which manufactures portable liquid storage tank containers and other steel-related products).
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) applicable to interim financial information and the instructions to Form10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements, although the Condensed Consolidated Balance Sheet at June 30, 2019 was derived from the audited Consolidated Balance Sheet at that date. In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The accompanying results of operations are not necessarily indicative of the operating results that may be expected for the entire fiscal year ending June 30, 2020, particularly in light of the novel strain of coronavirus(COVID-19) that was reported to have surfaced in Wuhan, China and has spread to a number of other countries, including the United States, Canada, Australia and New Zealand. In March 2020, the World Health Organization characterizedCOVID-19 as a pandemic. The Company believes its business is essential, which allows it to continue to serve customers that remain operational. However, if the Company is required to close a certain number of its locations or a number of its employees cannot work because of illness or otherwise, its business could be materially adversely affected in a rapid manner. Similarly, if customers experience adverse business consequences due to theCOVID-19 pandemic, including being required to shut down their operations, demand for the Company’s services and products could also be materially adversely affected in a rapid manner. The impact of theCOVID-19 pandemic is fluid, continues to evolve and, therefore, at this time it cannot be reasonably predicted to what extent the Company’s consolidated results of operations and financial condition will ultimately be impacted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto of the Company, which are included in the Company’s Annual Report on Form10-K for the fiscal year ended June 30, 2019 filed with the Securities and Exchange Commission (“SEC”).
Unless otherwise indicated, references to “FY 2019” and “FY 2020” are to the nine months ended March 31, 2019 and 2020, respectively. Certain amounts have been reclassified or revised to conform with the current year presentation. The most significant are the rates disclosed at June 30, 2019 in the table for the open interest rate swap contract in Note 6.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes include assumptions used in assigning value to identifiable intangible assets at the acquisition date, the assessment for impairment of goodwill, the assessment for impairment of other intangible assets, the allowance for doubtful accounts, share-based compensation expense, residual value of the lease fleet, derivative liability valuation and deferred tax assets and liabilities. Assumptions and factors used in the estimates are evaluated on an annual basis or whenever events or changes in circumstances indicate that the previous assumptions and factors have changed. The results of the analysis could result in adjustments to estimates. The Company considered the impact ofCOVID-19 on the estimates and assumptions used and determined that there was not a material adverse effect on the Company’s FY 2020 consolidated results of operations and consolidated financial position as of March 31, 2020.
Inventories
Inventories are comprised of the following (in thousands):
June 30, | March 31, | |||||||
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2019 | 2020 | |||||||
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Finished goods | $ | 25,576 | $ | 21,511 | ||||
Work in progress | 1,275 | 1,686 | ||||||
Raw materials | 2,226 | 2,312 | ||||||
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$ | 29,077 | $ | 25,509 | |||||
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Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
Estimated Useful Life | June 30, | March 31, | ||||||||||
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2019 | 2020 | |||||||||||
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Land | — | $ | 2,168 | $ | 2,168 | |||||||
Building and improvements | 10 — 40 years | 4,893 | 4,893 | |||||||||
Transportation and plant equipment (including finance lease assets) | 3 — 20 years | 47,433 | 48,592 | |||||||||
Furniture, fixtures and office equipment | 3 — 10 years | 13,786 | 14,312 | |||||||||
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68,280 | 69,965 | |||||||||||
Less accumulated depreciation and amortization | (45,385) | (45,464) | ||||||||||
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$ | 22,895 | $ | 24,501 | |||||||||
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Depreciation expense on property, plant and equipment totaled $1,609,000 and $4,936,000 for the quarter ended March 31, 2020 and FY 2020, respectively; and $1,999,000 and $5,734,000 for the quarter ended March 31, 2019 and FY 2019, respectively.
Lease Fleet
The Company has a fleet of storage, portable building, office and portable liquid storage tank containers, mobile offices, modular buildings and steps that it primarily leases to customers under operating lease agreements with varying terms. Units in the lease fleet are also available for sale. The cost of sales of a unit in the lease fleet is recognized at the carrying amount at the date of sale. At June 30, 2019 and March 31, 2020, the gross costs of the lease fleet were $598,757,000 and $596,565,000, respectively. Depreciation expense on lease fleet totaled $6,185,000 and $19,151,000 for the quarter ended March 31, 2020 and FY 2020, respectively; and $7,677,000 and $22,528,000 for the quarter ended March 31, 2019 and FY 2019, respectively.
Goodwill and Other Intangible Assets
The purchase consideration of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair values on the respective acquisition dates (see Note 4). Based on these values, the excess purchase consideration over the fair value of the net assets acquired was allocated to goodwill. The Company accounts for goodwill in accordance with FASB ASC Topic 350,Intangibles — Goodwill and Other.FASB ASC
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite lives and requires these assets be reviewed for impairment. The Company operates two reportable geographic areas and the vast majority of goodwill recorded was in the acquisitions of Royal Wolf,Pac-Van, Southern Frac and Lone Star.
The Company assesses the potential impairment of goodwill on an annual basis or if a determination is made based on a qualitative assessment that it is more likely than not (i.e., greater than 50%) that the fair value of the reporting unit is less than its carrying amount. The Company’s annual impairment assessment at June 30, 2019 concluded that the fair value of the goodwill of each of its reporting units was greater than their respective carrying amounts.
At March 31, 2020, the Company determined that qualitative factors in its North American leasing operations pertaining to conditions in the oil and gas market required a quantitative impairment analysis for Lone Star. This impairment analysis indicated that the implied value of goodwill at Lone Star was still greater than its carrying value.
Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions. The North American oil and gas market has been, and the Company expects it to continue to be, highly cyclical, generally fluctuating in correlation with the price of West Texas Intermediate Crude (“WTI”). The recent decrease in demand caused by theCOVID-19 pandemic, the political tensions between several large oil producing countries and a lack of storage space for refined oil has resulted in a substantial decline in WTI prices and drilling activity. Specifically impacting the Company is a reduction in drilling activity of oil wells located in the Permian and Eagle Ford shales basins, the two primary basins in which it operates. Should WTI prices and drilling activity in the Permian and Eagle Ford shales basins remain depressed for an extended period of time, an impairment is possible as it would have a negative effect on the long-term financial model used by the Company in analyzing potential impairment. The Company believes that this downturn in the oil and gas market is temporary, reflecting the cyclical nature of the industry, and that WTI prices and drilling activity will recover to normalized levels over the next twelve months. However, the Company intends to continue to monitor its North American goodwill for impairment in response to events or changes in circumstances.
Other intangible assets include those with indefinite lives (trademark and trade name) and finite lives (primarily customer base and lists,non-compete agreements and deferred financing costs), as follows (in thousands):
June 30, 2019 | March 31, 2020 | |||||||||||||||||||||||
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Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
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Trademark and trade name | $ | 5,486 | $ | (453 | ) | $ | 5,033 | $ | 5,482 | $ | (453 | ) | $ | 5,029 | ||||||||||
Customer base and lists | 31,069 | (17,174 | ) | 13,895 | 31,638 | (18,905 | ) | 12,733 | ||||||||||||||||
Non-compete agreements | 8,782 | (8,031 | ) | 751 | 8,616 | (8,130 | ) | 486 | ||||||||||||||||
Deferred financing costs | 3,563 | (2,290 | ) | 1,273 | 3,643 | (2,642 | ) | 1,001 | ||||||||||||||||
Other | 4,328 | (3,471 | ) | 857 | 2,492 | (2,075 | ) | 417 | ||||||||||||||||
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$ | 53,228 | $ | (31,419 | ) | $ | 21,809 | $ | 51,871 | $ | (32,205 | ) | $ | 19,666 | |||||||||||
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Amortization expense related to amortizable intangible assets, other than deferred financing costs, totaled $918,000 and $2,843,000 for the quarter ended March 31, 2020 and FY 2020, respectively; and $1,322,000 and $3,994,000 for the quarter ended March 31, 2019 and FY 2019, respectively. Amortization expense, which is included in interest expense, related to deferred financing costs recorded as amortizable intangible assets totaled $120,000 and $353,000 for the quarter ended March 31, 2020 and FY 2020, respectively; and $116,000 and $442,000 for the quarter ended March 31, 2019 and FY 2019, respectively.
Net Income per Common Share
Basic net income per common share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the periods. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, vested or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The potential dilutive securities (common stock equivalents) the Company had outstanding related to stock options,non-vested equity shares, restricted stock units and convertible debt. The following is a reconciliation of weighted average shares outstanding used in calculating earnings per common share:
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2019 | 2020 | 2019 | 2020 | |||||||||||||
Basic | 29,975,295 | 30,294,868 | 29,084,947 | 30,250,904 | ||||||||||||
Dilutive effect of common stock equivalents | — | — | — | 1,201,973 | ||||||||||||
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Diluted | 29,975,295 | 30,294,868 | 29,084,947 | 31,452,877 | ||||||||||||
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Potential common stock equivalents totaling 2,167,371 for both the quarter ended March 31, 2019 and FY 2019, 2,049,340 and 847,367 for the quarter ended March 31, 2020 and FY 2020, respectively, have been excluded from the computation of diluted earnings per share because the effect is anti-dilutive.
Revenue from Contracts with Customers
The Company leases and sells new and used storage, office, building and portable liquid storage tank containers, modular buildings and mobile offices to its customers, as well as provides other ancillary products and services. The Company recognizes revenue in accordance with two accounting standards. The rental revenue portions of the Company’s revenues that arise from lease arrangements are accounted for in accordance with Topic 842,Leases. Revenues determined to benon-lease related, including sales of lease inventories and fleet, sales of manufactured units and rental-related services, are accounted for in accordance with ASUNo. 2014-09,Revenue from Contracts with Customers(Topic 606), which was adopted by the Company under the modified retrospective method at July 1, 2018. The adoption did not have a material impact on the Company’s consolidated financial statements, nor was there a significant cumulative effect of initially applying the new standard.
Our portable storage and modular space rental customers are generally billed in advance for services, which generally includes fleet pickup. Liquid containment rental customers are typically billed in arrears monthly and sales transactions are generally billed upon transfer of the sold items. Payments from customers are generally due upon receipt or30-day payment terms. Specific customers have extended terms for payment, but no terms are greater than one year from the invoice date.
Leasing Revenue
Typical rental contracts include the direct rental of fleet, which is accounted for under Topic 842. Rental-related services include fleet delivery and fleet pickup, as well as other ancillary services, which are primarily accounted for under Topic 606. The total amounts of rental-related services related to Topic 606 recognized during the quarter ended March 31, 2019 and FY 2019 and the quarter ended March 31, 2020 and FY 2020 were $13,855,000 and $41,560,000 and $14,054,000 and $41,806,000, respectively. A small portion of the rental-related services, include subleasing, special events leases and other miscellaneous streams, are accounted for under Topic 842. For contracts that have multiple performance obligations, revenue is allocated to each performance obligation in the contract based on the Company’s best estimate of the standalone selling prices of each distinct performance obligation. The standalone selling price is determined using methods and assumptions developed consistently across similar customers and markets generally applying an expected cost plus an estimated margin to each performance obligation. The Company did not elect the practical expedient for lessor accounting.
Rental contracts are based on a monthly rate for our portable storage and modular space fleet and a daily rate for our liquid containment fleet. Rental revenue is recognized ratably over the rental period. The rental continues until the end of the initial term of the lease or when cancelled by the customer or the Company. If equipment is returned prior to the end of the contractual lease period, customers are typically billed a cancellation fee, which is recorded as rental revenue upon the return of the equipment. Customers may utilize our equipment transportation services and otheron-site services in conjunction with the rental of equipment, but are not required to do so. Given the short duration of these services, equipment transportation services and otheron-site services revenue of a rented unit is recognized in leasing revenue upon completion of the service.
Non-Lease Revenue
Non-lease revenues consist primarily of the sale of new and used units, and to a lesser extent, sales of manufactured units are all accounted for under Topic 606. Sales contracts generally have a single performance obligation that is satisfied at the time of delivery, which is the point in time control over the unit transfers and the Company is entitled to consideration due under the contract with its customer.
Contract Costs and Liabilities
The Company incurs commission costs to obtain rental contracts and for sales of new and used units. We expect the period benefitted by each commission to be less than one year. Therefore, we have applied the practical expedient for incremental costs of obtaining a contract and expense commissions as incurred.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
When customers are billed in advance for rentals, end of lease services, and deposit payments, we defer revenue and reflect unearned rental revenue at the end of the period. As of June 30, 2019 and March 31, 2020, we had approximately $22,671,000 and $24,358,000, respectively, of unearned rental revenue included in unearned revenue and advance payments in the accompanying consolidated balance sheets. Revenues of $1,348,000 and $14,207,000, which were included in the unearned rental revenue balance at June 30, 2019, were recognized during the quarter ended March 31, 2020 and FY 2020, respectively. The Company’s uncompleted contracts with customers have unsatisfied (or partially satisfied) performance obligations. For the future service revenues that are expected to be recognized within twelve months, the Company has elected to utilize the optional disclosure exemption made available regarding transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations. The transaction price for performance obligations that will be completed in greater than twelve months is generally variable based on the costs ultimately incurred to provide those services and therefore we are applying the optional exemption to omit disclosure of such amounts.
Sales taxes charged to customers are excluded from revenues and expenses.
Sales of new modular buildings not manufactured by the Company are typically covered by warranties provided by the manufacturer of the products sold. Certain sales of manufactured units are covered by assurance-type warranties and as of June 30, 2019 and March 31, 2020, the Company had $219,331 and $189,111, respectively, of warranty reserve included in trade payables and accrued liabilities in the accompanying consolidated balance sheets.
Disaggregated Rental Revenue
In the following tables, total revenue is disaggregated by revenue type for the periods indicated. The tables also include a reconciliation of the disaggregated rental revenue to the Company’s reportable segments (in thousands).
Quarter Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
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North America | ||||||||||||||||||||||||||||||||
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Leasing | ||||||||||||||||||||||||||||||||
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Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Non-lease: | ||||||||||||||||||||||||||||||||
Sales lease inventories and fleet | $ | 15,155 | $ | - | $ | 15,155 | $ | - | $ | - | $ | 15,155 | $ | 14,547 | $ | 29,702 | ||||||||||||||||
Sales manufactured units | - | - | - | 3,505 | (981 | ) | 2,524 | - | 2,524 | |||||||||||||||||||||||
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Totalnon-lease revenues | 15,155 | - | 15,155 | 3,505 | (981 | ) | 17,679 | 14,547 | 32,226 | |||||||||||||||||||||||
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Leasing: | ||||||||||||||||||||||||||||||||
Rental revenue | 23,981 | 3,804 | 27,785 | - | (103 | ) | 27,682 | 11,971 | 39,653 | |||||||||||||||||||||||
Rental-related services | 9,916 | 4,293 | 14,209 | - | - | 14,209 | 3,882 | 18,091 | ||||||||||||||||||||||||
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Total leasing revenues | 33,897 | 8,097 | 41,994 | - | (103 | ) | 41,891 | 15,853 | 57,744 | |||||||||||||||||||||||
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Total revenues | $ | 49,052 | $ | 8,097 | $ | 57,149 | $ | 3,505 | $ | (1,084) | $ | 59,570 | $ | 30,400 | $ | 89,970 | ||||||||||||||||
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Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
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North America | ||||||||||||||||||||||||||||||||
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Leasing | ||||||||||||||||||||||||||||||||
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Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Non-lease: | ||||||||||||||||||||||||||||||||
Sales lease inventories and fleet | $ | 48,649 | $ | 35 | $ | 48,684 | $ | - | $ | - | $ | 48,684 | $ | 39,550 | $ | 88,234 | ||||||||||||||||
Sales manufactured units | - | - | - | 10,079 | (3,799 | ) | 6,280 | - | 6,280 | |||||||||||||||||||||||
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Totalnon-lease revenues | 48,649 | 35 | 48,684 | 10,079 | (3,799 | ) | 54,964 | 39,550 | 94,514 | |||||||||||||||||||||||
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Leasing: | ||||||||||||||||||||||||||||||||
Rental revenue | 75,765 | 11,681 | 87,446 | - | (524 | ) | 86,922 | 36,139 | 123,061 | |||||||||||||||||||||||
Rental-related services | 31,183 | 11,425 | 42,608 | - | - | 42,608 | 11,793 | 54,401 | ||||||||||||||||||||||||
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Total leasing revenues | 106,948 | 23,106 | 130,054 | - | (524 | ) | 129,530 | 47,932 | 177,462 | |||||||||||||||||||||||
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Total revenues | $ | 155,597 | $ | 23,141 | $ | 178,738 | $ | 10,079 | $ | (4,323 | ) | $ | 184,494 | $ | 87,482 | $ | 271,976 | |||||||||||||||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Quarter Ended March 31, 2019 | ||||||||||||||||||||||||||||||||
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Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Non-lease: | ||||||||||||||||||||||||||||||||
Sales lease inventories and fleet | $ | 14,386 | $ | - | $ | 14,386 | $ | - | $ | - | $ | 14,386 | $ | 10,818 | $ | 25,204 | ||||||||||||||||
Sales manufactured units | - | - | - | 2,736 | (1,304 | ) | 1,432 | - | 1,432 | |||||||||||||||||||||||
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Totalnon-lease revenues | 14,386 | - | 14,386 | 2,736 | (1,304 | ) | 15,818 | 10,818 | 26,636 | |||||||||||||||||||||||
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Leasing: | ||||||||||||||||||||||||||||||||
Rental revenue | 22,519 | 5,906 | 28,425 | - | (424 | ) | 28,001 | 12,872 | 40,873 | |||||||||||||||||||||||
Rental-related services | 9,289 | 5,508 | 14,797 | - | - | 14,797 | 3,903 | 18,700 | ||||||||||||||||||||||||
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Total leasing revenues | 31,808 | 11,414 | 43,222 | - | (424 | ) | 42,798 | 16,775 | 59,573 | |||||||||||||||||||||||
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Total revenues | $ | 46,194 | $ | 11,414 | $ | 57,608 | $ | 2,736 | $ | (1,728) | $ | 58,616 | $ | 27,593 | $ | 86,209 | ||||||||||||||||
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Nine Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||
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Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Non-lease: | ||||||||||||||||||||||||||||||||
Sales lease inventories and fleet | $ | 53,949 | $ | - | $ | 53,949 | $ | - | $ | - | $ | 53,949 | $ | 38,704 | $ | 92,653 | ||||||||||||||||
Sales manufactured units | - | - | - | 10,670 | (2,729 | ) | 7,941 | - | 7,941 | |||||||||||||||||||||||
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Totalnon-lease revenues | 53,949 | - | 53,949 | 10,670 | (2,729 | ) | 61,890 | 38,704 | 100,594 | |||||||||||||||||||||||
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Leasing: | ||||||||||||||||||||||||||||||||
Rental revenue | 68,483 | 20,029 | 88,512 | - | (1,515 | ) | 86,997 | 37,958 | 124,955 | |||||||||||||||||||||||
Rental-related services | 27,980 | 17,301 | 45,281 | - | - | 45,281 | 11,164 | 56,445 | ||||||||||||||||||||||||
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Total leasing revenues | 96,463 | 37,330 | 133,793 | - | (1,515 | ) | 132,278 | 49,122 | 181,400 | |||||||||||||||||||||||
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Total revenues | $ | 150,412 | $ | 37,330 | $ | 187,742 | $ | 10,670 | $ | (4,244 | ) | $ | 194,168 | $ | 87,826 | $ | 281,994 | |||||||||||||||
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Implemented Accounting Pronouncement – Lease Accounting
In February 2016, the FASB issued new lease accounting guidance in ASUNo. 2016-02,Leases (Topic 842). This new standard was initiated as a joint project with the International Accounting Standards Board to simplify lease accounting and improve the quality of and comparability of financial information for users. This accounting standard, as updated, eliminated the concept ofoff-balance sheet treatment for “operating leases” for lessees for the vast majority of lease contracts. Under ASUNo. 2016-02, at inception, a lessee must classify all leases with a term of over one year as either finance or operating, with both classifications resulting in the recognition of a defined“right-of-use” asset and a lease liability on the balance sheet. However, recognition in the income statement will differ depending on the lease classification, with finance leases recognizing the amortization of theright-of-use asset separate from the interest on the lease liability and operating leases recognizing a single total lease expense. Lessor accounting under ASUNo. 2016-02 is substantially unchanged from the previous lease requirements under U.S. GAAP.
The Company adopted ASU No. 2016-02 effective July 1, 2019, utilizing a modified retrospective transition approach and using the effective date as the date of initial application. As a result, financial information was not updated and the disclosures required under the new accounting standard was not provided for dates and periods before July 1, 2019. The accounting standard included optional transitional practical expedients intended to simplify its adoption and the Company adopted the package of practical expedients, which allowed it to retain the historical lease classification determined under legacy U.S. GAAP, as well as relief from reviewing expired or existing contracts to determine if they contain leases. As of July 1, 2019, the right of use assets (operating lease assets) related to operating leases recorded on the Company’s consolidated balance sheet was $70,797,000 and the related liabilities (operating lease liabilities) was $71,298,000. The difference between the right of use assets and related lease liabilities is predominantly deferred rent. The adoption of this accounting standard did not materially impact the Company’s consolidated statements of operations or cash flows.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Operating Lease Assets and Liabilities
We lease our corporate office, certain administrative offices, and certain branch locations through the United States, Canada, and Asia-Pacific. Additionally, we lease equipment to support our operations, including vehicles and office equipment. For operating leases with an initial term greater than twelve months, the Company recognizes a lease asset and liability at commencement date. The Company follows the short-term lease exception as an accounting policy; therefore, leases with an original term of 12 months or less are not recognized on the balance sheet. Lease assets are initially measured at cost, which includes the initial amount of the lease liability, plus any initial direct costs incurred, less lease incentives received. The liability is initially and subsequently measured as the present value of the unpaid lease payments. The Company uses estimates and judgments in the determination of our lease liabilities. Key estimates and judgments include the following:
Lease Discount Rate – The Company is required to discount unpaid fixed lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate, which would typically be the senior lending borrowing rate at the respective geographic venue of the operating lease.
Lease Term – The Company includes thenon-cancellable period of the lease, plus any additional periods covered by an extension of the lease that are reasonably certain to be exercised. The Company expects to exercise options to extend many operating leases after considering the relevant economic factors.
Fixed Payments – Lease payments included in the measurement of the lease liability include fixed payments owed over the lease term, termination penalties if it is expected that a termination option will be exercised, the price to purchase the underlying asset if it is reasonably certain that the purchase option will be exercised and residual value guarantees, if applicable.
Future payments of operating lease liabilities at March 31, 2020 are as follows (in thousands):
Year Ending March 31, | ||||
2021 | $ | 11,371 | ||
2022 | 9,878 | |||
2022 | 8,959 | |||
2024 | 7,533 | |||
2025 | 6,533 | |||
Thereafter | 53,804 | |||
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Total commitments | 98,078 | |||
Less – interest | (33,683) | |||
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$ | 64,395 | |||
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Non-cancellable operating lease rentals at June 30, 2019 are payable as follows (in thousands):
Year Ending June 30, | ||||
2020 | $ | 11,655 | ||
2021 | 9,198 | |||
2022 | 6,585 | |||
2023 | 4,992 | |||
2024 | 3,103 | |||
Thereafter | 9,091 | |||
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$ | 44,624 | |||
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Lease Expense and Activity
Payments due under lease contracts include fixed payments plus, if applicable, variable payments. Fixed payments under leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent. Variable expenses associated with leases are recognized when they are incurred. For real estate leases, variable payments include such items as allocable property taxes, local sales and business taxes, and common area maintenance charges. Variable payments associated with equipment leases include such items as maintenance services provided by the lessor and local sales and business taxes. The Company has elected the accounting policy to not separate lease components andnon-lease components. All expenses for operating leases are recognized within the costs and expenses in determining operating income.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Operating lease activity during the periods was as follows (in thousands):
Quarter Ended | Nine Months Ended | |||||||
March 31, 2020 | ||||||||
Expense: | ||||||||
Short-term lease expense | $ | 957 | $ | 2,780 | ||||
Fixed lease expense | 3,296 | 9,786 | ||||||
Variable lease expense | 313 | 1,043 | ||||||
Sublease income | (1,120) | (3,569) | ||||||
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$ | 3,446 | $ | 10,040 | |||||
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Cash paid and new or modified operating lease information: | ||||||||
Operating cash flows from operating leases | $ | 2,973 | $ | 8,933 | ||||
Net operating lease assets obtained in exchange for new or modified operating lease liabilities | 499 | 4,208 | ||||||
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The weighted-average remaining lease term and weighted average discount rate for operating leases at March 31, 2020 was 12.4 years and 6.2%, respectively. Rental expense onnon-cancellable operating leases during the quarter ended March 31, 2019 and FY 2019 was $3,461,000 and $10,062,000, respectively.
Note 3. Equity Transactions
Preferred Stock
Upon issuance of shares of preferred stock, the Company records the liquidation value as the preferred equity in the consolidated balance sheet, with any underwriting discount and issuance or offering costs recorded as a reduction in additionalpaid-in capital.
Series B Preferred Stock
The Company has outstanding privately-placed 8.00% Series B Cumulative Preferred Stock, par value of $0.0001 per share and liquidation value of $1,000 per share (“Series B Preferred Stock”). The Series B Preferred Stock is offered primarily in connection with business combinations. At June 30, 2019 and March 31, 2020, the Company had outstanding 100 shares of Series B Preferred Stock with an aggregate liquidation preference totaling $102,000. The Series B Preferred Stock is not convertible into GFN common stock, has no voting rights, except as required by Delaware law, and is redeemable after February 1, 2014; at which time it may be redeemed at any time, in whole or in part, at the Company’s option. Holders of the Series B Preferred Stock are entitled to receive, when declared by the Company’s Board of Directors, annual dividends payable quarterly in arrears on the 31st day of January, July and October and on the 30th day of April of each year. In the event of any liquidation or winding up of the Company, the holders of the Series B Preferred Stock will have preference to holders of common stock.
Series C Preferred Stock
The Company has outstanding publicly-traded 9.00% Series C Cumulative Redeemable Perpetual Preferred Stock, liquidation preference $100.00 per share (the “Series C Preferred Stock”). At June 30, 2019 and March 31, 2020, the Company had outstanding 400,000 shares of Series C Preferred Stock with an aggregate liquidation preference totaling $40,620,000 and $40,610,000, respectively. Dividends on the Series C Preferred Stock are cumulative from the date of original issue and will be payable on the 31st day of each January, July and October and on the 30thday of April when, as and if declared by the Company’s Board of Directors. Commencing on May 17, 2018, the Company may redeem, at its option, the Series C Preferred Stock, in whole or in part, at a cash redemption price of $100.00 per share, plus any accrued and unpaid dividends to, but not including, the redemption date. Among other things, the Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or other mandatory redemption, and is not convertible into or exchangeable for any of the Company’s other securities. Holders of the Series C Preferred Stock generally will have no voting rights, except for limited voting rights if dividends payable on the outstanding Series C Preferred Stock are in arrears for six or more consecutive ornon-consecutive quarters, and under certain other circumstances. If the Company fails to maintain the listing of the Series C Preferred Stock on the NASDAQ Stock Market (“NASDAQ”) for 30 days or more, the per annum dividend rate will increase by an additional 2.00% per $100.00 stated
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
liquidation value ($2.00 per annum per share) so long as the listing failure continues. In addition, in the event of any liquidation or winding up of the Company, the holders of the Series C Preferred Stock will have preference to holders of common stock and are pari passu with the Series B Preferred Stock. The Series C Preferred Stock is listed on NASDAQ under the symbol “GFNCP.”
Dividends
As of March 31, 2020, since issuance, dividends paid or payable totaled $107,000 for the Series B Preferred Stock and dividends paid totaled $24,500,000 for the Series C Preferred Stock. The characterization of dividends to the recipients for Federal income tax purposes is made based upon the earnings and profits of the Company, as defined by the Internal Revenue Code.
Note 4. Acquisitions
The Company can enhance its business and market share by entering into new markets in various ways, including starting up a new location or acquiring a business consisting of container, modular unit or mobile office assets of another entity. An acquisition generally provides the Company with operations that enables it to at least cover existing overhead costs and is preferable to astart-up or greenfield location. The accompanying consolidated financial statements include the operations of acquired businesses from the dates of acquisition.
FY 2020 Acquisition
On February 28, 2020, the Company, throughPac-Van, purchased the storage container and storage trailer business ofMar-Rube Trailer Rental(“Mar-Rube”) for approximately $2,502,000, which included a general indemnity and other adjustment amounts of $263,000.Mar-Rube is located in Baltimore, Maryland. The preliminary allocation to tangible and intangible assets acquired and liabilities assumed based on their estimated fair market values was as follows (in thousands):
Mar-Rube February 28, 2020 | ||||
Fair value of the net tangible assets acquired and liabilities assumed: | ||||
Inventories | $ | 145 | ||
Property, plant and equipment | 43 | |||
Lease fleet | 753 | |||
Unearned revenue and advance payments | (96) | |||
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Total net tangible assets acquired and liabilities assumed | 845 | |||
Fair value of intangible assets acquired: | ||||
Non-compete agreement | 23 | |||
Customer lists/relationships | 977 | |||
Goodwill | 657 | |||
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Total intangible assets acquired | 1,657 | |||
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Total purchase consideration | $ | 2,502 | ||
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The FY 2020 operating results prior to and since the respective date of acquisition were not considered significant.
Goodwill recognized is attributable primarily to expected corporate synergies, the assembled workforce and other factors. The goodwill recognized in theMar-Rube acquisition is deductible for U.S. income tax purposes
The Company incurred approximately $162,000 and $285,000 during the quarter ended March 31, 2019 and FY 2019, respectively; and $47,000 and $559,000 during the quarter ended March 31, 2020 and FY 2020, respectively, of incremental transaction costs associated with acquisition-related activity that were expensed as incurred and are included in selling and general expenses in the accompanying consolidated statements of operations.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5. Senior and Other Debt
Asia-Pacific Leasing Senior Credit Facility
The Company’s operations in the Asia-Pacific area had an AUS$150,000,000 secured senior credit facility, as amended, under a common terms deed arrangement with the Australia and New Zealand Banking Group Limited (“ANZ”) and Commonwealth Bank of Australia (“CBA”) (the “ANZ/CBA Credit Facility”). On October 26, 2017, RWH (subsequently replaced by GFNAPH) and its subsidiaries and a syndicate led by Deutsche Bank AG, Sydney Branch (“Deutsche Bank”) entered into a Syndicated Facility Agreement (the “Syndicated Facility Agreement”). Pursuant to the Syndicated Facility Agreement, the parties entered into a senior secured credit facility and repaid the ANZ/CBA Credit Facility on November 3, 2017. The senior secured credit facility, as amended (the “Deutsche Bank Credit Facility”), consists of a $26,412,000 (AUS$43,000,000) Facility A that will amortize semi-annually; a $71,559,000 (AUS$116,500,000) Facility B that has no scheduled amortization; a $12,285,000 (AUS$20,000,000) revolving Facility C that is used for working capital, capital expenditures and general corporate purposes; and a $23,034,000 (AUS$37,500,000) revolving Term Loan Facility D. Borrowings bear interest at the three-month bank bill swap interest rate in Australia (“BBSY”), plus a margin of 4.25% to 5.50% per annum, as determined by net leverage, as defined. In addition, financing fees totaling $1,763,700 (AUS$2,871,400) are payable quarterly in advance through maturity. The Deutsche Bank Credit Facility is secured by substantially all of the assets of Royal Wolf and by the pledge of all the capital stock of GFNAPH and its subsidiaries and matures on November 2, 2023. However, an exit fee of $645,900 (AUS$1,051,600) is due on November 3, 2020 from the original November 3, 2017 financing. Prepayment penalties equal to 3.0% and 1.0% of any amount prepaid under the Deutsche Bank Credit Facility will expire on March 22, 2020 and 2021, with no prepayment penalty due after March 22, 2021.
The Deutsche Bank Credit Facility is subject to certain financial and other customary covenants, including, among other things, compliance with specified net leverage and debt requirement or fixed charge ratios based on earnings before interest, income taxes, impairment, depreciation and amortization and othernon-operating costs and income (“EBITDA”), as defined. The Deutsche Bank Credit Facility Agreement also requires Royal Wolf to prepay amounts borrowed by a percentage of excess cash flow, as defined, as of the end of each fiscal year, depending on the net leverage ratio as of such date.
At March 31, 2020, borrowings under the Deutsche Bank Credit Facility totaled $113,944,000 (AUS$185,504,000), net of deferred financing costs of $426,000 (AUS$694,000), and availability, including cash at the bank, totaled $21,502,000 (AUS$35,006,000).
The above amounts were translated based upon the exchange rate of one Australian dollar to 0.614241 U.S. dollar and one New Zealand dollar to 0.597524 U.S. dollar at March 31, 2020.
Bison Capital Notes
General
On September 19, 2017, Bison Capital Equity Partners V, L.P and its affiliates (“Bison Capital”), GFN, GFN U.S., GFNAPH and GFN Asia Pacific Finance Pty Ltd, an Australian corporation (“GFNAPF”), entered into that certain Amended and Restated Securities Purchase Agreement dated September 19, 2017 (the “Amended Securities Purchase Agreement”). On September 25, 2017, pursuant to the Amended Securities Purchase Agreement, GFNAPH and GFNAPF issued and sold to Bison an 11.9% secured senior convertible promissory note dated September 25, 2017 in the original principal amount of $26,000,000 (the “Convertible Note”) and an 11.9% secured senior promissory note dated September 25, 2017 in the original principal amount of $54,000,000 (the “Senior Term Note” and collectively with the Convertible Note, the “Bison Capital Notes”). Net proceeds from the sale of the Bison Capital Notes were used to repay in full all principal, interest and other amounts due under the term loan to Credit Suisse, to acquire the 49,188,526 publicly-traded shares of RWH not owned by the Company and to pay all related fees and expenses.
The Bison Capital Notes had a maturity of five years and bore interest from the date of issuance, payable quarterly in arrears beginning on January 2, 2018. The Bison Capital Notes may have been prepaid at 102% of the original principal amount, plus accrued interest, after the first anniversary and prior to the second anniversary of issuance, at 101% of the original principal amount, plus accrued interest, after the second anniversary and prior to the third anniversary of issuance and with no prepayment premium after the third anniversary of issuance. The Company may have elected to defer interest under the Bison Capital Notes until the second anniversary of issuance. Interest on the Bison Capital Notes were payable in Australian dollars, but the principal was to be repaid in U.S. dollars. The Bison Capital Notes were secured by a first priority security interest over all of the assets of GFN U.S., GFNAPH and GFNAPF, by the pledge by GFN U.S. of the capital stock of GFNAPH and GFNAPF and by of all of the capital stock of RWH. The Bison Capital Notes were subject to all terms, conditions and covenants set forth in the Amended Securities Purchase Agreement. The
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Amended Securities Purchase Agreement contained certain financial and other customary and restrictive covenants, including, among other things, a minimum EBITDA requirement to equal or exceed AUS$30,000,000 per trailing12-month period. In addition, the Bison Capital Notes must have been repaid upon a change of control, as defined. GFNAPF was dissolved in September 2018.
On March 25, 2019, the Senior Term Note was repaid in full by proceeds totaling $63,311,000 (AUS$89,804,000) borrowed under the Deutsche Bank Credit Facility, which included interest the Company elected to defer and a prepayment fee of two percent.
Convertible Note
At any time prior to maturity, Bison Capital may have converted unpaid principal and interest under the Convertible Note into shares of GFN common stock based upon a price of $8.50 per share (3,058,824 shares based on the original $26,000,000 principal amount), subject to adjustment as described in the Convertible Note. If GFN common stock trades above 150% of the conversion price over 30 consecutive trading days and the aggregate dollar value of all GFN common stock traded on NASDAQ exceeds $600,000 over the last 20 consecutive days of the same30-day period, GFN may force Bison Capital to convert all or a portion of the Convertible Note. Such a conversion threshold occurred on September 5, 2018, and on September 6, 2018 the Company elected to force the conversion and delivered a notice to the holders requiring the conversion of the Convertible Note into 3,058,824 shares of the Company’s common stock effective September 10, 2018. The Convertible Note included a provision which required GFNAPH to pay Bison Capital, via the payment of principal, interest and the realized value of GFN common stock received after conversion of the Convertible Note, a minimum return of 1.75 times the original principal amount.Although the conversion feature of this minimum return provision was included in the conversion rights derivative discussed below, as a result of the forced conversion, this embedded derivative with a fair value of $8,918,000 at September 10, 2018 remains bifurcated and separately accounted for on a standalone basis. The Company determined the fair value using a valuation model and market prices and will reassess its value at each reporting period, with any changes in value reported in the accompanying consolidated statements of operations. At March 31, 2020, the fair value of this bifurcated derivative was $26,147,000. In the event that Bison Capital or holders of the Convertible Note receive aggregate proceeds in excess of $48,900,000 from the sale of GFN common stock received after the conversion of the Convertible Note, then 50% of the interest actually paid to Bison Capital (such amount, the “Price Increase”) shall be repaid by Bison Capital or holders of the Convertible Note by either (i) paying such Price Increase to GFNAPH in the form of cash, (ii) returning to GFN shares of GFN Common Stock with a value equal to the Price Increase or (iii) any combination of (i) or (ii) above that if the aggregate equals the Price Increase. The value of the GFN common stock for purposes of the return of shares to GFN shall be deemed to be the average price per share of GFN common stock realized by the Convertible Note holder in the sale of such shares. The Convertible Note holders may satisfy such obligations by returning to GFN shares of GFN common stock with an aggregate value equivalent to the Price Increase.
The Company evaluated the Convertible Note at its issuance and determined that certain conversion rights were an embedded derivative that required bifurcation because they were not deemed to be clearly and closely related to the Convertible Note, met the definition of a derivative and none of the exceptions applied. As a result, the Company separately accounted for these conversion rights as a standalone derivative. As of the date of issuance on September 25, 2017, the fair value of this bifurcated derivative was determined to be $1,864,000, resulting in a principal balance of $24,136,000 for the Convertible Note. The Company determined the fair value of the bifurcated derivative using a valuation model and market prices and reassessed its fair value at the end of each reporting period, with any changes in value reported in the accompanying consolidated statements of operations. At September 10, 2018, prior to conversion, the fair value of this bifurcated derivative was $29,288,000, of which $20,370,000 was extinguished upon the conversion of the Convertible Note into shares of the Company’s common stock. The value of the shares received was recorded as a benefit to equity of $44,506,000 in FY 2019.
North America Senior Credit Facility
At March 31, 2020, the North America leasing(Pac-Van and Lone Star) and manufacturing operations (Southern Frac) had a combined $285,000,000 senior secured revolving credit facility, as amended, with a syndicate led by Wells Fargo Bank, National Association (“Wells Fargo”) that also includes East West Bank, CIT Bank, N.A., the CIBC Bank USA, KeyBank, National Association, Bank Hapoalim, B.M., Associated Bank and Bank of the West (the “Wells Fargo Credit Facility”). In addition, the Wells Fargo Credit Facility provides an accordion feature that may be exercised by the syndicate, subject to the terms in the credit agreement, to increase the maximum amount that may be borrowed by an additional $25,000,000. The Wells Fargo Credit Facility matures on March 24, 2022, assuming the Company’s publicly-traded senior notes due July 31, 2021(see below) are extended at least 90 days past this scheduled maturity date; otherwise the Wells Fargo Credit Facility would mature on March 24, 2021. There was also a separate loan agreement with Great American Capital Partners (“GACP”), where GACP provided aFirst-In,Last-Out Term Loan (“FILO Term Loan”) within the Wells Fargo Credit Facility in the amount of $20,000,000 that had the same maturity date and commenced principal amortization
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
on October 1, 2018 at $500,000 per quarter. On December 24, 2018, the FILO Term Loan, with a principal balance of $19,500,000, including accrued interest and prepayment fee of one percent, was repaid in full through borrowings from the Wells Fargo Credit Facility and all terms and provisions relating to the FILO Term Loan were terminated within the credit agreement.
The Wells Fargo Credit Facility is secured by substantially all of the rental fleet, inventory and other assets of the Company’s North American leasing and manufacturing operations. The Wells Fargo Credit Facility effectively not only finances the North American operations, but also the funding requirements for the Series C Preferred Stock (see Note 3) and the publicly-traded unsecured senior notes. The maximum amount of intercompany dividends thatPac-Van and Lone Star are allowed to pay in each fiscal year to GFN for the funding requirements of GFN’s senior and other debt and the Series C Preferred Stock are (a) the lesser of $5,000,000 for the Series C Preferred Stock or the amount equal to the dividend rate of the Series C Preferred Stock and its aggregate liquidation preference and the actual amount of dividends required to be paid to the Series C Preferred Stock; and (b) $6,300,000 for the public offering of unsecured senior notes or the actual amount of annual interest required to be paid; provided that (i) the payment of such dividends does not cause a default or event of default; (ii) each ofPac-Van and Lone Star is solvent; (iii) excess availability, as defined, is $5,000,000 or more under the Wells Fargo Credit Facility; (iv) the fixed charge coverage ratio, as defined, will be greater than 1.25 to 1.00; and (v) the dividends are paid no earlier than ten business days prior to the date they are due.
Borrowings under the Wells Fargo Credit Facility accrue interest, at the Company’s option, either at the base rate, plus 0.5% and a range of 1.00% to 1.50%, or the LIBOR rate, plus 1.0% and a range of 2.50% to 3.00%. The Wells Fargo Credit Facility also specifies the future conditions under which the current LIBOR-based interest rate could be replaced in the future with an alternate benchmark interest rate. The FILO Term Loan that was within the Wells Fargo Credit Facility bore interest at 11.00% above the LIBOR rate, with a LIBOR rate floor of 1.00%.
The Wells Fargo Credit Facility contains, among other things, certain financial covenants, including fixed charge coverage ratios, and other covenants, representations, warranties, indemnification provisions, and events of default that are customary for senior secured credit facilities; including a covenant that would require repayment upon a change in control, as defined.
At March 31, 2020, borrowings and availability under the Wells Fargo Credit Facility totaled $179,442,000 and $97,190,000, respectively.
Senior Notes
On June 18, 2014, the Company completed the sale of unsecured senior notes (the “Senior Notes”) in a public offering for an aggregate principal amount of $72,000,000. On April 24, 2017, the Company completed the sale of a“tack-on” offering of its publicly-traded Senior Notes for an aggregate principal amount of $5,390,000 that was priced at $24.95 per denomination. Net proceeds were $5,190,947, after deducting an aggregate original issue discount (“OID”) of $10,780 and underwriting discount of $188,273. In both offerings, the Company used at least 80% of the gross proceeds to reduce indebtedness atPac-Van and Lone Star under the Wells Fargo Credit Facility in order to permit the payment of intercompany dividends byPac-Van and Lone Star to GFN to fund the interest requirements of the Senior Notes. For the‘tack-on” offering, this amounted to $4,303,376 of the net proceeds. The Company has total outstanding publicly-traded Senior Notes in an aggregate principal amount of $77,390,000 ($76,184,000 and $76,618,000, net of unamortized debt issuance costs of $1,206,000 and $772,000, at June 30, 2019 and March 31, 2020, respectively).
The Senior Notes were issued in minimum denominations of $25 and integral multiples of $25 in excess thereof and pursuant to the first supplemental indenture (the “First Supplemental Indenture”) dated as of June 18, 2014 by and between the Company and Wells Fargo, as trustee (the “Trustee”). The First Supplemental Indenture supplements the indenture entered into by and between the Company and the Trustee dated as of June 18, 2014 (the “Base Indenture”). The Senior Notes bear interest at the rate of 8.125% per annum, mature on July 31, 2021 and are not subject to any sinking fund. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31, commencing on July 31, 2014. The Senior Notes rank equally in right of payment with all of the Company’s existing and future unsecured senior debt and senior in right of payment to all of its existing and future subordinated debt. The Senior Notes are effectively subordinated to any of the Company’s existing and future secured debt, to the extent of the value of the assets securing such debt. The Senior Notes are structurally subordinated to all existing and future liabilities of the Company’s subsidiaries and are not guaranteed by any of the Company’s subsidiaries.
On October 31, 2018, the Company successfully completed a consent solicitation to amend the Base Indenture and First Supplemental Indenture to permit the Company to incur additional indebtedness from time to time, including pursuant to its existing Wells Fargo Credit Facility and existing master finance/capital lease (the classification of such leases changed upon adoption of a new accounting standard, as discussed in Note 2) agreement, or such new finance/capital lease obligations as the Company may enter into from time to time. The consent of at least a majority in the aggregate
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
principal amount outstanding of the Senior Notes as of the record date (as defined in the consent solicitation statement dated October 16, 2018) was required to approve the proposed amendments and the Company received consents from approximately 63.3% of the holders of the Senior Notes. Upon the terms and subject to the conditions described in the consent solicitation statement, the Company made cash payments totaling $195,820, or $0.10 per $25 of Senior Notes held by each holder as of the record date who had validly delivered consent. As a result of the successful consent solicitation, the Company and the Trustee entered into the second supplemental indenture dated October 31, 2018 (the “Second Supplemental Indenture” and, together with the Base Indenture and First Supplemental Indenture, the “Indenture”).
The Company had an option, prior to July 31, 2017, to redeem the Senior Notes in whole or in part upon the payment of 100% of the principal amount of the Senior Notes being redeemed, plus any additional amount required by the Indenture. In addition, the Company may have redeemed up to 35% of the aggregate outstanding principal amount of the Senior Notes before July 31, 2017 with the net cash proceeds from certain equity offerings at a redemption price of 108.125% of the principal amount plus accrued and unpaid interest. If the Company sells certain of its assets or experiences specific kinds of changes in control, as defined, it must offer to redeem the Senior Notes. The Company may, at its option, at any time and from time to time, on or after July 31, 2017, redeem the Senior Notes in whole or in part. The Senior Notes will be redeemable at a redemption price initially equal to 106.094% (102.031% at March 31, 2020) of the principal amount of the Senior Notes (and which declines each year on July 31) plus accrued and unpaid interest to the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Senior Notes. The Company has not redeemed any of its Senior Notes.
The Indenture contains covenants which, among other things, limit the Company’s ability to make certain payments, to pay dividends and to incur additional indebtedness if the incurrence of such indebtedness would cause the company’s consolidated fixed charge coverage ratio, as defined in the Indenture, to be below 2.0 to 1.0. The Senior Notes are listed on NASDAQ under the symbol “GFNSL.”
Other
At March 31, 2020, equipment financing and other debt totaled $8,293,000.
The Company was in compliance with the financial covenants under all its credit facilities as of March 31, 2020.
The weighted-average interest rate in the Asia-Pacific area was 13.7% and 10.7% during the quarter ended March 31, 2019 and FY 2019, respectively, and 6.2% and 7.3% during the quarter ended March 31, 2020 and FY 2020, respectively; which does not include the effect of translation, derivative valuation, amortization of deferred financing costs and accretion. The weighted-average interest rate in North America was 6.2% and 6.7% during the quarter ended March 31, 2019 and FY 2019, respectively, and 5.4% and 5.8% during the quarter ended March 31, 2020 and FY 2020, respectively; which does not include the effect of the amortization of deferred financing costs and accretion.
Note 6. Financial Instruments
Fair Value Measurements
FASB ASC Topic 820,Fair Value Measurements and Disclosures, defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, as follows:
Level 1 - Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2 - Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and
Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s derivative instruments are not traded on a market exchange; therefore, the fair values are determined using valuation models that include assumptions about yield curve at the reporting dates as well as counter-party credit risk. The assumptions are generally derived from market-observable data. The Company has consistently applied these calculation techniques to all periods presented, which are considered Level 2. Derivative
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
instruments measured at fair value and their classification in the consolidated balances sheets and statements of operations are as follows (in thousands):
Derivative – Fair Value (Level 2) | ||||||||||||||||||||||
Type of Derivative Contract | Balance Sheet Classification | June 30, 2019 | March 31, 2020 | |||||||||||||||||||
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| |||||||||||||||||||||
Swap Contracts | Trade payables and accrued liabilities | $ | 2,233 | $ | 2,598 | |||||||||||||||||
Forward-Exchange Contracts | Trade and other receivables | 2 | 287 | |||||||||||||||||||
Trade payables and accrued liabilities | 18 | — | ||||||||||||||||||||
Bifurcated Derivatives | Fair value of bifurcated derivatives in Convertible Note | 19,782 | 26,147 | |||||||||||||||||||
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| |||||||||||||||||||||
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||
Type of Derivative Contract | Statement of Operations | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||
Swap Contracts | Unrealized gain (loss) included in “Interest expense” | $ | — | $ | — | $ | — | $ | — | |||||||||||||
Forward Exchange Contracts | Unrealized foreign currency exchange gain (loss) included in “Foreign exchange and other” | (152) | 587 | (279) | 331 | |||||||||||||||||
Bifurcated Derivatives | Change in valuation of bifurcated derivatives in Convertible Note | (1,131) | (11,259) | (22,829 | ) | (6,365) | ||||||||||||||||
Interest Rate Swap Contracts
The Company’s exposure to market risk for changes in interest rates relates primarily to its senior and other debt obligations. The Company’s policy is to manage its interest expense by using a mix of fixed and variable rate debt.
To manage its exposure to variable interest rates in a cost-efficient manner, the Company has entered into interest rate swaps and interest rate options, in which the Company agreed to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps and options were designated to hedge changes in the interest rate of a portion of the outstanding borrowings in the Asia-Pacific area. During the year ended June 30, 2017 (“FY 2017”), the Company entered into two interest rate swaps that were designated as cash flow hedges. The Company expected these derivatives to remain effective during their remaining terms, but recorded any changes in the portion of the hedges considered ineffective in interest expense in the consolidated statement of operations. There was no ineffective portion recorded in FY 2017 and only a nominal gain in the year ended June 30, 2018. During the quarter ended December 31, 2017, these two interest rate swap contracts were closed, with the Company incurring break costs of $148,000. In January 2018, the Company entered into another interest rate swap contract that was also designated as a cash flow hedge. The Company expects this derivative to remain highly effective during its term; however, any changes in the portion of the hedge considered ineffective would also be recorded in interest expense in the consolidated statement of operations. In April 2019, this interest swap contract was amended and extended. There was no ineffective portion recorded in FY 2019 and FY 2020.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s interest rate derivative instruments were not traded on a market exchange; therefore, the fair values were determined using valuation models which include assumptions about the interest rate yield curve at the reporting dates (Level 2 fair value measurement). As of June 30, 2019 and March 31, 2020, the open interest rate swap contracts were as follows (dollars in thousands):
June 30, | March 31, | |||||||||||
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| |||||||||||
2019 | 2020 | |||||||||||
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|
| |||||||||
Notional amounts | $ | 70,287 | $ | 61,424 | ||||||||
Fixed/Strike Rates | 7.42% | 7.17% | ||||||||||
Floating Rates | 6.70% | 5.62% | ||||||||||
Fair Value of Combined Contracts | $ | (2,233) | $ | (2,598) | ||||||||
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Foreign Currency Risk
The Company has transactional currency exposures. Such exposure arises from sales or purchases in currencies other than the functional currency. The currency giving rise to this risk is primarily U.S. dollars. Royal Wolf has a bank account denominated in U.S. dollars into which a small number of customers pay their debts. This is a natural hedge against fluctuations in the exchange rate. The funds are then used to pay suppliers, avoiding the need to convert to Australian dollars. Royal Wolf uses forward currency and participating forward contracts to eliminate the currency exposures on the majority of its transactions denominated in foreign currencies, either by transaction if the amount is significant, or on a general cash flow hedge basis. The forward currency and participating forward contracts are always in the same currency as the hedged item. The Company believes that financial instruments designated as foreign currency hedges are highly effective. However documentation of such as required by ASC Topic 815 does not exist. Therefore, all movements in the fair values of these hedges are reported in the statement of operations in the period in which fair values change. As of June 30, 2019, there were 21 open forward exchange contracts that mature between July 2019 and October 2019; and, as of March 31, 2020, there were 15 open forward exchange contracts that mature between April 2020 and September 2020, as follows (dollars in thousands):
June 30, | March 31, | |||||||||||
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2019 | 2020 | |||||||||||
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| |||||||||
Notional amounts | $ | 9,305 | $ | 5,272 | ||||||||
Exchange/Strike Rates (AUD to USD) | 0.67313 – 0.72039 | 0.56516 – 0.69982 | ||||||||||
Fair Value of Combined Contracts | $ | (16) | $ | 287 | ||||||||
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For the quarter ended March 31, 2019 and 2020, net unrealized and realized foreign exchange gains (losses) totaled $6,602,000 and $(6,454,000) and $(2,627,000) and $(59,000), respectively. In FY 2019 and FY 2020, net unrealized and realized foreign exchange gains (losses) totaled $5,334,000and $(10,141,000), and $(2,632,000) and $(104,000), respectively.
Fair Value of Other Financial Instruments
The fair value of the Company’s borrowings under the Senior Notes was determined based on a Level 1 input and for borrowings under its senior credit facilities determined based on Level 3 inputs; including a comparison to a group of comparable industry debt issuances (“Industry Comparable Debt Issuances”) and a study of credit (“Credit Spread Analysis”). Under the Industry Comparable Debt Issuance method, the Company compared the debt facilities to several industry comparable debt issuances. This method consisted of an analysis of the offering yields compared to the current yields on publicly traded debt securities. Under the Credit Spread Analysis, the Company first examined the implied credit spreads, which are based on data published by the United States Federal Reserve. Based on this analysis the Company was able to assess the credit market. The fair value of the Company’s senior credit facilities as of June 30, 2019 and March 31, 2020 was determined to be approximately $402,245,000 (carrying value of $406,499,000, gross of deferred financing costs of $2,314,000) and $350,504,000 (carrying value of $371,202,000, gross of deferred financing costs of $1,198,000), respectively. The Company believes that the fair value of its other debt of $6,956,000 and $8,293,000 at June 30, 2019 and March 31, 2020 approximated or would not vary significantly from their carrying values.
Under the provisions of FASB ASC Topic 825,Financial Instruments,the carrying value of the Company’s other financial instruments (consisting primarily of cash and cash equivalents, net receivables, trade payables and accrued liabilities) approximate fair value.
Note 7. Related-Party Transactions
Effective January 31, 2008, the Company entered into a lease with an affiliate of the Company’s then Chief Executive Officer (now Executive Chairman of the Board of Directors) for its corporate headquarters in Pasadena, California. The rent is $7,393 per month, effective March 1, 2009, plus allocated charges for common area maintenance, real property taxes and insurance, for approximately 3,000 square feet of office space. The term of the lease is five years, with two five-year renewal options, and the rent is adjusted yearly based on the consumer price index. On October 11, 2012, the
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company exercised the first option to renew the lease for an additional five-year term commencing February 1, 2013 and on August 7, 2017, it exercised its second option for an additional five-year term commencing on February 1, 2018. Rental payments were $29,000 and $84,000 during the quarter ended March 31, 2019 and FY 2019, respectively; and $28,000 and $83,000 during the quarter ended March 31, 2020 and FY 2020, respectively.
The premises ofPac-Van’s Las Vegas branch are owned by and were leased from the then acting branch manager through December 31, 2016. From January 1, 2017 through May 12, 2017, the use of the premises was rented on amonth-to-month basis. Effective May 12, 2017, the Company entered into a lease agreement through December 31, 2020 for rental of $10,876 per month and the right to extend the term of the lease for threetwo-year options, with the monthly rental increasing at each option period from $11,420 to $12,590 per month. Rental payments on these premises totaled $38,000 and $138,000 during the quarter ended March 31, 2019 and FY 2019, respectively; and $40,000 and $116,000 during the quarter ended March 31, 2020 and FY 2020, respectively. FY 2019 includes an estimated property taxcatch-up of $29,000 paid directly to the landlord.
Note 8. Equity Plans
On September 11, 2014, the Board of Directors of the Company adopted the 2014 Stock Incentive Plan (the “2014 Plan”), which was approved by the stockholders at the Company’s annual meeting on December 4, 2014 and amended and restated by the stockholders at the annual meeting on December 3, 2015. The 2014 Plan is an “omnibus” incentive plan permitting a variety of equity programs designed to provide flexibility in implementing equity and cash awards, including incentive stock options, nonqualified stock options, restricted stock grants(“non-vested equity shares”), restricted stock units, stock appreciation rights, performance stock, performance units and other stock-based awards. Participants in the 2014 Plan may be granted any one of the equity awards or any combination of them, as determined by the Board of Directors or the Compensation Committee. Upon the approval of the 2014 Plan by the stockholders, the Company suspended further grants under its previous equity plans, the General Finance Corporation 2006 Stock Option Plan (the “2006 Plan”) and the 2009 Stock Incentive Plan (the “2009 Plan”) (collectively the “Predecessor Plans”), which had a total of 2,500,000 shares reserved for grant. Any stock options which are forfeited under the Predecessor Plans will become available for grant under the 2014 Plan, but the total number of shares available under the 2014 Plan will not exceed the 1,500,000 shares reserved for grant under the 2014 Plan, plus any options which were forfeited or are available for grant under the Predecessor Plans. If not sooner terminated by the Board of Directors, the 2014 Plan will expire on December 4, 2024, which is the tenth anniversary of the date it was approved by the Company’s stockholders. The 2006 Plan expired on June 30, 2016 and the 2009 Plan expired on December 10, 2019. On December 7, 2017, the stockholders approved an amendment unanimously approved by the Board of Directors of the Company that increased the number of shares reserved for issuance under the 2014 Plan by 1,000,000 shares, from 1,500,000 to 2,500,000 shares of common stock, plus any options which were forfeited or are available for grant under the 2009 Plan. The Predecessor Plans and the 2014 Plan are referred to collectively as the “Stock Incentive Plan.”
All grantsto-date consist of incentive andnon-qualified stock options that vest over a period of up to five years (“time-based”),non-qualified stock options that vest over varying periods that are dependent on the attainment of certain defined EBITDA and other targets (“performance-based”),non-vested equity shares (“restricted stock”) and restricted stock units (“RSU”). At March 31, 2020, 620,913 shares remained available for grant.
On February 11, 2020 (the “February 2020 Grant”), the Company granted 1,723 time-based and 1,722 performance-based options to a key employee of Royal Wolf to purchase a total of 3,445 shares of common stock at an exercise price equal to the closing market price of the Company’s common stock as of that date, or $9.49 per share. The options under the February 2020 Grant vest over 31 - 36 months from the date of grant, with the vesting of the performance-based options subject to the attainment of the targets. The fair value of the stock options in the February 2020 Grant was $4.49, determined using the Black-Scholes option-pricing model using the following assumptions: a risk-free interest rate of 1.515%, an expected life of 7.5 years, an expected volatility of 42.68% and no expected dividend.
Since inception, the range of the fair value of the stock options granted (other than tonon-employee consultants) and the assumptions used are as follows:
Fair value of stock options | $0.81 - $6.35 | |||
| ||||
Assumptions used: | ||||
Risk-free interest rate | 1.19% - 4.8% | |||
| Expected life (in years) | 7.5 | ||
Expected volatility | 26.5% - 84.6% | |||
Expected dividends | — | |||
|
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
At March 31, 2020, there were no significant outstanding stock options held bynon-employee consultants that were not fully vested. A summary of the Company’s stock option activity and related information for FY 2020 follows:
Number of Options (Shares) | Weighted- Exercise Price | Weighted- Remaining Contractual Term (Years) | ||||||||||||
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| |||||||||||||
Outstanding at June 30, 2019 | 1,676,196 | $ | 4.39 | |||||||||||
| Granted | 3,445 | 9.49 | |||||||||||
Exercised | (51,000 | ) | 1.96 | |||||||||||
Forfeited or expired | (600 | ) | 1.28 | |||||||||||
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Outstanding at March 31, 2020 | 1,628,041 | $ | 4.48 | 4.4 | ||||||||||
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| |||||||||||||
Vested and expected to vest at March 31, 2020 | 1,628,041 | $ | 4.48 | 4.4 | ||||||||||
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Exercisable at March 31, 2020 | 1,520,337 | $ | 4.33 | 4.1 | ||||||||||
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At March 31, 2020, outstanding time-based options and performance-based options totaled 1,058,095 and 569,946, respectively. Also at that date, the Company’s market price for its common stock was $6.24 per share, which was above the exercise prices of approximately 77% of the outstanding stock options, and the intrinsic value of the outstanding stock options at that date was $3,096,000. Share-based compensation of $9,389,000 related to stock options has been recognized in the consolidated statements of operations, with a corresponding benefit to equity, from inception through March 31, 2020. At that date, there remains $242,000 of unrecognized compensation expense to be recorded on a straight-line basis over the remaining weighted-average vesting period of less than one year.
A deduction is not allowed for U.S. income tax purposes with respect tonon-qualified options granted in the United States until the stock options are exercised or, with respect to incentive stock options issued in the United States, unless the optionee makes a disqualifying disposition of the underlying shares. The amount of any deduction will be the difference between the fair value of the Company’s common stock and the exercise price at the date of exercise. Accordingly, there is a deferred tax asset recorded for the U.S. tax effect of the financial statement expense recorded related to stock option grants in the United States. Effective July 1, 2017, the tax effect of the U.S. income tax deduction in excess of the financial statement expense, if any, will be recorded as a benefit in the consolidated statement of operations.
A summary of the Company’s restricted stock and RSU activity follows:
Restricted Stock | RSU | |||||||||||||||
Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | |||||||||||||
Nonvested at June 30, 2019 | 329,417 | $ | 8.28 | 139,187 | $ | 7.62 | ||||||||||
Granted | 44,985 | 10.26 | 29,131 | 9.49 | ||||||||||||
Vested | (61,031 | ) | 8.80 | (59,390 | ) | 7.52 | ||||||||||
Forfeited | (1,000 | ) | 10.34 | — | — | |||||||||||
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Nonvested at March 31, 2020 | 312,371 | $ | 8.45 | 108,928 | $ | 8.18 | ||||||||||
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Share-based compensation of $5,632,000 and $1,294,000 related to restricted stock and RSU, respectively, has been recognized in the consolidated statements of operations, with a corresponding benefit to equity, from inception through March 31, 2020. At that date, there remains $1,770,000 for the restricted stock and $516,000 for the RSU of unrecognized compensation expense to be recorded on a straight-line basis over the remaining vesting period of less than a year to 2.95 years for the restricted stock and less than a year to 2.5 years for the RSU.
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9. Commitments and Contingencies
Self-Insurance
The Company has insurance policies to cover auto liability, general liability, directors and officers liability and workers compensation-related claims. Effective on February 1, 2017, the Company became self-insured for auto liability and general liability through GFNI, a wholly-owned captive insurance company, up to a maximum of $1,200,000 per policy period. Claims and expenses are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. These losses include an estimate of claims that have been incurred but not reported. At June 30, 2019 and March 31, 2020, reported liability totaled $1,335,000 and $1,188,000, respectively, and has been recorded in the caption “Trade payables and accrued liabilities” in the accompanying consolidated balance sheets.
Other Matters
The Company is not involved in any material lawsuits or claims arising out of the normal course of business. The nature of its business is such that disputes can occasionally arise with employees, vendors (including suppliers and subcontractors) and customers over warranties, contract specifications and contract interpretations among other things. The Company assesses these matters on acase-by-case basis as they arise. Reserves are established, as required, based on its assessment of its exposure. The Company has insurance policies to cover general liability and workers compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance under pending litigation and claims, if any, will not have a material adverse effect on our financial position, operating results or cash flows.
Note 10. Cash Flows from Operating Activities and Other Financial Information
The following table provides a detail of cash flows from operating activities (in thousands):
Nine Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | (12,702) | $ | 7,767 | ||||
Adjustments to reconcile net income (loss) to cash flows from operating activities: | ||||||||
Gain on sales and disposals of property, plant and equipment | (76) | (220) | ||||||
Gain on sales of lease fleet | (6,219) | (7,029) | ||||||
Gains on bargain purchases of businesses | (1,767) | — | ||||||
Unrealized foreign exchange loss (gain) | (5,334) | 2,632 | ||||||
Non-cash realized foreign exchange loss on forced conversion of Convertible Note | 3,554 | — | ||||||
Unrealized loss (gain) on forward exchange contracts | 279 | (331) | ||||||
Change in valuation of bifurcated derivatives in Convertible Note | 22,829 | 6,365 | ||||||
Depreciation and amortization | 32,256 | 26,930 | ||||||
Amortization of deferred financing costs | 2,446 | 1,388 | ||||||
Accretion of interest | (529) | — | ||||||
Interest deferred on Senior Term Note | 4,798 | — | ||||||
Share-based compensation expense | 1,996 | 2,015 | ||||||
Deferred income taxes | 4,233 | 8,211 | ||||||
Changes in operating assets and liabilities (excluding assets and liabilities from acquisitions): | ||||||||
Trade and other receivables, net | (4,858) | 7,265 | ||||||
Inventories | (12,456) | 1,854 | ||||||
Prepaid expenses and other | (3,404) | (1,283) | ||||||
Trade payables, accrued liabilities and unearned revenues | 3,225 | (2,682) | ||||||
Income taxes | (291) | 238 | ||||||
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Net cash provided by operating activities | $ | 27,980 | $ | 53,120 | ||||
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 11. Segment Reporting
We have two geographic areas that include four operating segments; the Asia-Pacific area, consisting of the leasing operations of Royal Wolf, and North America, consisting of the combined leasing operations ofPac-Van and Lone Star, and the manufacturing operations of Southern Frac. Discrete financial data on each of the Company’s products is not available and it would be impractical to collect and maintain financial data in such a manner. In managing the Company’s business, senior management focuses on primarily growing its leasing revenues and operating cash flow (EBITDA), and investing in its lease fleet through capital purchases and acquisitions.
Transactions between reportable segments included in the tables below are recorded on an arms-length basis at market in conformity with U.S. GAAP and the Company’s significant accounting policies (see Note 2). The tables below represent the Company’s revenues from external customers, share-based compensation expense, depreciation and amortization, operating income, interest income and expense, expenditures for additions to long-lived assets (consisting of lease fleet and property, plant and equipment), long-lived assets, operating lease assets and goodwill; as attributed to its geographic and operating segments (in thousands):
Quarter Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
North America | ||||||||||||||||||||||||||||||||
Leasing | ||||||||||||||||||||||||||||||||
Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||
Sales | $ | 15,155 | $ | - | $ | 15,155 | $ | 3,505 | $ | (981 | ) | $ | 17,679 | $ | 14,547 | $ | 32,226 | |||||||||||||||
Leasing | 33,897 | 8,097 | 41,994 | — | (103 | ) | 41,891 | 15,853 | 57,744 | |||||||||||||||||||||||
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$ | 49,052 | $ | 8,097 | $ | 57,149 | $ | 3,505 | $ | (1,084 | ) | $ | 59,570 | $ | 30,400 | $ | 89,970 | ||||||||||||||||
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Share-based compensation | $ | 97 | $ | 11 | $ | 108 | $ | 9 | $ | 334 | $ | 451 | $ | 196 | $ | 647 | ||||||||||||||||
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Depreciation and amortization | $ | 4,104 | $ | 1,556 | $ | 5,660 | $ | 99 | $ | (179) | $ | 5,580 | $ | 3,132 | $ | 8,712 | ||||||||||||||||
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Operating income | $ | 9,316 | $ | 1,629 | $ | 10,945 | $ | 385 | $ | (1,474 | ) | $ | 9,856 | $ | 4,417 | $ | 14,273 | |||||||||||||||
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Interest income | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 153 | $ | 153 | ||||||||||||||||
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Interest expense | $ | 2,056 | $ | 61 | $ | 2,117 | $ | 23 | $ | 1,716 | $ | 3,856 | $ | 2,125 | $ | 5,981 | ||||||||||||||||
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Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
North America | ||||||||||||||||||||||||||||||||
Leasing | ||||||||||||||||||||||||||||||||
Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||
Sales | $ | 48,649 | $ | 35 | $ | 48,684 | $ | 10,079 | $ | (3,799 | ) | $ | 54,964 | $ | 39,550 | $ | 94,514 | |||||||||||||||
Leasing | 106,948 | 23,106 | 130,054 | — | (524 | ) | 129,530 | 47,932 | 177,462 | |||||||||||||||||||||||
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$ | 155,597 | $ | 23,141 | $ | 178,738 | $ | 10,079 | $ | (4,323 | ) | $ | 184,494 | $ | 87,482 | $ | 271,976 | ||||||||||||||||
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Share-based compensation | $ | 308 | $ | 35 | $ | 343 | $ | 27 | $ | 1,083 | $ | 1,453 | $ | 562 | $ | 2,015 | ||||||||||||||||
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Depreciation and amortization | $ | 12,203 | $ | 4,826 | $ | 17,029 | $ | 297 | $ | (537) | $ | 16,789 | $ | 10,141 | $ | 26,930 | ||||||||||||||||
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Operating income | $ | 34,506 | $ | 4,170 | $ | 38,676 | $ | 358 | $ | (4,578 | ) | $ | 34,456 | $ | 11,766 | $ | 46,222 | |||||||||||||||
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Interest income | $ | - | $ | - | $ | - | $ | - | $ | 2 | $ | 2 | $ | 517 | $ | 519 | ||||||||||||||||
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Interest expense | $ | 7,113 | $ | 266 | $ | 7,379 | $ | 89 | $ | 5,150 | $ | 12,618 | $ | 7,617 | $ | 20,235 | ||||||||||||||||
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Additions to long-lived assets | $ | 38,728 | $ | 892 | $ | 39,620 | $ | 41 | $ | (388) | $ | 39,273 | $ | 11,412 | $ | 50,685 | ||||||||||||||||
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At March 31, 2020 | ||||||||||||||||||||||||||||||||
Long-lived assets | $ | 321,036 | $ | 41,736 | $ | 362,772 | $ | 1,452 | $ | (9,462 | ) | $ | 354,762 | $ | 119,465 | $ | 474,227 | |||||||||||||||
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Operating lease assets | $ | 26,731 | $ | 2,514 | $ | 29,245 | $ | 275 | $ | 291 | $ | 29,811 | $ | 33,948 | $ | 63,759 | ||||||||||||||||
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Goodwill | $ | 65,078 | $ | 20,782 | $ | 85,860 | $ | — | $ | — | $ | 85,860 | $ | 22,732 | $ | 108,592 | ||||||||||||||||
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At June 30, 2019 | ||||||||||||||||||||||||||||||||
Long-lived assets | $ | 301,233 | $ | 44,694 | $ | 345,927 | $ | 1,707 | $ | (9,606 | ) | $ | 338,028 | $ | 141,689 | $ | 479,717 | |||||||||||||||
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Goodwill | $ | 64,517 | $ | 20,782 | $ | 85,299 | $ | — | $ | — | $ | 85,299 | $ | 26,024 | $ | 111,323 | ||||||||||||||||
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Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific Leasing | Consolidated | |||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||
Sales | $ | 14,386 | $ | - | $ | 14,386 | $ | 2,736 | $ | (1,304 | ) | $ | 15,818 | $ | 10,818 | $ | 26,636 | |||||||||||||||
Leasing | 31,808 | 11,414 | 43,222 | — | (424 | ) | 42,798 | 16,775 | 59,573 | |||||||||||||||||||||||
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$ | 46,194 | $ | 11,414 | $ | 57,608 | $ | 2,736 | $ | (1,728 | ) | $ | 58,616 | $ | 27,593 | $ | 86,209 | ||||||||||||||||
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Share-based compensation | $ | 86 | $ | 9 | $ | 95 | $ | 7 | $ | 393 | $ | 495 | $ | 160 | $ | 655 | ||||||||||||||||
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Depreciation and amortization | $ | 3,950 | $ | 2,403 | $ | 6,353 | $ | 101 | $ | (189 | ) | $ | 6,265 | $ | 4,733 | $ | 10,998 | |||||||||||||||
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Operating income | $ | 8,154 | $ | 2,708 | $ | 10,862 | $ | (91 | ) | $ | (1,484 | ) | $ | 9,287 | $ | 3,124 | $ | 12,411 | ||||||||||||||
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Interest income | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | 3 | $ | 24 | $ | 27 | ||||||||||||||||
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Interest expense | $ | 2,680 | $ | 250 | $ | 2,930 | $ | 53 | $ | 1,716 | $ | 4,699 | $ | 5,508 | $ | 10,207 | ||||||||||||||||
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GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||
North America | ||||||||||||||||||||||||||||||||
Leasing | ||||||||||||||||||||||||||||||||
Pac-Van | Lone Star | Combined | Manufacturing | Corporate and Intercompany Adjustments | Total | Asia – Pacific | Consolidated | |||||||||||||||||||||||||
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Revenues: | ||||||||||||||||||||||||||||||||
Sales | $ | 53,949 | $ | - | $ | 53,949 | $ | 10,670 | $ | (2,729 | ) | $ | 61,890 | $ | 38,704 | $ | 100,594 | |||||||||||||||
Leasing | 96,463 | 37,330 | 133,793 | - | (1,515 | ) | 132,278 | 49,122 | 181,400 | |||||||||||||||||||||||
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$ | 150,412 | $ | 37,330 | $ | 187,742 | $ | 10,670 | $ | (4,244 | ) | $ | 194,168 | $ | 87,826 | $ | 281,994 | ||||||||||||||||
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Share-based compensation | $ | 234 | $ | 23 | $ | 257 | $ | 19 | $ | 1,176 | $ | 1,452 | $ | 544 | $ | 1,996 | ||||||||||||||||
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Depreciation and amortization | $ | 11,455 | $ | 7,153 | $ | 18,608 | $ | 304 | $ | (562 | ) | $ | 18,350 | $ | 13,906 | $ | 32,256 | |||||||||||||||
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Operating income | $ | 28,962 | $ | 11,730 | $ | 40,692 | $ | 518 | $ | (4,116 | ) | $ | 37,094 | $ | 8,977 | $ | 46,071 | |||||||||||||||
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Interest income | $ | — | $ | — | $ | — | $ | — | $ | 5 | $ | 5 | $ | 103 | $ | 108 | ||||||||||||||||
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Interest expense | $ | 8,511 | $ | 939 | $ | 9,450 | $ | 212 | $ | 5,126 | $ | 14,788 | $ | 12,912 | $ | 27,700 | ||||||||||||||||
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Additions to long-lived assets | $ | 39,112 | $ | 1,771 | $ | 40,883 | $ | 20 | $ | (162) | $ | 40,741 | $ | 18,795 | $ | 59,536 | ||||||||||||||||
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Intersegment net revenues related to sales of primarily portable liquid storage containers and ground level offices from Southern Frac to the North American leasing operations totaled $1,304,000 and $2,729,000 during the quarter ended March 31, 2019 and FY 2019, respectively; and $981,000 and $3,799,000 during the quarter ended March 31, 2020 and FY 2020, respectively. Intrasegment net revenues in the North American leasing operations related to primarily the leasing of portable liquid storage containers fromPac-Van to Lone Star totaled $391,000 and $1,416,000 during the quarter ended March 31, 2019 and FY 2019, respectively; and $70,000 and $425,000 during the quarter ended March 31, 2020 and FY 2020, respectively.
Note 12. Subsequent Events
On April 10, 2020, the Company announced that its Board of Directors declared a cash dividend of $2.25 per share on the Series C Preferred Stock (see Note 3). The dividend is for the period commencing on January 31, 2020 through April 29, 2020, and is payable on April 30, 2020 to holders of record as of April 29, 2020.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the accompanying notes thereto, which are included in our Annual Report on Form10-K for the fiscal year ended June 30, 2019 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”), as well as the condensed consolidated financial statements included in this Quarterly Report on Form10-Q. This Quarterly Report on Form10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue” or the negative of such terms or other similar expressions. Risk factors that might cause or contribute to such discrepancies include, but are not limited to, those described in our Annual Report and other SEC filings. We maintain a web site atwww.generalfinance.comthat makes available, through a link to the SEC’s EDGAR system website, our SEC filings.
References to “we,” “us,” “our” or the “Company” refer to General Finance Corporation, a Delaware corporation (“GFN”), and its consolidated subsidiaries. These subsidiaries include GFN U.S. Australasia Holdings, Inc., a Delaware corporation (“GFN U.S.”); GFN Insurance Corporation, an Arizona corporation (“GFNI”); GFN North America Leasing Corporation, a Delaware corporation (“GFNNA Leasing”); GFN North America Corp., a Delaware corporation (“GFNNA”); GFN Realty Company, LLC, a Delaware limited liability company (“GFNRC”); GFN Manufacturing Corporation, a Delaware corporation (“GFNMC”), and its subsidiary, Southern Frac, LLC, a Texas limited liability company (collectively “Southern Frac”);Pac-Van, Inc., an Indiana corporation, and its Canadian subsidiary, PV Acquisition Corp., an Alberta corporation (collectively“Pac-Van”); and Lone Star Tank Rental Inc., a Delaware corporation (“Lone Star”); GFN Asia Pacific Holdings Pty Ltd, an Australian corporation (“GFNAPH”), and its subsidiaries, Royal Wolf Holdings Pty Ltd, an Australian corporation, which was dissolved in June 2019 (“RWH”), Royal Wolf Trading Australia Pty Limited, an Australian corporation, and Royalwolf Trading New Zealand Limited, a New Zealand Corporation (collectively, “Royal Wolf”).
Overview
Founded in October 2005, we are a leading specialty rental services company offering portable (or mobile) storage, modular space and liquid containment solutions in these three distinct, but related industries, which we collectively refer to as the “portable services industry.”
We have two geographic areas that include four operating segments; the Asia-Pacific (orPan-Pacific) area, consisting of Royal Wolf (which leases and sells storage containers, portable container buildings and freight containers in Australia and New Zealand) and North America, consisting ofPac-Van (which leases and sells storage, office and portable liquid storage tank containers, modular buildings and mobile offices), and Lone Star (which leases portable liquid storage tank containers and containment products, as well as provides certain fluid management services, to the oil and gas industry in the Permian and Eagle Ford basins of Texas), which are combined to form our “North American Leasing” operations, and Southern Frac (which manufactures portable liquid storage tank containers and other steel-related products). As of March 31, 2020, our two geographic leasing operations primarily lease and sell their products through 24 customer service centers (“CSCs”) in Australia, 15 CSCs in New Zealand, 63 branch locations in the United States and three branch locations in Canada. At that date, we had 277 and 742 employees and 46,219 and 56,071 lease fleet units in the Asia-Pacific area and North America, respectively.
Our lease fleet is comprised of three distinct specialty rental equipment categories that possess attractive asset characteristics and serve our customers’on-site temporary needs and applications. These categories match the sectors comprising the portable services industry.
Our portable storage category is segmented into two products: (1) storage containers, which primarily consist of new and used steel shipping containers under International Organization for Standardization (“ISO”) standards, that provide a flexible, low cost alternative to warehousing, while offering greater security, convenience and immediate accessibility; and (2) freight containers, which are designed for transport of products either by road and rail and are only offered in our Asia-Pacific territory.
Our modular space category is segmented into three products: (1) office containers, which are referred to as portable container buildings in the Asia-Pacific, are either modified or specifically manufactured containers that provide self-contained office space with maximum design flexibility. Office containers in the United States are oftentimes referred to as ground level offices (“GLOs”); (2) modular buildings, which provide customers with flexible space solutions and are often modified to customer specifications and (3) mobile offices, which arere-locatable units with aluminum or wood exteriors and wood (or steel) frames on a steel carriage fitted with axles, and which allow for an assortment of“add-ons” to provide convenient temporary space solutions.
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Our liquid containment category includes portable liquid storage tanks that are manufactured500-barrel capacity steel containers with fixed axles for transport. These units are regularly utilized for a variety of applications across a wide range of industries, including refinery, petrochemical and industrial plant maintenance, oil and gas services, environmental remediation and field services, infrastructure building construction, marine services, pipeline construction and maintenance, tank terminal services, waste management, wastewater treatment and landfill services.
Recent Developments
In December 2019, a novel strain of coronavirus(COVID-19) was reported to have surfaced in Wuhan, China and has since spread to a number of other countries, including the United States, Canada, Australia and New Zealand. In March 2020, the World Health Organization characterizedCOVID-19 as a pandemic. Through the nine months ended March 31, 2020, theCOVID-19 pandemic did not have a significant impact on our business. However, efforts to contain the spread ofCOVID-19 have intensified. Many countries, including the United States, Canada, Australia and New Zealand, have declared states of emergency or, at the very least, implemented restrictions, including banning international travel, restricting social gatherings, temporarily closing businesses not considered essential and issuing varying quarantine orders in response to theCOVID-19 pandemic. The existence of theCOVID-19 pandemic, the fear associated with theCOVID-19 pandemic and the reactions of governments and private sectors around the world in response to theCOVID-19 pandemic have impeded a great number of businesses (including ours, our customers and our vendors) to conduct normal business operations. We believe that our business is essential, which allows us to continue to serve customers that remain operational. However, if we are required to close a certain number of our locations or a number of our employees cannot work because of illness or otherwise, our business could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse business consequences due to theCOVID-19 pandemic, including being required to shut down their operations, demand for our services and products could also be materially adversely affected in a rapid manner. The situation will likely become more critical if prolonged. While we are closely monitoring the situation, including implementing restrictions on investing and spending, and laying the groundwork for other cost-cutting measures, the impact of theCOVID-19 pandemic is fluid, continues to evolve and, therefore, we cannot reasonably predict at this time the extent to which our results of operations, liquidity and financial condition will ultimately be impacted, nor to reasonably assess the various measures that we may have to put in place to mitigate the effect.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which provides relief, particularly to small businesses, and, among other things, includes modifications to the limitation on business interest expense and net operating loss provisions. Based on our preliminary review of available information, the CARES Act is not expected to have a material impact on our consolidated operating results or consolidated financial position.
Results of Operations
Quarter Ended March 31, 2020 (“QE FY 2020”) Compared to Quarter Ended March 31, 2019 (“QE FY 2019”)
Revenues.Revenues increased by $3.8 million, or 4%, to $90.0 million in QE FY 2020 from $86.2 million in QE FY 2019. This consisted of an increase of $2.8 million, or 10%, in revenues in the Asia-Pacific area, a slight decrease of $0.1 million in revenues in our North American leasing and an increase of $1.1 million, or 79%, in manufacturing revenues from Southern Frac. The effect of the average currency exchange rate of a weaker Australian dollar relative to the U.S. dollar in QE FY 2020 versus QE FY 2019 reduced the translation of revenues from the Asia-Pacific area. The average currency exchange rate of one Australian dollar during QE FY 2020 was $0.6588 U.S. dollar compared to $0.7126 U.S. dollar during QE FY 2019. In Australian dollars, total revenues in the Asia-Pacific area increased by 19% in QE FY 2020 from QE FY 2019.
Excluding Lone Star (doing business solely in the oil and gas sector), total revenues of our North American leasing operations increased by $3.2 million, or 7%, in QE FY 2020 from QE FY 2019; primarily in the construction, commercial, industrial and mining sectors, which increased by an aggregate $2.4 million between the periods. At Lone Star, revenues decreased by $3.3 million, or 29%, from $11.4 million in QE FY 2019 to $8.1 million in QE FY 2020. In local Australian dollars, revenue between the periods increased by AUS$7.2 million, primarily in the transportation, utilities and government sectors, which aggregated an AUS$9.2 million increase; offset somewhat by a decrease in the education sector of AUS$2.0 million.
Sales and leasing revenues represented 34% and 66% of totalnon-manufacturing revenues, respectively, in QE FY 2020, as compared to 30% and 70% of totalnon-manufacturing revenues, respectively, in QE FY 2019.
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Non-manufacturing sales during QE FY 2020 amounted to $29.7 million, compared to $25.2 million during QE FY 2019; representing an increase of $4.5 million, or 18%. This consisted of an increase of $3.7 million, or 34%, in the Asia-Pacific area and an increase of $0.8 million, or approximately 6%, in our North American leasing operations. The increasein the Asia-Pacific area was comprised of an increase of $3.9 million ($2.5 million increase due higher average prices, $1.8 million increase due to higher unit sales and a $0.4 million decrease due to foreign exchange movements) in the national accounts group, offset somewhat by a decrease of $0.2 million ($1.0 million increase due to higher unit sales, $0.5 million decrease due to lower average prices and a $0.7 million decrease due to foreign exchange movements) in the CSC operations. The translation of sales in the Asia-Pacific area was adversely impacted by the weaker Australian dollar when comparing QE FY 2020 to QE FY 2019. In Australian dollars, total sales in the Asia-Pacific area increased by 44% in QE FY 2020 from QE FY 2019, primarily in the transportation and utilities sectors, which increased by an aggregate AUS$8.9 million between the periods; and was offset somewhat by decreases totaling AUS$1.9 million in the education and consumer sectors. The transportation sector included two large sales in QE FY 2020 totaling AUS$9.2 million. In our North American leasing operations, the sales increase in QE FY 2020 from QE FY 2019 was primarily in the industrial, commercial, mining and education sectors, which increased by an aggregate $1.6 million between the periods; offset somewhat by a decrease of $1.1 million in the construction sector. The increase at Southern Frac in QE FY 2020 from QE FY 2019 was primarily due to manufacturing sales to one customer of specialty trailers totaling $1.1 million.
Leasing revenues totaled $57.8 million in QE FY 2020, a decrease of $1.8 million, or 3%, from $59.6 million in QE FY 2019. This consisted of a decrease of $0.9 million, or 2%, in North America and a decrease of $0.9 million, or 5%, in the Asia-Pacific area. In Australian dollars, in the Asia-Pacific area, leasing revenues actually increased by 2% in QE FY 2020 from QE FY 2019.
In the Asia-Pacific area, average utilization in the retail and the national accounts group operations was 82% and 78%, respectively, during QE FY 2020, as compared to 82% and 80%, respectively, in QE FY 2019. The overall average utilization was 81% in QE FY 2020 and 82% in QE FY 2019; but the average monthly lease rate of containers increased to AUS$169 in QE FY 2020 from AUS$166 in QE FY 2019, caused primarily by higher average lease rates in portable storage and building containers between the periods. However, the composite average monthly number of units on lease was over 800 lower in QE FY 2020, as compared to QE FY 2019. Locally, in Australian dollars, leasing revenue remained constant or increased across a majority of the sectors in QE FY 2020 versus QE FY 2019, particularly in the consumer, government and moving (removals) and storage sectors, which increased between the periods by an aggregate AUS$0.9 million; but this was offset somewhat by a decrease of AUS$0.5 million in the education sector.
In our North American leasing operations, average utilization rates were 69%, 79%, 50%, 81% and 82% and average monthly lease rates were $117, $385, $838, $378 and $893 for storage containers, office containers, frac tank containers, mobile offices and modular units, respectively, during QE FY 2020; as compared to 76%, 83%, 74%, 84% and 84% and average monthly lease rates were $113, $354, $921, $323 and $788 for storage containers, office containers, frac tank containers, mobile offices and modular units in QE FY 2019, respectively. The average composite utilization rate was 71% QE FY 2020 and 79% in QE FY 2019, and the composite average monthly number of units on lease was over 400lower in QE FY 2020 as compared to QE FY 2019.The decrease in leasing revenues between the periods was primarily in the oil and gas sector, which in QE FY 2020 was $3.4 million below QE FY 2019, substantially all attributable to Lone Star; but this decrease was significantly offset by increases across the board in all other sectors, particularly construction, which increased by $1.5 million.
Cost of Sales. Cost of sales from our lease inventories and fleet (which is the cost related to our sales revenues only and exclusive of the line items discussed below) increased by $3.3 million from $18.1 million during QE FY 2019 to $21.4 million during QE FY 2020, but our gross profit percentage from thesenon-manufacturing sales remained constant at 28% during both periods. Despite this, fluctuations in gross profit percentage between periods would not be unusual as a significant amount of ournon-manufacturing sales are out of the lease fleet which, among other things, would have varying sales prices and carrying values. Cost of sales from our manufactured products totaled $2.0 million in QE FY 2020, as compared to $1.2 million in QE FY 2019, resulting in a gross margin of $0.5 million in QE FY 2020 versus a gross margin of $0.2 million in QE FY 2019. In addition, the gross margin percentage in our manufacturing operations improved to 20% in QE FY 2020, as compared to 14% in QE FY 2019, due to the increased production and sales discussed above.
Direct Costs of Leasing Operations and Selling and General Expenses.The total of direct costs of leasing operations and selling and general expenses increased slightly by $0.1 million from $43.6 million during QE FY 2019 to $43.7 million during QE FY 2020. However, as a percentage of revenues, these costs decreased to 49% during QE FY 2020 from 51% in QE FY 2019 due primarily to our infrastructure not proportionately increasing with the higher revenues between the periods.
Depreciation and Amortization.Depreciation and amortization decreased by $2.3 million to $8.6 million in QE FY 2020 from $10.9 million in QE FY 2019. The decrease was in both geographic venues, $0.7 million in North America and $1.6 million in the Asia-Pacific area, impacted by the effect of certain intangible assets becoming fully amortized. The decrease in the Asia-Pacific also included the translation effect of a weaker Australian dollar to the U.S. dollar in QE FY 2020 versus QE FY 2019.
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Interest Expense. Interest expense of $6.0 million in QE FY 2020 decreased by $4.2 million from $10.2 million in QE FY 2019. In North America, QE FY 2020 interest expense decreased by $0.8 million from QE FY 2019 due to both lower average borrowings and a lower weighted-average interest rate between the periods. The weighted-average interest rate in QE FY 2020 was 5.4% (which does not include the effect of the accretion of interest and amortization of deferred financing costs) versus 6.2% in QE FY 2019. In the Asia-Pacific area, QE FY 2020 interest expense was $3.4 million lower from QE FY 2019 also due to both lower average borrowings and a lower weighted-average interest rate between the periods, as well as the translation effect of a weaker Australian dollar between the periods. The weighted-average interest rate was 6.2% (which does not include the effect of translation, interest rate swap contracts and options and the amortization of deferred financing costs) in QE FY 2020 versus 13.7% in QE FY 2019.
Change in Valuation of Bifurcated Derivatives.QEFY 2020 includes anon-cash charge of $11.3 million for the change in the valuation of the stand-alone bifurcated derivatives in the Bison Capital Convertible Note (see Note 5 of Notes to Condensed Consolidated Financial Statements) versus a charge of $1.1 million in QE FY 2019.
Foreign Currency Exchange and Other. The currency exchange rate of one Australian dollar to one U.S. dollar was 0.7055 at December 31, 2018, 0.7099 at March 31, 2019, 0.701415 at December 31, 2019 and 0.614241 at March 31, 2020. In QE FY 2019 and QE FY 2020, net unrealized and realized foreign exchange gains (losses) totaled $6,602,000 and $(6,454,000) and $(2,627,000) and $(59,000), respectively. In addition, in QE FY 2019 and QE FY 2020, net unrealized exchange gains (losses) on forward exchange contracts totaled $(152,000) and $587,000, respectively.
Income Taxes.Our income tax provision for QE FY 2020 and QE FY 2019, which derived a very high effective tax rate from the U.S. federal statutory rate of 21%, was primarily as a result of nontaxable or nondeductible items for (i) the change in the valuation of the bifurcated derivatives in the Bison Capital Convertible Note and, in QE FY 2019, (ii) thenon-cash realized foreign exchange loss prior its conversion to equity. Additionally, in both periods, the effective tax rate also differs from the U.S. federal tax rate because of state income taxes from the filing of tax returns in multiple U.S. states and the effect of doing business and filing income tax returns in foreign jurisdictions and for equity plan activity that is currently recognized in the consolidated statements of operations.
Preferred Stock Dividends.In both QE FY 2020 and QE FY 2019, we paid dividends of $0.9 million primarily on our 9.00% Series C Cumulative Redeemable Perpetual Preferred Stock.
Net Income (Loss) Attributable to Common Stockholders.Net loss attributable to common stockholders was $9.5 million in QE FY 2020, versus $1.3 million in QE FY 2019, an increase loss of $8.2 million. This was primarily due to thenon-cash charge for the change in the valuation of the stand-alone bifurcated derivatives in the Bison Capital Convertible Note being $11.3 million in QE FY 2020, versus a charge of $1.1 million in QE FY 2019, as well as an adverse foreign exchange effect between the periods; offset somewhat by lower interest expense and higher operating profit in both geographic venues.
Nine Months Ended March 31, 2020 (“FY 2020”) Compared to Nine Months Ended March 31, 2019 (“FY 2019”)
Revenues.Revenues decreased by $10.0 million, or 4%, to $272.0 million in FY 2020 from $282.0 million in FY 2019. This consisted of a decrease of $8.0 million, or 4%, in revenues in our North American leasing operations, a slight decrease of $0.3 million in revenues in the Asia-Pacific area and a decrease of $1.7 million, or 21%, in manufacturing revenues from Southern Frac. The effect of the average currency exchange rate of a weaker Australian dollar relative to the U.S. dollar in FY 2020 versus FY 2019 reduced the translation of revenues from the Asia-Pacific area. The average currency exchange rate of one Australian dollar during FY 2020 was $0.6762 U.S. dollar compared to $0.7205 U.S. dollar during FY 2019. In Australian dollars, total revenues in the Asia-Pacific area actually increased by 6% in FY 2020 from FY 2019.
Excluding Lone Star (doing business solely in the oil and gas sector), total revenues of our North American leasing operations increased by $6.2 million, or 4%, in FY 2020 from FY 2019; primarily in the construction, commercial and retail sectors, which increased by an aggregate $11.3 million between the periods; offset somewhat by decreases totaling $5.4 million in the industrial, education and services sectors. At Lone Star, revenues decreased by $14.2 million, or 38%, from $37.3 million in FY 2019 to $23.1 million in FY 2020. The slight revenue decrease in the Asia-Pacific area occurred primarily because of the translation effect of the weaker Australian dollar between the periods, as discussed above. In local Australian dollars, revenue between the periods actually increased by AUS$7.3 million, primarily in the transportation, government and mining sectors, which increased by AUS$14.3 million; offset somewhat by decreases totaling AUS$7.0 million in the construction, consumer, education and moving (removals) and storage sectors.
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Sales and leasing revenues represented 33% and 67% of totalnon-manufacturing revenues, respectively, in FY 2020, compared to 34% and 66% of totalnon-manufacturing revenues, respectively in FY 2019.
Non-manufacturing sales during FY 2020 amounted to $88.2 million, compared to $92.6 million during FY 2019; representing a decrease of $4.4 million, or 5%. This consisted of a decrease of $5.2 million, or 10%, in our North American leasing operations and an increase of $0.8 million, or 2%, in sales in the Asia-Pacific area. The increase in the Asia-Pacific area was comprised of an increase of $4.5 million in the national accounts group ($2.0 million decrease due to lower unit sales, $7.2 million increase due to higher average prices and a $0.7 million decrease due to foreign exchange movements), offset somewhat by a decrease of $3.7 million ($2.5 million decrease due to lower unit sales, $0.5 million increase due to higher average prices and a $1.7 million decrease due to foreign exchange movements) in the CSC operations. The translation of sales in the Asia-Pacific area was adversely impacted by the weaker Australian dollar when comparing FY 2020 to FY 2019. In Australian dollars, total sales in the Asia-Pacific area increased by 9% in FY 2020 from FY 2019, primarily in the transportation, mining and government sectors, which increased by an aggregate AUS$13.9 million; offset somewhat by a total decrease of AUS$9.4 million in the construction, consumer, defense, education, moving (removals) and storage and utilities sectors. The transportation sector included two large sales in FY 2020 totaling AUS$9.2 million. In our North American leasing operations, the sales decrease in FY 2020 from FY 2019 was across most sectors, but primarily in the industrial, education and services sectors, which decreased by an aggregate $6.8 million between the periods; offset somewhat be a total increase of $1.8 million in the construction and commercial sectors. FY 2019 included four large sales aggregating $7.1 million, one in the industrial sector for $5.5 million, two in the education sector for $1.0 million and one in the mining sector for $0.6 million. The decrease at Southern Frac was due primarily from reduced sales of liquid containment tanks and chassis, which decreased by an aggregate $3.9 million in FY 2020 from FY 2019; offset somewhat by increases in manufacturing sales to one customer of specialty trailers totaling $1.1 million, plus increased sales between the periods in trash hoppers and other products totaling $1.1 million.
Leasing revenues totaled $177.5 million in FY 2020, a decrease of $3.9 million, or 2%, from $181.4 million in FY 2019. This consisted of a decrease of $2.8 million, or 2%, in North America and a decrease of $1.1 million, or 2%, in the Asia-Pacific area. In Australian dollars, leasing revenues actually increased by 4% percent in the Asia-Pacific area in FY 2020 from FY 2019.
In the Asia-Pacific area, average utilization in the retail and the national accounts group operations was 81% and 73%, respectively, during FY 2020, as compared to 84% and 73%, respectively, in FY 2019. The overall average utilization was 80% in FY 2020 and 82% in FY 2019; but the average monthly lease rate of containers increased to AUS$167 in FY 2020 from AUS$164 in FY 2019, caused primarily by higher average lease rates in portable storage and building containers between the periods. However, the composite average monthly number of units on lease was over 770 lower in FY 2020, as compared to FY 2019. Locally, in Australian dollars, leasing revenue remained constant or increased across a majority of the sectors in FY 2020 versus FY 2019, particularly in the consumer, government, moving (removals) and storage and retail sectors, which increased between the periods by an aggregate AUS$2.4 million.
In our North American leasing operations, average utilization rates were 75%, 80%, 56%, 84% and 82% and average monthly lease rates were $123, $387, $819, $365 and $874 for storage containers, office containers, frac tank containers, mobile offices and modular units, respectively, during FY 2020; as compared to 80%, 85%, 79%, 85% and 85% and average monthly lease rates were $120, $358, $983, $315 and $772 for storage containers, office containers, frac tank containers, mobile offices and modular units in FY 2019, respectively. The average composite utilization rate was 74% FY 2020 and 80% in FY 2019, and the composite average monthly number of units on lease was over 1,900higher in FY 2020 as compared to FY 2019.The decrease in leasing revenues between the periods was primarily in the oil and gas sector, which in FY 2020 was approximately $14.1 million below FY 2019, substantially all attributable to Lone Star; but this decrease was substantially offset by an aggregate $10.7 million increase in the construction, commercial, retail and industrial sectors.
Cost of Sales. Cost of sales from our lease inventories and fleet (which is the cost related to our sales revenues only and exclusive of the line items discussed below) decreased by $4.9 million from $68.2 million during FY 2019 to $63.3 million during FY 2020, and our gross profit percentage from thesenon-manufacturing sales increased to 28% in FY 2020 from 26% in FY 2019. Fluctuations in gross profit percentage between periods is not unusual as a significant amount of ournon-manufacturing sales are out of the lease fleet which, among other things, would have varying sales prices and carrying values. Cost of sales from our manufactured products totaled $5.4 million in FY 2020, as compared to $6.6 million in FY 2019, resulting in a gross margin of $0.9 million in FY 2020 versus a gross margin of $1.4 million in FY 2019, resulting in a gross margin percentage of 14% and 16%, respectively. The lower gross margin in FY 2020 from FY 2019 was due to the reduced sales discussed above and less than optimum production levels.
Direct Costs of Leasing Operations and Selling and General Expenses.The total of direct costs of leasing operations and selling and general expenses increased by $1.2 million from $129.2 million during FY 2019 to $130.4 million during FY 2020. As a percentage of revenues, these costs
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increased to 48% during FY 2020 from 46% in FY 2019 due to our infrastructure not decreasing with the lower revenues. Reduced sales during FY 2019 from FY 2020 and lower leasing revenues, due primarily to the soft oil and gas market in North America, adversely impacted revenues during FY 2020, but did not result in significant actions to reduce our infrastructure. We do not make significant infrastructure changes unless we believe the economic and market conditions causing these adverse factors are long-term in nature. As discussed above in “Recent Developments,” we are closely monitoring theCOVID-19 situation, including implementing restrictions on investing and spending, and laying the groundwork for other cost-cutting measures for the remainder of our fiscal year ending June 30, 2020 and the foreseeable future. The impact of theCOVID-19 pandemic is fluid, continues to evolve and, therefore, we cannot reasonably predict at this time the extent to which our infrastructure will ultimately be impacted.
Depreciation and Amortization.Depreciation and amortization decreased by $5.4 million to $26.6 million in FY 2020 from $32.0 million in FY 2019. The decrease was in both geographic venues, $1.6 million in North America and $3.8 million in the Asia-Pacific area, which were impacted from the effect of certain intangible assets becoming fully amortized. The decrease in the Asia-Pacific also included the translation effect of a weaker Australian dollar to the U.S. dollar in FY 2020 versus FY 2019.
Interest Expense. Interest expense of $20.2 million in FY 2020 decreased by $7.5 million from $27.7 million in FY 2019. In North America, FY 2020 interest expense decreased by $2.2 million from FY 2019 due to both lower average borrowings and a lower weighted-average interest rate between the periods. The weighted-average interest rate was 5.8% (which does not include the effect of the accretion of interest and amortization of deferred financing costs) in FY 2020 versus 6.7% in FY 2019. In the Asia-Pacific area, FY 2020 interest expense was $5.3 million lower from FY 2019 also due to both lower average borrowings and a lower weighted-average interest rate between the periods, as well as the translation effect of a weaker Australian dollar between the periods. The weighted-average interest rate was 7.3% (which does not include the effect of translation, interest rate swap contracts and options and the amortization of deferred financing costs) in FY 2020 versus 10.7% in FY 2019.
Change in Valuation of Bifurcated Derivatives.FY 2020 includes anon-cash charge of $6.4 million for the change in the valuation of the stand-alone bifurcated derivatives in the Bison Capital Convertible Note (see Note 5 of Notes to Condensed Consolidated Financial Statements) versus a charge of $22.8 million in FY 2019.
Foreign Currency Exchange and Other. The currency exchange rate of one Australian dollar to one U.S. dollar was 0.7411 at June 30, 2018, 0.7099 at March 31, 2019, 0.7029 at June 30, 2019 and 0.614241 at March 31, 2020. In FY 2019 and FY 2020, net unrealized and realized foreign exchange gains (losses) totaled $5,334,000 and $(10,141,000) and $(2,632,000) and $(104,000), respectively. FY 2019 includes anon-cash realized foreign exchange loss of $3,554,000 related to the Bison Capital Convertible Note prior to its conversion to equity (see Note 5 of Notes to Condensed Consolidated Financial Statements). In addition, in FY 2019 and FY 2020, net unrealized exchange gains on forward exchange contracts totaled $(279,000) and $331,000, respectively.
Income Taxes.Our income tax provision for FY 2020 and FY 2019, which derived a very high effective tax rate from the U.S. federal statutory rate of 21%, was primarily as a result of nontaxable or nondeductible items for (i) the change in the valuation of the bifurcated derivatives in the Bison Capital Convertible Note and, in FY 2019, (ii) thenon-cash realized foreign exchange loss prior its conversion to equity. Additionally, in both periods, the effective tax rate also differs from the U.S. federal tax rate because of state income taxes from the filing of tax returns in multiple U.S. states and the effect of doing business and filing income tax returns in foreign jurisdictions and for equity plan activity that is currently recognized in the consolidated statements of operations.
Preferred Stock Dividends.In both FY 2020 and FY 2019, we paid dividends of $2.8 million primarily on our 9.00% Series C Cumulative Redeemable Perpetual Preferred Stock.
Net Income (Loss) Attributable to Common Stockholders.Net income attributable to common stockholders was $5.0 million in FY 2020 versus a net loss of $15.5 million in FY 2019, a significant improvement of $25.0 million. This was primarily due to thenon-cash charge for the change in the valuation of the stand-alone bifurcated derivatives in the Bison Capital Convertible Note being $6.4 million versus a charge of $22.8 million in FY 2019, as well as lower interest expense and higher operating profit in the Asia-Pacific area; offset somewhat by the lower operating profit in North America.
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Measures not in Accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”)
Earnings before interest, income taxes, impairment, depreciation and amortization and othernon-operating costs and income (“EBITDA”) and adjusted EBITDA are supplemental measures of our performance that are not required by, or presented in accordance with, U.S. GAAP. These measures are not measurements of our financial performance under U.S. GAAP and should not be considered as alternatives to net income, income from operations or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating, investing or financing activities as a measure of liquidity. Adjusted EBITDA is anon-U.S. GAAP measure. We calculate adjusted EBITDA to eliminate the impact of certain items we do not consider to be indicative of the performance of our ongoing operations. You are encouraged to evaluate each adjustment and whether you consider each to be appropriate. In addition, in evaluating adjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the expenses excluded from our presentation of adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual ornon-recurring items. We present adjusted EBITDA because we consider it to be an important supplemental measure of our performance and because we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, many of which present EBITDA and a form of adjusted EBITDA when reporting their results. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or to reduce our indebtedness. We compensate for these limitations by relying primarily on our U.S. GAAP results and using adjusted EBITDA only supplementally. The following table shows our adjusted EBITDA and the reconciliation from net income (loss) (in thousands):
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
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2019 | 2020 | 2019 | 2020 | |||||||||||||
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Net income (loss) | $ | (332) | $ | (8,625) | $ | (12,702) | $ | 7,767 | ||||||||
Add (deduct) — | ||||||||||||||||
Provision for income taxes | 1,429 | 3,715 | 5,056 | 9,969 | ||||||||||||
Change in valuation of bifurcated derivatives in Convertible Note | 1,131 | 11,259 | 22,829 | 6,365 | ||||||||||||
Foreign currency exchange and other loss | 3 | 2,096 | 3,296 | 2,405 | ||||||||||||
Interest expense | 10,207 | 5,981 | 27,700 | 20,235 | ||||||||||||
Interest income | (27) | (153) | (108) | (519) | ||||||||||||
Depreciation and amortization | 10,998 | 8,712 | 32,256 | 26 ,930 | ||||||||||||
Share-based compensation expense | 655 | 647 | 1,996 | 2,015 | ||||||||||||
Refinancing costs not capitalized | 58 | — | 506 | — | ||||||||||||
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Adjusted EBITDA | $ | 24,122 | $ | 23,632 | $ | 80,829 | $ | 75,167 | ||||||||
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Our business is capital intensive, so from an operating level we focus primarily on EBITDA and adjusted EBITDA to measure our results. These measures provide us with a means to track internally generated cash from which we can fund our interest expense and fleet growth objectives. In managing our business, we regularly compare our adjusted EBITDA margins on a monthly basis. As capital is invested in our established branch (or CSC) locations, we achieve higher adjusted EBITDA margins on that capital than we achieve on capital invested to establish a new branch, because our fixed costs are already in place in connection with the established branches. The fixed costs are those associated with yard and delivery equipment, as well as advertising, sales, marketing and office expenses. With a new market or branch, we must first fund and absorb thestart-up costs for setting up the new branch facility, hiring and developing the management and sales team and developing our marketing and advertising programs. A new branch will have low adjusted EBITDA margins in its early years until the number of units on rent increases. Because of our higher operating margins on incremental lease revenue, which we realize on abranch-by-branch basis, when the branch achieves leasing revenues sufficient to cover the branch’s fixed costs, leasing revenues in excess of the break-even amount produce large increases in profitability and adjusted EBITDA margins. Conversely, absent significant growth in leasing revenues, the adjusted EBITDA margin at a branch will remain relatively flat on a period by period comparative basis.
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Liquidity and Financial Condition
Though we have raised capital at the corporate level to primarily assist in the funding of acquisitions and lease fleet expenditures, as well as for general purposes, our operating units substantially fund their operations through secured bank credit facilities that require compliance with various covenants. These covenants require our operating units to, among other things; maintain certain levels of interest or fixed charge coverage, EBITDA (as defined), utilization rate and overall leverage.
Asia-Pacific Leasing Senior Credit Facility
Our operations in the Asia-Pacific area had an AUS$150,000,000 secured senior credit facility, as amended, under a common terms deed arrangement with the Australia and New Zealand Banking Group Limited (“ANZ”) and Commonwealth Bank of Australia (“CBA”) (the “ANZ/CBA Credit Facility”). On October 26, 2017, RWH (subsequently replaced by GFNAPH) and its subsidiaries and a syndicate led by Deutsche Bank AG, Sydney Branch (“Deutsche Bank”), entered into a Syndicated Facility Agreement (the “Syndicated Facility Agreement”). Pursuant to the Syndicated Facility Agreement, the parties entered into a senior secured credit facility and repaid the ANZ/CBA Credit Facility on November 3, 2017. The senior secured credit facility, as amended (the “Deutsche Bank Credit Facility”), consists of a $26,412,000 (AUS$43,000,000) Facility A that will amortize semi-annually; a $71,559,000 (AUS$116,500,000) Facility B that has no scheduled amortization; a $12,285,000 (AUS$20,000,000) revolving Facility C that is used for working capital, capital expenditures and general corporate purposes; and a $23,034,000 (AUS$37,500,000) revolving Term Loan Facility D. Borrowings bear interest at the three-month bank bill swap interest rate in Australia (“BBSY”), plus a margin of 4.25% to 5.50% per annum, as determined by net leverage, as defined. The Deutsche Bank Credit Facility is secured by substantially all of the assets of Royal Wolf and by the pledge of all the capital stock of GFNAPH and its subsidiaries and matures on November 2, 2023.
Bison Capital Notes
On September 19, 2017, Bison Capital Equity Partners V, L.P and its affiliates (“Bison Capital”), GFN, GFN U.S., GFNAPH and GFNAPF, entered into that certain Amended and Restated Securities Purchase Agreement dated September 19, 2017 (the “Amended Securities Purchase Agreement”). On September 25, 2017, pursuant to the Amended Securities Purchase Agreement, GFNAPH and GFNAPF issued and sold to Bison an 11.9% secured senior convertible promissory note dated September 25, 2017 in the original principal amount of $26,000,000 (the “Convertible Note”) and an 11.9% secured senior promissory note dated September 25, 2017 in the original principal amount of $54,000,000 (the “Senior Term Note” and collectively with the Convertible Note, the “Bison Capital Notes”). Net proceeds from the sale of the Bison Capital Notes were used to repay in full all principal, interest and other amounts due under the term loan to Credit Suisse (see Note 5 of Notes to Consolidated Financial Statements), to acquire the 49,188,526 publicly-traded shares of RWH not owned by us and to pay all related fees and expenses.
On September 6, 2018, we elected to force the conversion of the Convertible Note under its terms therein and delivered a notice to the holders requiring the conversion of the Convertible Note into 3,058,824 shares of the Company’s common stock effective September 10, 2018. GFNAPF was dissolved in September 2018.
On March 25, 2019, the Senior Term Note was repaid in full by proceeds borrowed under the Deutsche Bank Credit Facility, which included interest we elected to defer.
North America Senior Credit Facility
Our North America leasing(Pac-Van and Lone Star) and manufacturing operations (Southern Frac) have a combined $285,000,000 senior secured revolving credit facility, as amended, with a syndicate led by Wells Fargo Bank, National Association (“Wells Fargo”) that also includes East West Bank, CIT Bank, N.A., the CIBC Bank USA, KeyBank, National Association, Bank Hapoalim, B.M., Associated Bank and Bank of the West (the “Wells Fargo Credit Facility”). In addition, the Wells Fargo Credit Facility provides an accordion feature that may be exercised by the syndicate, subject to the terms in the credit agreement, to increase the maximum amount that may be borrowed by an additional $25,000,000. The Wells Fargo Credit Facility matures on March 24, 2022, assuming our publicly-traded senior notes due July 31, 2021(see below) are extended at least 90 days past this scheduled maturity date; otherwise the Wells Fargo Credit Facility would mature on March 24, 2021. There was also a separate loan agreement with Great American Capital Partners (“GACP”), where GACP provided aFirst-In,Last-Out Term Loan (“FILO Term Loan”) within the Wells Fargo Credit Facility in the amount of $20,000,000 that had the same maturity date and commenced principal amortization on October 1, 2018 at $500,000 per quarter. On December 24, 2018, the FILO Term Loan, with a principal balance of $19,500,000, including accrued interest and prepayment fee of one percent, was repaid in full and all terms and provisions relating to the FILO Term Loan were terminated within the credit agreement.
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Borrowings under the Wells Fargo Credit Facility accrue interest, at the our option, either at the base rate, plus 0.5% and a range of 1.00% to 1.50%, or the LIBOR rate, plus 1.0% and a range of 2.50% to 3.00%. The FILO Term Loan bore interest at 11.00% above the LIBOR rate, with a LIBOR rate floor of 1.00%. The Wells Fargo Credit Facility also specifies the future conditions under which the current LIBOR-based interest rate could be replaced in the future with an alternate benchmark interest rate.
The Wells Fargo Credit Facility is secured by substantially all of the rental fleet, inventory and other assets of our North American leasing and manufacturing operations. The Wells Fargo Credit Facility effectively not only finances our North American operations, but also the funding requirements for the Series C Preferred Stock and the publicly-traded unsecured senior notes (see below). The maximum amount of intercompany dividends thatPac-Van and Lone Star are allowed to pay in each fiscal year to GFN for the funding requirements of GFN’s senior and other debt and the Series C Preferred Stock are (a) the lesser of $5,000,000 for the Series C Preferred Stock or the amount equal to the dividend rate of the Series C Preferred Stock and its aggregate liquidation preference and the actual amount of dividends required to be paid to the Series C Preferred Stock; and (b) $6,300,000 for the public offering of unsecured senior notes or the actual amount of annual interest required to be paid; provided that (i) the payment of such dividends does not cause a default or event of default; (ii) each ofPac-Van and Lone Star is solvent; (iii) excess availability, as defined, is $5,000,000 or more under the Wells Fargo Credit Facility; (iv) the fixed charge coverage ratio, as defined, will be greater than 1.25 to 1.00; and (v) the dividends are paid no earlier than ten business days prior to the date they are due.
Corporate Senior Notes
On June 18, 2014, we completed the sale of unsecured senior notes (the “Senior Notes”) in a public offering for an aggregate principal amount of $72,000,000. On April 24, 2017, we completed the sale of a“tack-on” offering of our publicly-traded Senior Notes for an aggregate principal amount of $5,390,000 that was priced at $24.95 per denomination. Net proceeds were $5,190,947, after deducting an aggregate original issue discount (“OID”) of $10,780 and underwriting discount of $188,273. In both offerings, we used at least 80% of the gross proceeds to reduce indebtedness atPac-Van and Lone Star under the Wells Fargo Credit Facility in order to permit the payment of intercompany dividends byPac-Van and Lone Star to GFN to fund the interest requirements of the Senior Notes. For the‘tack-on” offering, this amounted to $4,303,376 of the net proceeds. The Company has total outstanding publicly-traded Senior Notes in an aggregate principal amount of $77,390,000. The Senior Notes bear interest at the rate of 8.125% per annum, mature on July 31, 2021 and are not subject to any sinking fund. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31, commencing on July 31, 2014. The Senior Notes rank equally in right of payment with all of our existing and future unsecured senior debt and senior in right of payment to all of its existing and future subordinated debt. The Senior Notes are effectively subordinated to any of our existing and future secured debt, to the extent of the value of the assets securing such debt. The Senior Notes are structurally subordinated to all existing and future liabilities of our subsidiaries and are not guaranteed by any of our subsidiaries.
As of March 31, 2020, our required principal and other obligations payments for the twelve months ending March 31, 2021 and the subsequent three twelve-month periods are as follows (in thousands):
Twelve Months Ending March 31, | ||||||||||||||||
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2021 | 2022 | 2023 | 2024 | |||||||||||||
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Deutsche Bank Credit Facility | $ | 4,977 | $ | 4,977 | $ | 4,977 | $ | 99,439 | ||||||||
Wells Fargo Credit Facility (a) | — | 179,442 | — | — | ||||||||||||
Senior Notes | — | 77,390 | — | — | ||||||||||||
Other | 2,919 | 1,578 | 1,857 | 1,303 | ||||||||||||
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$ | 7,896 | $ | 263,387 | $ | 6,834 | $ | 100,742 | |||||||||
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(a) | Matures March 24, 2022, assuming the Senior Notes are refinanced. |
Reference is made to “Recent Developments” above for a discussion on theCOVID-19 pandemic and Notes 3 and 5 of Notes to Condensed Consolidated Financial Statements for further discussion of our equity transactions and senior and other debt, respectively, and Note 12 for a discussion of subsequent events.
We currently do not pay a dividend on our common stock and do not intend on doing so in the foreseeable future.
Capital Deployment and Cash Management
Our business is capital intensive, and we acquire leasing assets before they generate revenues, cash flow and earnings. These leasing assets have long useful lives and require relatively minimal maintenance expenditures. Most of the capital we deploy into our leasing business historically has been used to expand our operations geographically, to increase the number of units available for lease at our branch and CSC locations and to add to the breadth of our product mix. Our operations have generally generated annual cash flow which would include, even in profitable periods, the deferral of income taxes caused by accelerated depreciation that is used for tax accounting.
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As we discussed above, our principal source of capital for operations consists of funds available from the senior secured credit facilities at our operating units. We also finance a smaller portion of capital requirements through finance leases and lease-purchase contracts. We intend to continue utilizing our operating cash flow and net borrowing capacity primarily to expanding our container sale inventory and lease fleet through both capital expenditures and accretive acquisitions; as well as paying dividends on the Series C Preferred Stock and 8.00% Series B Cumulative Preferred Stock (“Series B Preferred Stock”), if and when declared by our Board of Directors. While we have always owned a majority interest in Royal Wolf and its results and accounts are included in our consolidated financial statements, access to its operating cash flows, cash on hand and other financial assets and the borrowing capacity under its senior credit facility are limited to us in North America contractually by its senior lenders.
Supplemental information pertaining to our consolidated sources and uses of cash is presented in the table below (in thousands):
Nine Months Ended March 31, | ||||||||
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2019 | 2020 | |||||||
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Net cash provided by operating activities | $ | 27,980 | $ | 53,120 | ||||
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Net cash used in investing activities | $ | (55,839) | $ | (30,076) | ||||
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Net cash provided (used in) by financing activities | $ | 13,950 | $ | (20,580) | ||||
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Cash Flow for FY 2020 Compared to FY 2019
Operating activities. Our operations provided cash of $53.1 million during FY 2020 versus $28.0 million during FY 2019, an increase of $25.1 million between the periods. Net income in FY 2020 of $7.8 million was a significant improvement of $20.5 million from the net loss in FY 2019 of $12.7 million and our management of operating assets and liabilities in FY 2020, when compared to FY 2019, further increased cash by $23.2 million. Historically we have experienced significant variations in operating assets and liabilities between periods when conducting our business in due course. In addition, thenon-cash gains on the bargain purchases of two businesses we acquired in FY 2019 improved our cash between the periods by $1.8 million as we did not make any such acquisitions in FY 2020. In addition, net unrealized gains and losses from foreign exchange and foreign exchange contracts (see Note 6 of Notes to Condensed Consolidated Financial Statements), which affect operating results but arenon-cash addbacks for cash flow purposes, increased operating cash flow by approximately $7.4 million between the periods, from a net cash decrease of $5.1 million in FY 2019 to a net cash increase of $2.3 million in FY 2020. However, cash from operating activities between the periods decreased by a total of $20.0 million as a result ofnon-cash adjustments relating to the change in the valuation of the stand-alone bifurcated derivatives in the Bison Capital Convertible Note, which increased cash by $22.8 million in FY 2019 versus increasing cash by only $6.4 million in FY 2020, a decrease between the periods of $16.4 million; and thenon-cash addback of the realized foreign exchange loss prior to its conversion to equity (see Note 5 of Notes to Condensed Consolidated Financial Statements), which increased cash in FY 2019 by $3.6 million. In addition,non-cash depreciation and amortization, including the amortization of deferred financing costs, accretion of interest and interest deferred on the Senior Term Note, decreased cash between the periods by $5.9 million, from an aggregate $34.2 million increase in FY 2019 to a $28.3 million increase in FY 2020. Deferred income taxes increased cash flows in FY 2020 by $8.2 million, versus $4.2 million in FY 2019, an increase between the periods of $4.0 million. During FY 2020 and FY 2019, the net gain on the sales of lease fleet reduced operating cash flows by $7.0 million and $6.2 million, respectively; and, in both periods,non-cash share-based compensation increased operating cash flows by approximately $2.0 million.
Investing Activities. Cash used in investing activities was $30.1 million during FY 2020, as compared to $55.8 million used during FY 2019, resulting in a net decrease in cash used between the periods of $25.7 million. We made one acquisition in North America in FY 2020 for $2.2 million, whereas in FY 2019 we made five business acquisitions, four in North America and one in the Asia-Pacific area, for $17.1 million (see Note 4 of Notes to Condensed Consolidated Financial Statements). Purchases of property, plant and equipment, or rolling stock (maintenance capital expenditures), were $7.0 million in FY 2020 and $5.9 million in FY 2019, an increase of $1.1 million, primarily in our North American leasing operations. In both periods, proceeds from sales of property, plant and equipment were not significant. Net capital expenditures of lease fleet (purchases, net of proceeds from sales of lease fleet) were $21.1 million in FY 2020, as compared to $33.0 million in FY 2019, a decrease of $11.9 million. In FY 2020, net capital expenditures of lease fleet were approximately $20.7 million in North America, as compared to $24.2 million in FY 2019, a decrease of $3.5 million; and net capital expenditures of lease fleet in the Asia Pacific totaled $0.4 million in FY 2020, versus a net investment of $8.8 million in FY 2019, a decrease of $8.4 million. The amount of cash that we use during any period in investing activities is almost entirely within management’s discretion and we have no significant long-term contracts or other arrangements pursuant to which we may be required to purchase at a certain price or a minimum amount of goods or services.
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Financing Activities. Cash used in financing activities was $20.6 million during FY 2020, as compared to $14.0 million of cash provided during FY 2019, a decrease to cash between the periods of $34.6 million. In FY 2020, we repaid a net $17.8 million on our senior and other debt versus borrowing a net $79.6 million in FY 2019. These financing activities were primarily to fund our investment in the container lease fleet, make business acquisitions, pay dividends and manage our operating assets and liabilities. In addition, in FY 2019, $63.3 million was borrowed under the Deutsche Bank Credit Facility to repay the Senior Term Note (see Note 5 of Notes to Condensed Consolidated Financial Statements). Deferred financing costs, totaled $0.4 million in FY 2019, which primarily related to the Senior Notes consent solicitation and an amendment to Wells Fargo Credit Facility, as compared to $0.1 million in FY 2020, which related to another amendment to Wells Fargo Credit Facility. Cash of $2.8 million was used during both periods to pay dividends on primarily our Series C Preferred Stock. In FY 2020 and FY 2019, we received proceeds of $0.9 million and $0.1 million, respectively, from issuances of common stock on the exercises of stock options.
Asset Management
Receivables and inventories were $47.0 million and $25.5 million at March 31, 2020 and $56.2 million and $29.1 million at June 30, 2019, respectively. At March 31, 2020, DSO in trade receivables were 33 days and 45 days in the Asia-Pacific area and our North American leasing operations, as compared to 34 days and 46 days at June 30, 2019, respectively. Effective asset management is always a significant focus as we strive to apply appropriate credit and collection controls and maintain proper inventory levels to enhance cash flow and profitability. As further discussed above in “Recent Developments,” if our customers experience adverse business consequences due to theCOVID-19 pandemic, including being required to shut down their operations, demand for our services and products could also be materially adversely affected in a rapid manner, including the increase of DSO in trade receivables.
The net book value of our total lease fleet was $449.7 million at March 31, 2020, as compared to $456.8 million at June 30, 2019. At March 31, 2020, we had 102,290 units (24,602 units in retail operations in Australia, 9,335 units in national account group operations in Australia, 12,282 units in New Zealand, which are considered retail; and 56,071 units in North America) in our lease fleet, as compared to 99,743 units (25,355 units in retail operations in Australia, 9,254 units in national account group operations in Australia, 12,574 units in New Zealand, which are considered retail; and 52,560 units in North America) at June 30, 2019. At those dates, 75,745 units (19,830 units in retail operations in Australia, 6,605 units in national account group operations in Australia, 10,682 units in New Zealand, which are considered retail; and 38,628 units in North America); and 77,214 units (20,376 units in retail operations in Australia, 5,931 units in national account group operations in Australia, 10,196 units in New Zealand, which are considered retail; and 40,711 units in North America) were on lease, respectively.
In the Asia-Pacific area, the lease fleet was comprised of 38,686 storage and freight containers and 7,533 portable building containers at March 31, 2020; and 39,616 storage and freight containers and 7,567 portable building containers at June 30, 2019. At those dates, units on lease were comprised of 31,953 storage and freight containers and 5,164 portable building containers; and 31,610 storage and freight containers and 4,893 portable building containers, respectively.
In North America, the lease fleet was comprised of 40,180 storage containers,6,168 office containers (GLOs), 4,209 portable liquid storage tank containers, 4,339 mobile offices and 1,175 modular units at March 31, 2020; and 37,304 storage containers,5,426 office containers (GLOs), 4,215 portable liquid storage tank containers, 4,436 mobile offices and 1,179 modular units at June 30, 2019. At those dates, units on lease were comprised of 27,198 storage containers, 4,993 office containers, 1,928 portable liquid storage tank containers, 3,544 mobile offices and 965 modular units; and 28,561 storage containers, 4,437 office containers, 2,793 portable liquid storage tank containers, 3,931 mobile offices and 989 modular units, respectively.
Contractual Obligations and Commitments
Our material contractual obligations and commitments consist of outstanding borrowings under our credit facilities discussed above and operating leases for facilities and office equipment. We believe that our contractual obligations have not changed significantly from those included in the Annual Report.
Off-Balance Sheet Arrangements
We do not maintain anyoff-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Seasonality
Although demand from certain customer segments can be seasonal, our operations as a whole are not seasonal to any significant extent. We experience a reduction in sales volumes at Royal Wolf during Australia’s summer holiday break frommid-December to the end of January, followed by February being a short working day month. However, this reduction in sales typically is counterbalanced by increased levels of lease revenues derived from the removals, or moving and storage industry, which experiences its seasonal peak of personnel relocations during this same summer holiday break. Demand from some ofPac-Van’s customers can be seasonal, such as in the construction industry, which tends to increase leasing activity in the first and fourth quarters of our fiscal year; while customers in the retail industry tend to lease more units in the second quarter. Our business at Lone Star and Southern Frac, which has been significantly derived from the oil and gas industry, may decline in our second quarter months of November and December and our third quarter months of January and February, particularly if inclement weather delays, or suspends, customer projects.
Environmental and Safety
Our operations, and the operations of many of our customers, are subject to numerous federal and local laws and regulations governing environmental protection and transportation. These laws regulate such issues as wastewater, storm water and the management, storage and disposal of, or exposure to, hazardous substances. We are not aware of any pending environmental compliance or remediation matters that are reasonably likely to have a material adverse effect on our business, financial position or results of operations. However, the failure by us to comply with applicable environmental and other requirements could result in fines, penalties, enforcement actions, third party claims, remediation actions, and could negatively impact our reputation with customers. We have a company-wide focus on safety and have implemented a number of measures to promote workplace safety.
Impact of Inflation
We believe that inflation has not had a material effect on our business. However, during periods of rising prices and, in particular when the prices increase rapidly or to levels significantly higher than normal, we may incur significant increases in our operating costs and may not be able to pass price increases through to our customers in a timely manner, which could harm our future results of operations.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, were-evaluate all of our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions as additional information becomes available in future periods.
A comprehensive discussion of our critical and significant accounting policies and management estimates are included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsand in Note 2 of Notes to Consolidated Financial Statements in the Annual Report. Reference is also made to Note 2 of Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form10-Q for a further discussion of our significant accounting policies. We believe there have been no significant changes in our critical accounting policies, estimates and judgments since June 30, 2019.
Impact of Recently Issued Accounting Pronouncements
Effective July 1, 2019, we adopted Accounting Standard Update (“ASU”)No. 2016-02,Leases (Topic 842). Reference is made to Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of the adoption of this accounting standard, as well as any recently issued accounting pronouncements that could potentially impact us.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign exchanges and other market-driven rates or prices. Exposure to interest rates and currency risks arises in the normal course of our business and we may use derivative financial instruments to hedge exposure to fluctuations in foreign exchange rates and interest rates. We believe we have no material market risks to our operations, financial position or liquidity as a result of derivative activities, including forward-exchange contracts.
Reference is made to Notes 5 and 6 of Notes to Condensed Consolidated Financial Statements for a discussion of our senior and other debt and financial instruments.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” in Rules13a-15(e) and15d-15(e) of the Exchange Act. In designing and evaluating our disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and that our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule13a-15(b), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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None.
In evaluating our forward-looking statements, readers should specifically consider risk factors that may cause actual results to vary from those contained in the forward-looking statements. Risk factors associated with our business are included, but not limited to, our Annual Report on Form10-K for the year ended June 30, 2019, as filed with the SEC on September 12, 2019 (“Annual Report”) and other subsequent filings with the SEC, including the following:
Our business, results of operations and financial condition may be adversely affected by global public health epidemics, including the strain of coronavirus known asCOVID-19., and the recent disruption in the global oil markets and resulting substantial price decline.
Our business, consolidated results of operations and financial condition would be adversely affected if a global public health pandemic, includingCOVID-19, interferes with the ability of our employees, vendors, and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business. A global public health pandemic, includingCOVID-19, poses the risk that we or our employees, vendors, customers may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities, restrictions on travel to or from locations where we provide service, or restrictions on shipping products from certain jurisdictions where they are produced or into certain jurisdictions where customers are located. The extent to which theCOVID-19 pandemic will impact our business remains uncertain, however, there could be a material adverse impact on our financial condition or results of operations.
Our business, results of operations and financial condition may be adversely affected by the recent disruption in the global oil markets and resulting substantial price decline.
As a result of the decrease in demand caused by theCOVID-19 pandemic and the political tensions between several large oil producing countries, there has been a substantial decline in oil and gas prices. A significant portion of our leasing revenues in North America are derived from customers in the oil and gas industry, particularly those doing business in the Permian and Eagle Ford basins in Texas, who are typically adversely affected when this industry is in a downward economic cycle. The substantial decline in oil and gas prices could result in the reduction of drilling activity, project modifications, delays or cancellations, general business disruptions and delays in payment of, or nonpayment of, amounts that are owed to us. The extent to which the decline in oil and gas prices will impact our business remains uncertain, however, there could be a material adverse impact on our financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
See Exhibit Index attached.
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EXHIBIT INDEX
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 5, 2020 | GENERAL FINANCE CORPORATION | |||
By: /s/ Jody E. Miller Jody E. Miller Chief Executive Officer | ||||
By: /s/ Charles E. Barrantes Charles E. Barrantes Chief Financial Officer |
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