This week’s review focuses on a provider of liquid and solid containment solutions providing services to various industrial services industries. BakerCorp International’s most recent Q1 results, as well as its FY 2016 results, reveal a company that is responding well to market pressures and positioning for a profitable future.
Interest coverage for FY 2016 was a strong 1.9x.
Volatility in the oil and gas sector over the past few years has made management very intentional in reducing the company’s exposure in that sector from over 20% in FY 2015 to a surprisingly low current level of 10.4%.
The company has continued to expand its European operations with Q1 year-over-year revenues up 14.2%
BakerCorp has implemented cost efficiencies across the company resulting in a 16.6% reduction in operating expenses in Q1.
The last half of the year historically brings the bulk of BakerCorp’s business as well as several large-scale projects from client companies scheduled to commence in Q3 and Q4.
BakerCorp’s 2019 bonds are currently yielding a fantastic 16+% yield to maturity. For income investors looking to increase cash flow and overall portfolio return, these bonds would be a welcomed addition. In light of BakerCorp’s strong interest coverage, expanding European operations and increasing cost efficiencies, these short 34-month bonds have met the criteria for addition to our FX1 and FX2 portfolios.
About the Issuer
Based in Plano Texas, BakerCorp International is a provider of liquid and solid containment solutions operating within the specialty sector of the broader industrial services industry. The company provides equipment rental, service and sales to its customers through a solution-oriented approach often involving multiple products. BakerCorp provides containment solutions within the United States through a national network with the capability to serve customers in all 50 states as well as a number of international locations in Europe and Canada. It maintains one of the largest and most diverse liquid and solid containment rental fleets in the industry consisting of more than 24,500 units, including steel tanks, polyethylene tanks, modular tanks, roll-off boxes, pumps, pipes, hoses and fittings, filtration, tank trailers, berms, and trench shoring equipment. BakerCorp serves multiple industries including the construction industry, municipal services, chemicals, transportation, industrial and environmental services and oil and gas. BakerCorp is owned by London-based private equity firm Permira.
Consistent Revenues, Effects of Oil and Gas
BakerCorp’s revenues over its past three fiscal years (which ends on January 31st) have been fairly consistent, with variations from its FY 2014 (ended 1/31/2014) between 2% and 6%. (FY 2014 revenues were $310.6 M, FY 2015 revenues were $332.3 M and FY 2016 revenues were $303.1 M). The 8.8% decrease between FY 2015 and FY 2016 was largely due to the decline in the demand for BakerCorp’s services in the upstream oil and gas industry. The decline in drilling and production activity reduced the demand for containment solutions. During FY 2016 and FY 2015, services to the oil and gas industry represented approximately 15.8% and 20.4% of total revenues respectively. Since that time, revenues tied to oil and gas have decreased. In the quarter ended April 30, 2016, the portion of revenues tied to oil and gas had dropped to 10.4% of total revenues. Although the percentage dropped, the decrease in demand for BakerCorp’s services from the oil and gas industry was responsible for 55% of the revenue decrease year-over-year in Q1.
Both oil and natural gas prices has seen a recovery since earlier this year. Most feel that prices will continue to recover, albeit slowly, but not always consistently. As these prices stabilize, BakerCorp should indirectly benefit as its oil and gas customers begin increasing production again.
BakerCorp has also made strides in increasing its revenues from its European operations. For its latest quarter (Q1), the company reported revenues from its European of $8.56 M as compared to $7.49 M for the same period a year earlier, representing an increase of 14.2%.
In response to the effects of commodity volatility in the U.S., over the last 12 months BakerCorp has significantly increased its operating efficiencies and reduced costs. Part of this cost reduction has been right-sizing the number of employees, reducing the workforce by over 10% between January 2015 and January 2016. The company also consolidated some of its field offices, ultimately closing three locations during the same time period. The results can be seen in the company’s latest quarterly report, with operating expenses down by 16.6% year-over-year. BakerCorp management expects further cost savings for the current fiscal year as the full effects of these cost efficiencies are realized.
On its last earnings call, BakerCorp management expressed optimism about business and revenues in the last half of the year. Several large construction customers with major projects that were delayed from Q1 are set to begin in the second half of the year. In addition, demand from customers has historically been higher during the second half of the company’s fiscal year, with peak demand for products and services occurring during the months of August through November. This peak demand is driven by customers needing to complete maintenance work and other projects before the onset of colder weather. In addition, most of the company’s projected capital expenditures were made in Q1, with very little additional capex for the remainder of the year. This will translate to less operating costs with management anticipating being free cash flow positive in this current fiscal year.
U.S. Economic Outlook
The most recent news regarding the economic outlook for the United States looks encouraging. Job creation is on the rise, as are average earnings and take home pay for workers. The unemployment rate is still low at 4.9% and the dollar remains strong. Demand for housing is being driven by the labor market, which is steadily generating increases in wages as it nears full employment. Data on house prices, residential construction, new home sales and home builders’ confidence have been upbeat in recent months. In July pending home sales rose 1.4 percent from a year ago. This combination of strong employment and firming wage growth should remain supportive of income and consumer spending. Moving forward, the Atlanta Federal Reserve is currently forecasting GDP growth accelerating at a 3.8 percent annualized rate in the third quarter, after averaging a scant 1.0 percent in the last three quarters. With BakerCorp’s involvement in many different industries, general growth in the U.S. economy should bode well for the company’s outlook moving forward.
Interest Coverage and Liquidity
BakerCorp registered strong interest coverage for its FY 2016 as well as its most recent quarter ended April 30, 2016. For its FY 2016 (ended January 31, 2016), the company had operating income of $80.8 million (without the effect of the $182.8 M impairment and $63.1 M depreciation expense) and interest expense of $42.3 million for an interest coverage of 1.9x. For it’s latest quarter, interest coverage did decrease, but is still sufficient, especially considering the company’s anticipation of a strong second half of the year for revenues. For Q1, BakerCorp registered operating income of $16.5 M (without impairment charge and depreciation expense) and interest expense of $10.5 M, for an interest coverage ratio of 1.6x.
As of April 30, 2016 BakerCorp had a very solid $78.8 M in liquidity, with $33.8 million in cash and $45 million available from a fully available revolving credit facility.
The default risk is BakerCorp’s ability to perform. BakerCorp has remained consistent in its revenue generation, and has continued to have strong interest coverage. With the company historically showcasing higher demand for its services in the second half of the year, coupled with the company’s cost reduction measures and anticipation of several major projects coming online in Q3 and Q4, the extremely competitive 16+% yields on these short 34-month bonds appear to outweigh the risks we could identify.
BakerCorp’s debt includes these 2019 notes ($240 M due June 2019) as well as a senior term loan ($406.9 M). The senior term loan needs to be refinanced or repaid by March 2019. The outcome of this refinancing would affect the company’s ability to also either pay off or refinance the debt from the notes. However, again considering the company’s consistency in revenue generation, it would appear that the company would be able to satisfy the requirements to refinance its debt.
Summary and Conclusion
BakerCorp has shown its consistency in revenue generation over the past few years. As any company exposed to the oil and gas industry has felt the effects of that commodity’s volatility, BakerCorp’s level of exposure continues to decline. With demand for the company’s services peaking in the last half of the year, as well as several large customer projects slated to kick off in Q3 and Q4, BakerCorp’s revenues should see a significant increase over the last half of the year. On a larger scale, the uptick in economic growth in the U.S. should also prove to be a benefit to BakerCorp via the growth in the many industries it serves. The outstanding 16+% yields on these bonds make them ideal for investors looking to increase cash flow and rev up portfolio returns. In consideration of these factors, these short-term, thinly traded, BakerCorp 2019 bonds are targeted for addition to both our FixedIncome1.com and Fixed-Income2.com managed income portfolios.
Issuer: BakerCorp International
Ratings: Caa3 / CCC
Yield to Maturity: ~16.19%
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Disclosure: Durig Capital and certain clients may have positions in BakerCorp International 2019 bonds.
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