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GFN > SEC Filings for GFN > Form 10-K on 17-Sep-2013All Recent SEC Filings

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Annual Report

Item 7. 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 included elsewhere in this Annual Report on Form 10-K. This discussion includes forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from those anticipated or discussed in those forward-looking statements as a result of various factors; including, but not limited to, those described in Item 1A. "Risk Factors."

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 North America Corp., a Delaware corporation ("GFNNA"); GFN Manufacturing Corporation, a Delaware corporation ("GFNMC"), and its subsidiary, southern Frac, LLC, a Texas limited liability company (collectively "Southern Frac"); Royal Wolf Holdings Limited (formerly GFN Australasia Holdings Pty Ltd)., an Australian corporation publicly traded on the Australian Securities Exchange ("RWH"), and its Australian and New Zealand subsidiaries (collectively, "Royal Wolf"); Pac-Van, Inc., an Indiana corporation , and its Canadian subsidiary, PV Acquisition Corp., an Alberta corporation, doing business as "Container King" (collectively "Pac-Van").

Background and Overview

We incorporated in Delaware on October 14, 2005 and completed our initial public offering ("IPO") in April 2006. Our primary long-term strategy and business plan are to acquire and operate rental services and specialty finance businesses in North and South America, Europe and the Asia-Pacific (or Pan-Pacific) area.

At June 30, 2013, we have two geographic segments that include three operating units; Royal Wolf, which leases and sells storage containers, portable container buildings and freight containers in Australia and New Zealand, which is referred geographically by us to be the Asia-Pacific (or Pan-Pacific) area; Pac-Van, which leases and sells storage, office and portable liquid storage tank containers, modular buildings and mobile offices in North America; and Southern Frac, which manufactures portable liquid storage tank containers in North America.

We do business in three distinct, but related industries, mobile storage, modular space and liquid containment; which we collectively refer to as the "portable services industry." However, our business in the liquid containment industry commenced during the second half of the year ended June 30, 2012 and was not significant at June 30, 2012. Our two leasing subsidiaries, Royal Wolf and Pac-Van, lease and sell their products through nineteen customer service centers ("CSCs") in Australia, eight CSCs in New Zealand and twenty-nine branch locations across eighteen states in the United States and in Alberta, Canada. As of June 30, 2013, we had 263 and 466 employees and 39,183 and 15,076 lease fleet units in the Asia-Pacific area and North America, respectively.

Our products primarily consist of the following:

Mobile Storage

Storage Containers. Storage containers consist of new and used shipping containers that provide a flexible, low cost alternative to warehousing, while offering greater security, convenience and immediate accessibility. Our storage products include general purpose dry storage containers, refrigerated containers and specialty containers in a range of standard and modified sizes, designs and storage capacities. Specialty containers include blast-resistant units, hoarding units and hazardous-waste units. We also offer storage vans, also known as storage trailers or dock-height trailers.

Freight Containers. Freight containers are specifically designed for transport of products by road and rail. Our freight container products include curtain-side, refrigerated and bulk cargo containers, together with a range of standard and industry-specific dry freight containers.

Modular Space

Modular Buildings. Also known as manufactured buildings, modular buildings provide customers with additional space and are often modified to customer specifications. Modular buildings range in size from 1,000 to more than 30,000 square feet and may be highly customized.

Mobile Offices. Also known as trailers or construction trailers, mobile offices are re-locatable units with aluminum or wood exteriors on wood (or steel) frames on a steel carriage fitted with axles, allowing for an assortment of "add-ons" to provide comfortable and convenient temporary space solutions.

Portable Container Buildings and Office Containers. Portable container buildings and office containers are either modified or specifically-manufactured containers that provide self-contained office space with maximum design flexibility. Office containers in the U.S. are oftentimes referred to as ground level offices ("GLOs").


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Liquid Containment

Portable Liquid Storage Tank Containers. Portable liquid storage tank containers are often referred to as "frac tanks" or "frac tank containers" and are manufactured steel containers with fixed steel axles for transport and use in a variety of industries; including oil and gas exploration and field services, refinery, chemical and industrial plant maintenance, environmental remediation and field services, infrastructure building construction, marine services, pipeline construction and maintenance, tank terminals services, wastewater treatment and waste management and landfill services. While there are a number of different sizes of tanks currently used in the market place, we are currently focusing on the more common 500-barrel capacity containers. Our products typically include features such as guardrails, safety stairways, multiple entry ways and a sloped bottom for easy cleaning, an epoxy lining, and various feed and drain lines.

Results of Operations

Year Ended June 30, 2013 ("FY 2013") Compared to Year Ended June 30, 2012 ("FY 2012")

The following compares our FY 2013 results of operations with our FY 2012 results of operations.

Revenues. Revenues increased $33.3 million, or 16%, to $245.5 million in FY 2013 from $212.2 million in FY 2012. This consisted of an increase of $11.3 million, or 8%, in revenues at Royal Wolf, a $2.9 million increase, or 4%, in revenues at Pac-Van and a $19.1 million in manufacturing revenues from Southern Frac; which we acquired on October 1, 2012. The translation effect of the average currency exchange rate, driven by the slight weakening in the Australian dollar relative to the U.S. dollar in FY 2013 versus FY 2012, did not significantly impact the translation in FY 2013 of the total revenues at Royal Wolf when compared to FY 2012. In Australian dollars, total revenues at Royal Wolf increased by 9% in FY 2013 from FY 2012. The average currency exchange rate of one Australian dollar during FY 2013 was $1.02725 U.S. dollar compared to $1.03272 U.S. dollar during FY 2012.

The revenue increase at Royal Wolf was primarily in the mining, defense and consumer sectors where revenues increased by over $11.0 million in FY 2013 from FY 2012. At Pac-Van, increases across-the-board in most sectors totaling $10.8 million (particularly in the commercial, construction, mining and energy, education and industrial, sectors, which totaled $7.6 million) were substantially offset by decreases totaling $7.9 million in the government and services sectors. In FY 2012, revenues were substantially enhanced by the recognition of $6.5 million in revenues to one customer in the government-related sector in the United States pursuant to a contract for modular units.

Sales and leasing revenues represented 45% and 55% of total revenues, excluding Southern Frac, in FY 2013 and 51% and 49% of total revenues in FY 2012, respectively.

Sales during FY 2013 amounted to $122.1 million, compared to $108.3 million during FY 2012; representing an increase of $13.8 million, or 13%. This included a $4.9 million decrease, or 17%, in sales at Pac-Van and $19.1 million in sales from Southern Frac. The slight decrease of $0.4 million, or 0.5%, in sales in FY 2013 from FY 2012 at Royal Wolf was comprised of an increase of $4.7 million ($8.8 million increase due to higher unit sales, $4.0 million decrease due to average price decreases and $0.1 million decrease due to foreign exchange movements) in the national accounts group and a decrease of $5.1 million ($7.8 million decrease due to lower unit sales, $3.2 million increase due to average price increases and $0.5 million decrease due to foreign exchange movements) in the CSC operations. At Pac-Van, the lower sales in FY 2013 versus FY 2012 (which included the $6.5 million of sales revenues recognized from one customer in the government-related sector discussed above) were primarily due to a total $8.2 million decrease in the government, services, retail, commercial and construction sectors; offset somewhat by increases of $3.3 million in the other sectors, particularly the education sector, which increased by $1.6 million. At Southern Frac, portable liquid storage tank container sales in FY 2013 consisted of 577 units at an average sales price of approximately $33,200 per unit.

Leasing revenues during FY 2013 totaled $123.4 million, as compared to $103.9 million during FY 2012, representing an increase of $19.5 million, or 19%. Leasing revenues increased at Royal Wolf by $11.7 million, or 19%, and by $7.8 million, or 19%, at Pac-Van. In Australian dollars, FY 2013 leasing revenues at Royal Wolf also increased by 19% from FY 2012.

At Royal Wolf, average utilization in the retail operations was 85% during FY 2013 and 87% during FY 2012; and average utilization in the national accounts group operations was 74% during FY 2013 and 79% during FY 2012. In FY 2013 and FY 2012, the overall average utilization was 82% and 84%, respectively; and the average monthly lease rate of containers was AUS$164 in FY 2013 and AUS$151 in FY 2012. Leasing revenues in FY 2013 increased over FY 2012 due primarily to the combination of the higher average monthly lease rate and the average monthly number of units on lease being more than 3,300 higher in FY 2013 as compared to FY 2012. These factors more than offset the


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reduction in the average utilization rates between periods, though the utilization rates remain strong in FY 2013. We believe the primary reasons we are generally able to maintain high average utilization rates and increase our average units on lease between periods at Royal Wolf are the stronger economy in the Asia-Pacific area and our position as the only company with a national footprint in the mobile storage industry in Australia and New Zealand. We continually review each local market in which we do business to determine if local factors justify increases or decreases in lease rates and the effect these changes would have on utilization and revenues.

At Pac-Van, average utilization rates were 82%, 82%, 87%, 67% and 75% and average monthly lease rates were $105, $262, $965, $236 and $843 for storage containers, office containers, frac tank containers, mobile offices and modular units, respectively, during FY 2013; as compared to 86%, 83%, 57%, 66% and 77% and $102, $254, $1,232, $225 and $774 for storage containers, office containers, frac tank containers, mobile offices and modular units in FY 2012, respectively. The average composite utilization rate in FY 2013 and FY 2012 was 76% for both years, and the composite average monthly number of units on lease was over 1,550 higher in FY 2013 as compared to FY 2012. The strong utilization and generally higher monthly lease rates resulted primarily from improved demand across most sectors, with a slight reduction in leasing revenues of $0.5 million in the government and education 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 $4.5 million, from $79.6 million during FY 2012 to $75.1 million during FY 2013, as a result of the lower sales from our lease inventories and fleet discussed above. However, our gross profit percentage from these sales revenues remained at approximately 27%. Cost of sales from our manufactured portable liquid storage tank containers totaled $17.9 million, or approximately $31,100 per unit, which included additional costs of $145,000 due to the purchase price allocation effect at Southern Frac of carrying the opening inventory on October 1, 2012 at fair value. Our gross profit percentage from sales of manufactured units was slightly above 6% during FY 2013.

Direct Costs of Leasing Operations and Selling and General Expenses. Direct costs of leasing operations and selling and general expenses increased in absolute dollars from $87.5 million during FY 2012 to $101.2 million during FY 2013, or by $13.7 million, but remained steady as a percentage of revenues at 41%. This absolute dollar increase was not only the result of our increased leasing operations, but also to the additional selling and administrative expenses of $2.3 million incurred at Southern Frac in FY 2013, which included $174,000 of one-time transaction-related costs since the date of acquisition, as well as $1.0 million of incremental transaction costs incurred on all acquisition-related activities.

Depreciation and Amortization. Depreciation and amortization increased by $2.9 million to $21.8 million in FY 2013 from $18.9 million in FY 2012 primarily as a result of our increasing investment in the lease fleet and business acquisitions.

Interest Expense. Interest expense of $11.0 million in FY 2013 was $1.7 million lower than the $12.7 million in FY 2012. This was comprised of a decrease in interest expense of $0.7 million in North America and a decrease of $1.0 million at Royal Wolf. The weighted-average interest rate (which does not include the effect of translation, interest rate swap contracts and options and the amortization of deferred financing costs) at Royal Wolf of 6.1% in FY 2013 decreased significantly from 8.1% in FY 2012 and effectively offset the comparatively higher average borrowings between periods. In North America, the decrease in the weighted-average interest rate (which does not include the effect of the amortization of deferred financing costs) of 4.8% in FY 2013 from 6.4% in FY 2012 also more than offset the higher average borrowings in FY 2013, as compared to FY 2012.

Foreign Currency Exchange and Other. The currency exchange rate of one Australian dollar to one U.S. dollar was $1.0597 at June 30, 2011, $1.0161 at June 30, 2012 and 0.9146 at June 30, 2013. In FY 2012 and FY 2013, net unrealized and realized foreign exchange gains (losses) totaled $(712,000) and $893,000, and $(272,000) and $229,000, respectively. In FY 2013, the estimated fair value of the tangible and intangible assets acquired and liabilities assumed exceeded the purchase prices of two of our acquisitions resulting in bargain purchase gains of $160,000 (see Note 4 of Notes to Consolidated Financial Statements).

Income Taxes. Our effective income tax rate was 41.8% in FY 2013 and 38.0% in FY 2012. The effective rate is greater than the U.S. federal rate of 34% primarily 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.

Noncontrolling Interest. Noncontrolling interest in the Royal Wolf and Southern Frac results of operations was $7.7 million in FY 2013, as compared to $6.1 million in FY 2012, reflecting primarily the higher profitability of Royal Wolf between periods.

Net Income Attributable to Common Stockholders. Net income attributable to common stockholders of $3.5 million in FY 2013 was $1.1 million greater than the $2.4 million in FY 2012, primarily as a result of the greater operating profit in both the Pan-Pacific area and North America, lower interest expense, and bargain purchase gains in FY 2013 when compared to FY 2012.


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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 other non-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 a non-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 or non-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 (in thousands):

                                                      Year Ended June 30,
                                                       2012           2013
         Net income                                 $    8,742      $ 11,413
         Add (deduct) -
         Provision for income taxes                      5,360         8,195
         Foreign currency exchange gain and other         (443 )      (1,028 )
         Interest expense                               12,743        10,969
         Interest income                                  (157 )         (58 )
         Depreciation and amortization                  18,924        22,241
         Share-based compensation expense                  901         1,316

         Adjusted EBITDA                            $   46,070      $ 53,048

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 the start-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 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 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.

Liquidity and Financial Condition

Each of our operating units substantially funds its 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.

Royal Wolf has an approximately $115,080,000 (AUS$101,000,000 and NZ$29,300,000) senior credit facility


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with Australia and New Zealand Banking Group Limited ("ANZ"), which is secured by substantially all of the assets of our Australian and New Zealand subsidiaries (the "ANZ Credit Facility"). Approximately $87,022,000 (AUS$71,000,000 container purchases sub-facility and NZ$28,500,000 flexible rate term loan facility) matures on September 30, 2016, $13,719,000 (AUS$15,000,000 capital expenditure sub-facility) matures on November 14, 2014, another $13,719,000 (AUS$15,000,000 multi-option sub-facility) matures by June 30, 2014 and $620,000 (NZ$800,000 term facility) matures in varying installments over the next five years.

Pac-Van had an $85,000,000 senior secured revolving credit facility with a syndicate led by PNC Bank, National Association ("PNC") that included Wells Fargo Bank, National Association ("Wells Fargo") and Union Bank, N.A. (the "PNC Credit Facility"). The PNC Credit Facility was scheduled to mature on January 16, 2013, but on September 7, 2012, Pac-Van entered into a new five-year, senior secured revolving credit facility with a syndicate led by Wells Fargo, that also includes HSBC Bank USA, NA ("HSBC"), and the Private Bank and Trust Company (the "Wells Fargo Credit Facility"). Under the Wells Fargo Credit Facility, as amended, Pac-Van may borrow up to $120,000,000, subject to the terms of a borrowing base, as defined, and provides for the issuance of irrevocable standby letters of credit in amounts totaling up to $5,000,000. In connection with the initial funding of the Wells Fargo Credit Facility, all outstanding amounts due under the PNC Credit Facility and the $15,000,000 senior subordinated note with Laminar Direct Capital, L.L.C. ("Laminar Note") were fully repaid. During FY 2013, total net proceeds of $44,000,000 were received from GFN to reduce indebtedness under the Wells Fargo Credit Facility as a result of certain equity transactions (see below); $12,000,000 of these proceeds were actually advances for company-wide cash management purposes that, in effect, would be repaid to GFN on demand.

Southern Frac has a senior secured credit facility with Wells Fargo (the "Wells Fargo SF Credit Facility"). The Wells Fargo SF Credit Facility, as amended, provides for (i) a senior secured revolving line of credit under which Southern Frac may borrow, subject to the terms of a borrowing base, as defined, up to $12,000,000 with a three-year maturity; (ii) a combined $860,000 equipment and capital expenditure term loan (the "Restated Equipment Term Loan"), which fully amortizes over 48 months commencing July 1, 2013; and (iii) a $1,500,000 term loan (the "Term Loan B"), which fully amortizes over 18 months, commencing May 1, 2013.

Reference is made to Note 5 of Notes to Consolidated Financial Statements for further discussion of our senior and other debt.

As of June 30, 2013, our required principal and other obligations payments for the years ending June 30, 2014 and the subsequent three fiscal years are as follows (in thousands):

                                                     Year Ending June 30,
                                           2014        2015       2016        2017
         ANZ Credit Facility              $ 1,393     $ 6,610     $ 504     $ 82,829
         Wells Fargo Credit Facility           -           -         -            -
         Wells Fargo SF Credit Facility     2,822         548       215          215
         Other                              1,240         864       280           73

                                          $ 5,455     $ 8,022     $ 999     $ 83,117

On May 17, 2013, we completed a public offering of 350,000 shares of a 9.00% Series C Cumulative Redeemable Perpetual Preferred Stock (the "Series C Preferred Stock"), liquidation preference $100.00 per share, and on May 24, 2013, the underwriters exercised their overallotment option to purchase an additional 50,000 shares. Proceeds from the offering totaled $37,500, 000, after deducting the underwriting discount of $2,000,000 and offering costs of $500,000. Among other things, we used $36,000,000 of the net proceeds to reduce indebtedness at Pac-Van under the Wells Fargo Credit Facility (pursuant to the requirement that at least 80% of the gross proceeds, or $32,000,000, be used for that purpose) and $1,295,000 to redeem our Series A 12.5% Cumulative Preferred Stock ("Series A Preferred Stock"). With the satisfaction of the 80% gross proceeds requirement, Pac-Van is permitted to pay intercompany dividends in each fiscal year to GFN and its subsidiaries equal to the lesser of $4,000,000 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, provided that (i) the payment of such dividends does not cause a default or event of default; (ii) Pac-Van is solvent;
(iii) Pac-Van is permitted to borrow $4,000,000 or more under the Wells Fargo Credit Facility; and (iv) Pac-Van is in compliance with the fixed charge coverage ratio covenant after giving effect to the payment and the dividends are paid no earlier than ten business days prior to the date they are due.

As of June 25, 2013, the expiration date of warrants issued by us in a rights offering on June 25, 2010, we received total net proceeds during FY 2013 of $8,154,000, of which $8,000,000 was used to reduce indebtedness at Pac-Van under the Wells Fargo Credit Facility.

Reference is made to Note 3 of Notes to Consolidated Financial Statements for further discussion of our Series C Preferred Stock and other equity transactions.


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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 . . .

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