Summary of MOBILE MINI INC

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 our December 31, 2008 consolidated financial statements and the accompanying notes thereto which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2009. This discussion contains forward-looking statements. Forward-looking statements are based on current expectations and assumptions that involve risks and uncertainties. Our actual results may differ materially from those anticipated in forward-looking statements.
The following discussion takes into account our merger transaction with Mobile Storage Group, Inc. on June 27, 2008. Our operating results for the reporting periods ended June 30, 2009 reflect the results of the acquired operations of Mobile Storage Group, whereas our operating results for the reporting periods ended June 30, 2008, reflect the results of the acquired operations of Mobile Storage Group since June 27, 2008 and include certain estimated expenses related to the integration and merger in connection with the acquisition. Overview
General
We are the largest provider of portable storage solutions in North America and the United Kingdom, through a total lease fleet of approximately 264,000 portable storage and mobile office units at June 30, 2009. We offer a wide range of portable storage products in varying lengths and widths with an assortment of differentiated features such as our patented locking systems, multiple doors, electrical wiring and shelving.
We derive most of our revenues from the leasing of portable storage containers and mobile offices. In addition to our leasing business, we also sell portable storage containers and occasionally sell mobile office units. Our sales revenues represented 10.0% and 10.2% of total revenues for the six months ended June 30, 2008 and 2009, respectively.
On June 27, 2008, we acquired the outstanding shares of Mobile Storage Group through a merger of a wholly-owned subsidiary of Mobile Mini into Mobile Storage Group's ultimate parent, MSG WC Holdings Corp. Immediately thereafter, each of MSG WC Holdings Corp. and two of its direct subsidiaries merged with and into Mobile Mini and Mobile Storage Group became a wholly-owned subsidiary of Mobile Mini. We refer to this transaction as "the Merger" or "the acquisition" throughout this report.
The Merger was the largest acquisition we have completed and it increased the scope of our operations in both the U.S. and the U.K. Our condensed consolidated statements of income for the periods ended June 30, 2008 and 2009 include certain expenses incurred related to integration of the business acquired in the Merger. See the Notes to Condensed Consolidated Financial Statements included herein for additional information regarding the Merger.
Prior to acquiring MSG, Mobile Mini grew through both organic growth and smaller acquisitions, which we use to gain a presence in new markets. Typically, we enter a new market through the acquisition of the business of a smaller local competitor and then apply our business model, which is usually much more customer service and marketing focused than the business we are buying or its competitors in the market. If we cannot find a desirable acquisition opportunity in a market we wish to enter, we establish a new location from the ground up. As a result, a new branch location will typically have fairly low operating margins during its early years, but as our marketing efforts help us penetrate the new market and we increase the number of units on rent at the new branch, we take advantage of operating efficiencies to improve operating margins at the branch and typically reach company average levels after several years. When we enter a new market, we incur certain costs in developing an infrastructure. For example, advertising and marketing costs will be incurred and certain minimum levels of staffing and delivery equipment will be put in place regardless of the new market's revenue base. Once we have achieved revenues during any period that are sufficient to cover our fixed expenses, we generate high margins on incremental lease revenues. Therefore, each additional unit rented in excess of the break-even level, contributes significantly to profitability. Conversely, additional fixed expenses that we incur require us to achieve additional revenue as compared to the prior period to cover the additional expense.
As a result of the Merger, we have been implementing our business model across the newly acquired MSG branches. While we have been able to realize significant cost reductions as a result of the combination of two companies, costs of implementing our business model at the branches we acquired offset some of the cost reductions.

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The level of non-residential construction activity is an important external factor that we examine to determine the direction of our business. Customers in the construction industry represented approximately 36% and 43% of our units on rent at December 31, 2008 and 2007, respectively, and because of the degree of operating leverage we have, increases or decreases in non-residential construction activity can have a significant effect on our operating margins and net income. In 2007, after three years of very strong growth in non-residential construction activity in the U.S, this sector began to moderate and then decline and the level of our construction related business began to slow down and then decline. This decline continues to adversely affect our results of operations into 2009.
In managing our business, we focus on growing leasing revenues, particularly in existing markets where we can take advantage of the operating leverage inherent in our business model. Our goal is to maintain a stable growth rate. We are a capital-intensive business, more historically than we currently are, so in addition to focusing on earnings per share, we focus on adjusted EBITDA to measure our results. We calculate this number by first calculating EBITDA, which we define as net income before interest expense, debt restructuring or extinguishment expense (if applicable), provision for income taxes, depreciation and amortization. This measure eliminates the effect of financing transactions that we enter into and this measure provides us with a means to track internally generated cash from which we can fund our interest expense and our lease fleet growth. In comparing EBITDA from year to year, we typically further adjust EBITDA to ignore the effect of what we consider non-recurring events not related to our core business operations.
Because EBITDA is a non-GAAP financial measure, as defined by the SEC, we include below in this report reconciliations of EBITDA to the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States.
We present EBITDA because we believe it provides useful information regarding our ability to meet our future debt payment requirements, capital expenditures and working capital requirements and that it provides an overall evaluation of our financial condition. In addition, EBITDA is a component of certain financial covenants under our revolving credit facility and is used to determine our available borrowing capacity and the facility's applicable interest rate in effect at any point in time. EBITDA has certain limitations as an analytical tool and should not be used as a substitute for net income, cash flows or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles in the United States or as a measure of our profitability or our liquidity. In particular, EBITDA, as defined, does not include:
• Interest expense - because we borrow money to partially finance our capital expenditures, primarily related to the expansion of our lease fleet, interest expense is a necessary element of our cost to secure this financing to continue generating additional revenues.

• Debt restructuring or extinguishment expense - as historically defined in our revolving credit facility, debt restructuring or debt extinguishment expenses are not deducted in our various calculations made under our facility and are treated no differently than interest expense. As discussed above, interest expense is a necessary element of our cost to finance a portion of the capital expenditures needed for the growth of our business.

• Income taxes - EBITDA, as defined, does not reflect income taxes or the requirements for any tax payments.

• Depreciation and amortization - because we are a leasing company, our business is very capital intensive and we hold acquired assets for a period of time before they generate revenues, cash flow and earnings; therefore, depreciation and amortization expense is a necessary element of our business.

When evaluating EBITDA as a performance measure, and excluding the above-noted charges, all of which have material limitations, investors should consider, among other factors, the following:
• increasing or decreasing trends in EBITDA;

• how EBITDA compares to levels of debt and interest expense; and

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• whether EBITDA historically has remained at positive levels.

Because EBITDA, as defined, excludes some but not all items that affect our cash flow from operating activities, EBITDA may not be comparable to a similarly titled performance measure presented by other companies.
The table below is a reconciliation of EBITDA to net cash provided by operating activities for the periods indicated:

                                                  Three Months Ended                Six Months Ended
                                                       June 30,                         June 30,
                                                2008             2009             2008            2009
                                                                    (In thousands)
EBITDA                                        $  20,354        $  33,611        $ 49,814        $  73,040
Interest paid                                    (3,712 )        (11,573 )        (6,990 )        (27,702 )
Income and franchise taxes paid                    (327 )           (728 )          (429 )           (872 )
Share-based compensation expense                  1,376            1,660           2,364            3,281
Gain on sale of lease fleet units                (1,603 )         (2,934 )        (3,094 )         (5,779 )
Loss on disposal of property, plant and
equipment                                             -               11              29               36
Changes in certain assets and
liabilities, net of effects of
businesses acquired:
Receivables                                      (4,898 )          5,836          (2,264 )         17,563
Inventories                                      (3,067 )          1,209          (3,570 )          1,639
Deposits and prepaid expenses                       357            2,105             900            2,435
Other assets and intangibles                      4,430             (260 )            99             (441 )
Accounts payable and accrued liabilities          7,701           (2,701 )         4,682          (16,364 )

Net cash provided by operating
activities                                    $  20,611        $  26,236        $ 41,541        $  46,836

EBITDA is calculated as follows, without further adjustment, for the periods indicated:

                                                  Three Months Ended                Six Months Ended
                                                       June 30,                         June 30,
                                                 2008             2009            2008            2009
                                                          (In thousands except percentages)
Net income                                    $    4,861        $  5,227        $ 15,519        $ 13,693
Interest expense                                   6,419          14,966          12,564          30,207
Provision for income taxes                         3,327           2,984          10,315           8,453
Depreciation and amortization                      5,747          10,434          11,416          20,687

EBITDA                                        $   20,354        $ 33,611        $ 49,814        $ 73,040

EBITDA margin(1)                                    25.1 %          35.4 %          31.2 %          37.4 %

EBITDA and EBITDA margin(1) excluding
integration, merger and restructuring
expenses:                                     $   31,963        $ 39,240        $ 61,423        $ 80,883

                                                    39.4 %          41.3 %          38.5 %          41.5 %

(1) EBITDA margin is calculated as EBITDA divided by total revenues expressed as a percentage.

In managing our business, we routinely compare our EBITDA margins from year to year and based upon size of branch. We define this margin as EBITDA divided by our total revenues, expressed as a percentage. We use this comparison, for example, to study internally the effect that increased costs have on our margins. As capital is invested in our established branch locations, we achieve higher EBITDA margins on that capital than we achieve on capital invested to establish a new branch, because our fixed costs are already in place in connection with the established branches. The fixed costs are those associated with yard and delivery equipment, as well as advertising, sales, marketing and office expenses. With a new market or branch, we must first fund and absorb the startup costs for setting up the new branch facility, hiring and developing the management and sales team and developing our marketing and advertising programs. A new branch will have low EBITDA margins in its early years until the number of units on rent increases. Because of our high operating margins on incremental lease revenue, which we realize on a branch-by-branch basis when the branch achieves leasing revenues sufficient to cover the branch's fixed costs, leasing revenues in excess of the break-even amount produce large increases in profitability. Conversely, absent significant growth in leasing revenues, the EBITDA margin at a branch would be expected to remain relatively flat on a period-by-period comparative basis.

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Accounting and Operating Overview
Our leasing revenues include all rent and ancillary revenues we receive for our portable storage, combination storage/office and mobile office units. Our sales revenues include sales of these units to customers. Our other revenues consist principally of charges for the delivery of the units we sell. Our principal operating expenses are (1) cost of sales; (2) leasing, selling and general expenses; and (3) depreciation and amortization, primarily depreciation of the portable storage units and portable offices in our lease fleet. Cost of sales is the cost of the units that we sold during the reported period and includes both our cost to buy, transport, remanufacture and modify used ocean-going containers and our cost to manufacture portable storage units and other structures. Leasing, selling and general expenses include among other expenses, advertising and other marketing expenses, real property lease expenses, commissions, repair and maintenance costs of our lease fleet and transportation equipment and corporate expenses for both our leasing and sales activities. Our repairs on wood offices require more maintenance cost than our portable storage units and have become a larger part of our lease fleet repair and maintenance expense over the past several years. Annual repair and maintenance expenses on our leased units over the last three fiscal years have averaged approximately 4.3% of lease revenues and are included in leasing, selling and general expenses. We expense our normal repair and maintenance costs as incurred (including the cost of periodically repainting units).
Our principal asset is our lease fleet, which has historically maintained value close to its original cost. The steel units in our lease fleet (other than van trailers) are depreciated on the straight-line method over our units' estimated useful life of 30 years after the date the unit is placed in service, with an estimated residual value of 55%. The depreciation policy is supported by our historical lease fleet data which shows that we have been able to obtain comparable rental rates and sales prices irrespective of the age of our container lease fleet. Our wood mobile office units are depreciated over 20 years to 50% of original cost. Van trailers, which constitute a small part of our fleet, are depreciated over seven years to a 20% residual value. In connection with the MSG acquisition, we also acquired non-core assets that were not part of our principal lease fleet. These assets include timber units which are older wood constructed mobile offices in the U.K. that are depreciated over 5 years to 10% of their assigned value. Other non-core units include portable toilets. Steel portable toilets are depreciated over 30 years to 55% of their residual value, wood timber portable toilets are depreciated over 5 years to 10% of their residual value and fiberglass portable toilets are depreciated over 3 years to 30% of their residual value.
The table below summarizes those transactions that effectively maintained the net book value of our lease fleet at $1.1 billion at December 31, 2008, and at June 30, 2009:

                                                                      Dollars               Units
                                                                   (In thousands)
Lease fleet at December 31, 2008, net                             $      1,078,156          273,748
Purchases:
Container purchases and containers, including freight                          532              217
Manufactured units:
Steel storage containers, combination storage/office combo
units and steel security offices                                               568               45
Wood mobile offices                                                            110                4
Remanufacturing and customization (3):
Remanufacturing or customization of units purchased or
acquired in the current year                                                   177               31
Remanufacturing or customization of 130 units purchased in a
prior year                                                                   5,062               58 (1)
Remanufacturing or customization of 5,272 units obtained
through acquisition in a prior year                                          3,981              477 (2)
Other                                                                       (4,345 )         (3,388 )(4)
Adjustments to valuations on acquired MSG trailers                          (8,387 )
Cost of sales from lease fleet                                             (11,181 )         (7,092 )
Effect of exchange rate changes                                             15,219
Depreciation                                                               (10,134 )

Lease fleet at June 30, 2009, net                                 $      1,069,758          264,100

(1) These units include the net additional units that were the result of splitting steel containers into one or more shorter units, such as splitting a 40-foot container into two 20-foot units, or one 25-foot unit and one 15-foot unit.

(2) Includes units moved from finished goods to lease fleet.

(3) Does not include any routine maintenance, which is expensed as incurred.

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(4) Includes net units transferred in and out of the lease fleet.

The table below outlines the composition of our lease fleet (by book value and unit count) at June 30, 2009:

                                                       Number of       Percentage
                                     Book Value          Units          of Units
                                   (In thousands)
       Steel storage containers   $        619,261        210,399               80 %
       Mobile offices                      530,510         42,614               16 %
       Van trailers                          7,283         11,087                4 %
       Other, primarily chassis              2,793

                                         1,159,847
       Accumulated depreciation            (90,089 )

                                  $      1,069,758        264,100              100 %

Appraisals on our fleet are conducted on a regular basis by an independent appraiser selected by our lenders and the appraiser does not differentiate in value based upon the age of the container or the length of time it has been in our fleet. As of June 30, 2009, based on this orderly liquidation value appraisal, on which our borrowings under our revolving credit facility are based, our lease fleet liquidation appraisal value is approximately $916.8 million, which equates to 85.7% of our lease fleet net book value of $1.1 billion at June 30, 2009.
Our expansion program and other factors can affect our overall lease fleet asset utilization rate. During the last five fiscal years, our annual utilization levels averaged 80.2%, and ranged from a low of 75.0% in 2008 to a high of 82.9% in 2005. Our utilization is somewhat seasonal, historically with the low normally being realized in the first quarter and the high realized in the fourth quarter. However, with the challenging economic business environment, especially in the non-residential construction industry, we have seen a decline in our utilization rates compared to the same period in the prior year. We ended the 2008 year with an average lease fleet utilization rate of 75.0%. Our average utilization rate for the second quarter of 2009 was 59.5% as compared to 64.6% in the first quarter of 2009 and as compared to 75.4% in the second quarter of 2008.

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RESULTS OF OPERATIONS
Three Months Ended June 30, 2009, Compared to Three Months Ended June 30, 2008 Total revenues for the quarter ended June 30, 2009 increased by $13.8 million, or 17.1%, to $94.9 million from $81.1 million for the same period in 2008. The increase in total revenues is primarily due to the acquisition of MSG. Leasing revenues for the quarter increased by $11.6 million, or 15.9%, to $84.4 million from $72.8 million for the same period in 2008. The increase in leasing revenue growth is primarily due to the acquisition, but was offset in part by a reduction in business activity due to the economic recession and a change in foreign currency exchange rates. Our sales of portable storage and office units for the quarter ended June 30, 2009 increased by 26.0%, to $9.9 million from $7.8 million during the same period in 2008. Leasing revenues, as a percentage of total revenues for the quarters ended June 30, 2009 and 2008, were 88.9% and 89.8%, respectively. Our leasing business continues to be our primary focus and leasing revenues have been the predominant part of our revenue mix over the past several years.
Cost of sales is the cost related to our sales revenues only. Cost of sales was 67.1% and 68.5% of sales revenue for the quarters ended June 30, 2009 and 2008, respectively. Our gross margins remained relatively high, at 32.8% for the quarter ended June 30, 2009 and 31.5% for the same period in 2008. Leasing, selling and general expenses increased $5.3 million, or 12.1%, to $49.1 million for the quarter ended June 30, 2009, from $43.8 million for the same period in 2008. Leasing, selling and general expenses, as a percentage of total revenues, decreased to 51.7% for the quarter ended June 30, 2009, from 54.0% for the same period in 2008, primarily due to the cost synergies achieved in the acquisition and our cost cutting measures during the current year. This cost cutting was primarily reductions in our workforce including migrating a number of our branches into operational yards. These operational yards do not have all the headcount and overhead associated with a fully staffed branch. In addition to a reduction in payroll costs, we benefited from lower repair and maintenance expenses related to our lease fleet, lower fuel costs and third-party haulers as compared to the prior period.
Integration, merger and restructuring expenses for the quarter ended June 30, 2009 were $5.6 million and primarily represent costs for repositioning assets to their intended location and costs associated with further reductions to our workforce. Other continuing costs related to integration, merger and restructuring will be expensed as incurred and may include additional repositioning of assets and further reductions in our workforce. EBITDA increased $13.2 million, or 65.1%, to $33.6 million, as compared to $20.4 million for the same period in 2008 and EBITDA margins were 35.4% and 25.1% of total revenues for the quarters ended June 30, 2009 and 2008, respectively. EBITDA, excluding integration, merger and restructuring expenses, increased $7.2 million, or 22.8%, to $39.2 million compared to $32.0 million for the same period in 2008. EBITDA margins, excluding integration, merger and restructuring expenses were 41.3% and 39.4% of total revenues for the three months ended June 30, 2009 and 2008, respectively.
Depreciation and amortization expenses increased $4.7 million, or 81.6%, to $10.4 million in the quarter ended June 30, 2009, as compared to $5.7 million during the same period in 2008. The increase is primarily due to the acquisition, investment in additional technology and communication equipment and some growth in lease fleet, (primarily acquired in 2008) and related delivery equipment.
Interest expense increased $8.6 million to $15.0 million for the quarter ended June 30, 2009 as compared to $6.4 million for the same period in 2008. This increase is primarily due to the debt assumed in the acquisition. Our average borrowing rate increased slightly during the second quarter of 2009 from the prior year level, including the effect of the assumption of Mobile Storage's $200.0 million 9.75% Senior Notes. The weighted average interest rate on our debt for the three months ended June 30, 2009 was 6.1% compared to 5.8% for the three months ended June 30, 2008, excluding amortization of debt issuance costs. Taking into account the amortization of debt issuance costs, the weighted average interest rate was 6.6% in the 2009 quarter and was 6.3% in the 2008 quarter.
Provision for income taxes was based on our annual estimated effective tax rate. The tax rate for the quarter ended June 30, 2009 was 36.3%, as compared to 40.6% during the same period in 2008. The 4.3% decrease is attributed to our United Kingdom operations related to favorable tax treatment on certain expenses resulting from the Merger, which were clarified in the second quarter of 2009 as being deductible for tax accounting. Our consolidated tax provision includes the expected tax rates for our operations in the United States, Canada, United Kingdom and The Netherlands.

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Net income for the three months ended June 30, 2009, was $5.2 million compared to net income of $4.9 million for the same period in 2008. Our second quarter net income results include integration, merger and restructuring expenses of $5.6 million and $11.6 million, (approximately $3.5 million and $7.2 million . . .