News Column

GENERAL FINANCE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 13, 2014

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 Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission ("SEC"), as well as the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-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 on Form 10-K for the year ended June 30, 2013 and other SEC filings. We maintain a web site at www.generalfinance.com that 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 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 ("Southern Frac"); Royal Wolf Holdings Limited, 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 (collectively "Pac-Van"); and Lone Star Tank Rental Inc., a Delaware corporation ("Lone Star"). 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. 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." Our two leasing subsidiaries, Royal Wolf and Pac-Van, lease and sell their products through twenty customer service centers ("CSCs") in Australia, eight CSCs in New Zealand, twenty-nine branch locations in the United States and two branch locations in Canada. As of March 31, 2014, we had 276 and 427 employees and 40,696 and 18,866 lease fleet units in the Asia-Pacific area and North America, respectively. On April 7, 2014, we, through Lone Star (our indirect wholly-owned subsidiary), closed our acquisition of substantially all of the assets and the assumption of certain of the liabilities of the affiliated companies, Lone Star Tank Rental, LP, based in Kermit, Texas, and KHM Rentals, LLC, based in Kenedy, Texas, for total consideration of approximately $95 million, subject to certain working capital and other adjustments to be determined after the closing date. As part of our North American leasing operations, Lone Star 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 through a fleet of more than 1,400 units, with approximately 166 employees. For its fiscal year ended December 31, 2013, the two affiliated companies had revenues of $44,357,000 and net income of $14,534,000.



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. 24



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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"). 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



Quarter Ended March 31, 2014 ("QE FY 2014") Compared to Quarter Ended March 31, 2013 ("QE FY 2013")

The following compares our QE FY 2014 results of operations with our QE FY 2013 results of operations.

Revenues. Revenues increased $1.9 million, or 3%, to $65.7 million in QE FY 2014 from $63.8 million in QE FY 2013. This consisted of a decrease of $3.8 million, or 10%, in revenues at Royal Wolf, a $4.2 million increase, or 22%, in revenues at Pac-Van and a $1.5 million increase in manufacturing revenues from Southern Frac. The translation effect of the average currency exchange rate, driven by the weakening in the Australian dollar relative to the U.S. dollar in QE FY 2014 versus QE FY 2013, significantly impacted the translation in QE FY 2014 of the total revenues at Royal Wolf when compared to QE FY 2013. In Australian dollars, total revenues at Royal Wolf increased by 5% in QE FY 2014 from QE FY 2013. The average currency exchange rate of one Australian dollar during QE FY 2014 was $0.89623 U.S. dollar compared to $1.03886 U.S. dollar during QE FY 2013. The revenue decrease at Royal Wolf was primarily in the mining, removals (moving) and storage sectors, where revenues decreased by $4.2 million in QE FY 2014 from QE FY 2013, but were mitigated somewhat by an increase of $1.5 million in the government sector. At Pac-Van, the revenue increase in QE FY 2014 from QE FY 2013 was due primarily to increases in the commercial, mining and energy and industrial sectors where revenues increased between the periods by an aggregate of $4.4 million. Sales and leasing revenues represented 41% and 59% of total non-manufacturing revenues, respectively, in QE FY 2014 and 46% and 54% of total non-manufacturing revenues, respectively, in QE FY 2013. Sales during QE FY 2014 amounted to $31.2 million, compared to $32.3 million during QE FY 2013; representing a decrease of $1.1 million, or 3%. This consisted of a $3.7 million decrease, or 18%, in sales at Royal Wolf, offset by an increase in manufacturing sales of $1.5 million, or 28%, at Southern Frac and an increase of $1.1 million, or 17%, at Pac-Van. Overall, non-manufacturing sales decreased by a net $2.6 million, or 10%, in QE FY 2014 from QE FY 2013. The decrease at Royal Wolf was comprised of a decrease of $3.0 million ($2.3 million decrease due to lower unit sales, $0.1 million decrease due to average price decreases and a $0.6 million decrease due to foreign exchange movements) in the national accounts group and a decrease of $0.7 million ($2.1 million decrease due to foreign exchange movements, a $1.0 million increase due to higher unit sales and a $0.4 million increase due to average price increases) in the CSC operations. At Pac-Van, the higher sales in QE FY 2014 versus QE FY 2013 were primarily due 25



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to increases in the commercial, industrial and mining and energy sectors, which increased by an aggregate of $2.0 million, and were offset somewhat by decreases in the government and services sectors totaling $0.9 million. At Southern Frac, portable liquid storage tank container sales in QE FY 2014 consisted of 217 units sold at an average sales price of approximately $31,400 per unit versus 158 units sold at an average sales price of approximately $33,600 per unit during QE FY 2013. Stronger drilling activity and initial sales of two new frac tank products, offset somewhat by a greater proportion of intercompany sales to Pac-Van, in QE FY 2014 when compared to QE FY 2013, were the primary reasons for the increase in manufacturing revenues. Leasing revenues during QE FY 2014 totaled $34.5 million, as compared to $31.5 million during QE FY 2013, representing an increase of $3.0 million, or 10%. Leasing revenues increased by $3.1 million, or 25%, at Pac-Van and decreased slightly by $0.1 million at Royal Wolf. In Australian dollars, however, QE FY 2014 leasing revenues at Royal Wolf actually increased by 15% from QE FY 2013. At Royal Wolf, average utilization in the retail and the national accounts group operations were 85% and 82%, respectively, during QE FY 2014, an increase from 84% and 80% in QE FY 2013. The overall average utilization increased to 84% in QE FY 2014 from 83% QE FY 2013; and the average monthly lease rate of containers was AUS$182 in QE FY 2014 versus AUS$162 in QE FY 2013. Leasing revenues in QE FY 2014 increased over QE FY 2013 in local currency due primarily to the combination of higher monthly lease rates and the average monthly number of units on lease being more than 1,700 higher in QE FY 2014 as compared to QE FY 2013. We believe the primary reasons we are generally able to maintain high average utilization rates and increase our average units on lease and monthly rate between periods at Royal Wolf is the generally stable 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 regularly 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 75%, 83%, 83%, 68% and 72% and average monthly lease rates were $104, $273, $847, $245 and $848 for storage containers, office containers, frac tank containers, mobile offices and modular units, respectively, during QE FY 2014; as compared to 78%, 83%, 85%, 65% and 74% and $101, $261, $910, $238 and $836 for storage containers, office containers, frac tank containers, mobile offices and modular units in QE FY 2013, respectively. The average composite utilization rate in QE FY 2014 and QE FY 2013 was 74% for both periods, and the composite average monthly number of units on lease was over 3,300 higher in QE FY 2014 as compared to QE FY 2013. The strong utilization, average monthly number of units on lease and generally higher monthly lease rates resulted primarily from improved demand across most sectors, particularly in the mining and energy, commercial, construction and industrial sectors, which increased by an aggregate of $3.0 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) decreased by $1.7 million from $19.8 million during QE FY 2013 to $18.1 million during QE FY 2014, as a result of the lower sales from our lease inventories and fleet discussed above. Our gross profit percentage from these non-manufacturing sales decreased slightly to 26% in QE FY 2014 from 27% in QE FY 2013. Cost of sales from our manufactured portable liquid storage tank containers totaled $5.0 million, or approximately $22,900 per unit, versus $5.6 million in QE FY 2013, or approximately $35,200 per unit. Overall, efficiencies gained from improved systems and processes, including lower material costs, substantially reduced our average cost per unit during QE FY 2014 from QE FY 2013. Direct Costs of Leasing Operations and Selling and General Expenses. As a result of our increased business activity, direct costs of leasing operations and selling and general expenses increased in absolute dollars by $1.4 million from $25.7 million during QE FY 2013 to $27.1 million during QE FY 2014; but increased only slightly as a percentage of revenues from 40% in QE FY 2013 to 41% in QE FY 2014.



Depreciation and Amortization. Depreciation and amortization increased by $0.4 million to $6.0 million in QE FY 2014 from $5.6 million in QE FY 2013, primarily as a result of our increasing investment in the lease fleet and business acquisitions.

Interest Expense. Interest expense of $2.5 million in QE FY 2014 was $0.3 million lower than the $2.8 million in QE FY 2013. This was comprised of a decrease in interest expense of $0.3 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 5.4% in QE FY 2014 decreased from 6.1% in QE FY 2013 and effectively offset the comparatively higher average borrowings between periods. The weighted-average interest rate (which does not include the effect of the amortization of deferred financing costs) in North America was 3.7% in QE FY 2014 and 4.9% in QE FY 2013. Foreign Currency Exchange and Other. The currency exchange rate of one Australian dollar to one U.S. dollar was $1.0374 at December 31, 2012, $1.0423 at March 31, 2013, $0.8874 at December 31, 2013 and $0.9251 at March 31, 2014. In QE FY 2013 and QE FY 2014, net unrealized and realized foreign exchange gains (losses) totaled $55,000 and $31,000, and $96,000 and $(55,000), respectively. 26



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Income Taxes. Our effective income tax rate was 41.8% in FY 2014 and 38.0% in FY 2013. 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.



Preferred Stock Dividends. In QE FY 2014, we paid $0.9 million on our 9.00% Series C Cumulative Redeemable Perpetual Preferred Stock (the "Series C Preferred Stock") issued in May 2013 (see Note 3 of Notes to Condensed Consolidated Financial Statements).

Noncontrolling Interests. Noncontrolling interests in the Royal Wolf and Southern Frac results of operations were approximately $1.8 million and $2.0 million in QE FY 2014 and QE FY 2013, respectively, reflecting the lower profitability of Royal Wolf due primarily to the translation effect of the weaker Australian dollar to the U.S. dollar in QE FY 2014 versus QE FY 2013.

Net Income Attributable to Common Stockholders. Net income attributable to common stockholders of $1.1 million in QE FY 2014 was $0.4 million more than the $0.7 million in QE FY 2013 primarily as a result of greater operating profit in North America and overall lower interest expense, offset somewhat by a higher effective income tax rate and increased preferred stock dividend payments.



Nine Months Ended March 31, 2014 ("FY 2014") Compared to Nine Months Ended March 31, 2013 ("FY 2013")

The following compares our FY 2014 results of operations with our FY 2013 results of operations.

Revenues. Revenues increased $16.4 million, or 9%, to $197.0 million in FY 2014 from $180.6 million in FY 2013. This consisted of an increase of $3.0 million, or 3%, in revenues at Royal Wolf, a $13.5 million increase, or 20%, in revenues at Pac-Van and a $0.1 million decrease 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 weakening in the Australian dollar relative to the U.S. dollar in FY 2014 versus FY 2013, significantly impacted the translation in FY 2014 of the total revenues at Royal Wolf when compared to FY 2013. In Australian dollars, total revenues at Royal Wolf increased by 16% in FY 2014 from FY 2013. The average currency exchange rate of one Australian dollar during FY 2014 was $0.91342 U.S. dollar compared to $1.03885 U.S. dollar during FY 2013. The revenue increase at Royal Wolf was primarily in the transport, government and mining sectors, where revenues increased by $13.1 million in FY 2014 from FY 2013, and were offset significantly by across-the-board decreases in most of the other sectors. At Pac-Van, the revenue increase in FY 2014 from FY 2013 was due primarily to increases in the commercial, mining and energy, industrial, retail, construction and education sectors where revenues increased between the periods by an aggregate of $14.6 million. Sales and leasing revenues represented 46% and 54% of total non-manufacturing revenues, respectively, in FY 2014 and 45% and 55% of total non-manufacturing revenues, respectively, in FY 2013. Sales during FY 2014 amounted to $97.0 million, compared to $88.1 million during FY 2013; representing an increase of $8.9 million, or 10%. This consisted of a $4.4 million increase, or 26%, in sales at Pac-Van and a $4.6 million increase, or 8%, in sales at Royal Wolf, offset slightly by a $0.1 million decrease in sales at Southern Frac. Overall, non-manufacturing sales increased by $9.0 million, or 12%, in FY 2014 from FY 2013. The increase at Royal Wolf was comprised of an increase of $10.6 million ($4.0 million increase due to higher unit sales and $9.4 million increase due to average price increases, offset somewhat by a $2.8 million decrease due to foreign exchange movements) in the national accounts group and a decrease of $6.0 million ($1.8 million decrease due to average price decreases and $5.5 million decrease due to foreign exchange movements, offset slightly by a $1.3 million increase due to higher unit sales) in the CSC operations. Sales in the national accounts group during FY 2014 included over $11.0 million (over AUS$12.0 million) to one customer, a freight logistics company that operates a national rail network. The operating margin of the over AUS$12.0 million sales contract with this customer was below 10%. At Pac-Van, higher sales in FY 2014 versus FY 2013 were primarily due to increases in the commercial, education and industrial sectors, which increased by an aggregate of $5.1 million. At Southern Frac, portable liquid storage tank container sales in FY 2014 consisted of 393 units sold at an average sales price of approximately $33,000 per unit versus 388 units sold at an average sales price of approximately $33,600 per unit during FY 2013. Leasing revenues during FY 2014 totaled $100.0 million, as compared to $92.5 million during FY 2013, representing an increase of $7.5 million, or 8%. Leasing revenues increased by $9.2 million, or 26%, at Pac-Van and decreased by $1.7 million, or 3%, at Royal Wolf. In Australian dollars, however, FY 2014 leasing revenues at Royal Wolf actually increased by 11% from FY 2013. 27



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At Royal Wolf, average utilization in the retail operations was 85% during both FY 2014 and FY 2013; and average utilization in the national accounts group operations was 76% during FY 2014 and 77% during FY 2013. In FY 2014 and FY 2013, the overall average utilization was 83%; and the average monthly lease rate of containers was AUS$175 in FY 2014 versus AUS$163 in FY 2013. Leasing revenues in FY 2014 increased over FY 2013 in local currency due primarily to the combination of the higher average monthly lease rate and the average monthly number of units on lease being more than 1,750 higher in FY 2014 as compared to FY 2013. We believe the primary reasons we are generally able to maintain high average utilization rates and increase our average units on lease and monthly lease rate between periods at Royal Wolf is the generally stable 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 regularly 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 80%, 82%, 83%, 68% and 72% and average monthly lease rates were $112, $272, $874, $242 and $832 for storage containers, office containers, frac tank containers, mobile offices and modular units, respectively, during FY 2014; as compared to 83%, 83%, 84%, 66% and 75% and $105, $260, $1,020, $236 and $843 for storage containers, office containers, frac tank containers, mobile offices and modular units in FY 2013, respectively. The average composite utilization rate in FY 2014 and FY 2013 was 77% in both periods; and the composite average monthly number of units on lease was over 3,000 higher in FY 2014 as compared to FY 2013. The strong utilization, average monthly number of units on lease and generally higher monthly lease rates resulted primarily from improved demand across most sectors, particularly in the mining and energy, commercial, construction, retail and industrial sectors, which increased by an aggregate of $9.7 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 $9.3 million, from $55.2 million during FY 2013 to $64.5 million during FY 2014, as a result of the higher sales from our lease inventories and fleet discussed above. However, our gross profit percentage from these sales revenues decreased to 23% in FY 2014 from 26% in FY 2013 due primarily to the lower margin on the sales to a Royal Wolf freight logistics customer, as discussed above. Cost of sales from our manufactured portable liquid storage tank containers totaled $9.5 million, or approximately $24,300 per unit, versus $12.1 million in FY 2013, or approximately $31,200 per unit, which included additional costs due to the purchase price allocation effect of carrying the opening inventory on October 1, 2012 at fair value. Overall, efficiencies gained from improved systems and processes, including lower material cots, substantially enhanced our gross profit percentage from sales of manufactured units to 26% during FY 2014 from 7% in FY 2013. Direct Costs of Leasing Operations and Selling and General Expenses. As a result of increased business activity, direct costs of leasing operations and selling and general expenses increased in absolute dollars by $4.9 million from $74.4 million during FY 2013 to $79.3 million during FY 2014; but decreased as a percentage of revenues from 41% in FY 2013 to 40% in FY 2014. In addition, this absolute dollar increase was not only the result of our increased leasing operations, but also the additional selling and administrative expenses of $1.4 million incurred at Southern Frac in FY 2014 from FY 2013 because FY 2013 included only six months of Southern Frac's operations.



Depreciation and Amortization. Depreciation and amortization increased by $1.1 million to $17.3 million in FY 2014 from $16.2 million in FY 2013, primarily as a result of our increasing investment in the lease fleet and business acquisitions.

Interest Expense. Interest expense of $7.2 million in FY 2014 was $1.4 million lower than the $8.6 million in FY 2013. This was comprised of a decrease in interest expense of $0.7 million in North America and a decrease of $0.7 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 5.7% in FY 2014 decreased from 6.1% in FY 2013 and more than offset the comparatively higher average borrowings between periods. In North America, the lower interest expense in FY 2014 versus FY 2013 was due to both a lower weighted-average interest rate and average borrowings. The weighted-average interest rate (which does not include the effect of the amortization of deferred financing costs) in North America was 3.7% in FY 2014 and 4.9% in FY 2013. Foreign Currency Exchange and Other. The currency exchange rate of one Australian dollar to one U.S. dollar was $1.0161 at June 30, 2012, $1.0423 at March 31, 2013, $0.9146 at June 30, 2013 and $0.9251 at March 31, 2014. In FY 2013 and FY 2014, net unrealized and realized foreign exchange gains (losses) totaled $163,000 and $194,000, and ($267,000) and $46,000, 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 $0.2 million. Income Taxes. Our effective income tax rate was 41.8% in FY 2014 and 38.0% in FY 2013. 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. 28



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Preferred Stock Dividends. In FY 2014, we paid $2.6 million on our Series C Preferred Stock (see Note 3 of Notes to Condensed Consolidated Financial Statements).

Noncontrolling Interests. Noncontrolling interests in the Royal Wolf and Southern Frac results of operations were $4.9 million in FY 2014, as compared to $5.6 million in FY 2013, reflecting the lower profitability of Royal Wolf primarily due to the translation effect of the weaker Australian dollar to the U.S. dollar between periods. Net Income Attributable to Common Stockholders. Net income attributable to common stockholders of $3.1 million in FY 2014 was $0.3 million lower than the $3.4 million in FY 2013 primarily as a result of lower operating profit in the Pan-Pacific area, net losses from foreign exchange and derivative instrument transactions versus a net gain in the prior period, a higher effective income tax rate and larger preferred stock dividend payments; offset somewhat by a greater operating profit in North America and overall lower interest expense.



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): Quarter Ended March 31, Nine Months Ended March 31, 2013 2014 2013 2014 Net income $ 2,798$ 3,826$ 9,121$ 10,610 Add (deduct) - Provision for income taxes 1,715 2,749 5,591 7,621 Foreign currency exchange loss (gain) and other (115 ) 512 (583 ) 1,061 Interest expense 2,749 2,490 8,604 7,216 Interest income (3 ) (14 ) (43 ) (37 ) Depreciation and amortization 5,710 6,214 16,406 17,848 Share-based compensation expense 322 533 968 1,403 Adjusted EBITDA $ 13,176$ 16,310$ 40,064$ 45,722 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 29



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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 $118,769,000 (AUS$101,000,000 and NZ$29,200,000) senior credit facility 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 $90,408,000 (AUS$71,000,000 container purchases sub-facility and NZ$28,500,000 flexible rate term loan facility) matures on September 30, 2016, $13,877,000 (AUS$15,000,000 capital expenditure sub-facility) matures on November 14, 2014, another $13,877,000 (AUS$15,000,000 multi-option sub-facility) matures by June 30, 2014 and $607,000 (NZ$700,000 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"). On February 7, 2014, Pac-Van amended the Wells Fargo Credit Facility to, among other things, increase the maximum borrowing capacity from $120,000,000 to $200,000,000 and add two new lenders (OneWest Bank and Capital One) to the syndicate. Borrowings under the facility will now accrue interest, at Pac-Van's option, either at the base rate plus 1.00% to 1.50% or the LIBOR plus 2.50% to 3.00%, and the maximum amount of intercompany dividends that Pac-Van is allowed to pay in each fiscal year to GFN and its subsidiaries for the Series C Preferred Stock increased from $4,000,000 to $5,000,000 (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 $5,000,000 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. 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 Condensed Consolidated Financial Statements for further discussion of our senior and other debt.

As of March 31, 2014, our required principal and other obligations payments for the twelve months ending March 31, 2015 and the subsequent three twelve-month periods are as follows (in thousands): Twelve Months Ending March 31, 2015 2016 2017 2018 ANZ Credit Facility $ 16,495$ 584$ 90,847$ 289 Wells Fargo Credit Facility - - - 97,447 Wells Fargo SF Credit Facility 6,646 215 215 54 Other 879 486 78 81 $ 24,020$ 1,285$ 91,140$ 97,871 On May 17, 2013, we completed a public offering of 350,000 shares of our 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. With the satisfaction of the 80% gross proceeds requirement, Pac-Van is permitted to pay intercompany 30



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dividends in each fiscal year to GFN and its subsidiaries for the Series C Preferred Stock equal to the lesser of $5,000,000 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 $5,000,000 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 Condensed Consolidated Financial Statements for further discussion of our Series C Preferred Stock and other equity transactions.

On March 31, 2014, we, at the corporate level, entered into a $25,000,000 facility agreement with Credit Suisse AG, Singapore Branch ("Credit Suisse Term Loan") as part of the financing for the acquisition of the affiliated entities, Lone Star Tank Rental, LP and KHM Rentals, LLC. The Credit Suisse Term Loan provides that the amount borrowed will bear interest at LIBOR plus 7.50% per year, will be payable quarterly, and that all principal and interest will mature two years from the date that we borrow the $25,000,000. In addition, the Credit Suisse Term Loan is secured by a first ranking pledge over all shares of RWH owned by GFN U.S., requires a certain coverage maintenance ratio in U.S. dollars based on the value of the RWH shares and, among other things, that an amount equal to six-months interest be deposited in an interest reserve account pledged to secure repayment of all amounts borrowed. On April 3, 2014, we borrowed the $25,000,000 available to us under the Credit Suisse Term Loan. 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, if and when declared by our Board of Directors.



We currently do not pay a dividend on our common stock and do not intend on doing so in the foreseeable future.

Significant Recent Developments

On April 7, 2014, we, primarily through Pac-Van and Lone Star, amended and restated the Wells Fargo Credit Facility (see above) as part of the financing for the acquisition of the affiliated entities, Lone Star Tank Rental, LP and KHM Rentals, LLC. The purchase consideration consisted of (i) $75,000,000 in cash, (ii) 1,230,012 shares of our common stock (the number of shares was agreed to based on a value of $8.13 per share, which was the average of the closing market price during the 15-day trading period ending April 2, 2014), (iii) $5,000,000 payable over five years for a non-compete agreement and (iv) $5,000,000 payable over two years for a general indemnity holdback. We funded the cash portion of the consideration using $50,000,000 of availability under the Wells Fargo Credit Facility, as amended, and $25,000,000 from the Credit Suisse Term Loan (see above). Effective May 8, 2014, Royal Wolf refinanced the ANZ Credit Facility ("Refinanced RWH Credit Facility") to, among other things, increase the maximum borrowing capacity to $161,900,000 (AUS$175,000,000), add Commonwealth Bank of Australia ("CBA") through a common terms deed arrangement with ANZ and generally improve the financial covenants. Under the common deed arrangement, ANZ's proportionate share of the Refinanced RWH Credit Facility is $97,100,000 (AUS$105,000,000) and CBA's proportionate share is $64,800,000 (AUS$70,000,000). The Refinanced RWH Credit Facility has $113,300,000 (AUS$122,500,000) maturing on July 31, 2017, the pricing of which is 0.45% lower than the existing ANZ Credit Facility, and $48,600,000 (AUS$52,500,000) maturing on July 31, 2019.



Cash Flow for FY 2014 Compared to FY 2013

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. 31



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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. Supplemental information pertaining to our consolidated sources and uses of cash is presented in the table below (in thousands): Nine Months Ended March 31, 2013 2014



Net cash provided by operating activities $ 20,975$ 20,760

Net cash used in investing activities $ (56,307 )$ (62,381 )

Net cash provided by financing activities $ 31,144$ 45,002

Operating activities. Our operations provided net cash flow of $20.8 million during FY 2014, a slight decrease from the $21.0 million of operating cash flow provided during FY 2013. Net income of $10.6 million in FY 2014 was $1.5 million higher than the net income of $9.1 million in FY 2013; however, our operating cash flows decreased by $6.7 million in FY 2014 from the management of operating assets and liabilities when compared to FY 2013. In FY 2014 and FY 2013, operating cash flows were reduced by $12.0 million and $5.2 million, respectively, from the management of operating assets and liabilities. Operating cash flows in FY 2014 increased by $1.7 million over FY 2013 as a result of larger non-cash adjustments of depreciation and amortization (including amortization of deferred financing costs and accretion of interest). Depreciation, amortization and accretion of interest totaled $18.5 million in FY 2014 versus $16.8 million in FY 2013. In addition, net unrealized losses (gains) from foreign exchange and derivative instruments (see Note 6 of Notes to Condensed Consolidated Financial Statements), which reduce operating results, but are non-cash add-backs for cash flow purposes, were $0.9 million in FY 2014 versus $(0.1) million in FY 2013; an increase of $1.0 million. In both periods, operating cash flows benefitted from the deferral of income taxes, which totaled $6.7 million in FY 2014 and $4.9 million in FY 2013. Historically, operating cash flows are typically enhanced by the deferral of most income taxes due to the rapid tax depreciation rate of our fixed assets and available net operating loss carryforwards. Additionally, in both FY 2014 and FY 2013, operating cash flows were reduced by gains on the sales of lease fleet of $5.2 million and enhanced by non-cash share-based compensation charges of $1.4 million and $1.0 million, respectively. Investing Activities. Net cash used by investing activities was $62.4 million during FY 2014, as compared to $56.3 million during FY 2013, an increase of $6.1 million. Purchases of property, plant and equipment, or rolling stock, were approximately $4.3 million in FY 2014, a decrease of $1.9 million from the $6.2 million in FY 2013; but net capital expenditures of lease fleet (purchases, net of proceeds from sales of lease fleet) were $42.3 million in FY 2014 as compared to $35.4 million in FY 2013, an increase of $6.9 million. The increase in FY 2014 net capital expenditures from FY 2013 was due to primarily container lease fleet purchases of $24.1 million in FY 2014 in North America as compared to $15.6 million in FY 2013, an increase of $8.5 million; whereas net capital expenditures in the Pan Pacific totaled $18.2 million in FY 2014 versus $19.8 million in FY 2013, a decrease of $1.6 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. In FY 2014, we made six business acquisitions (two in the Pan Pacific and four in North America) for cash totaling $15.7 million (see Note 4 of Notes to Condensed Consolidated Financial Statements), as compared to eight acquisitions (three in the Pan Pacific and five in North America) in FY 2013 for cash of $14.6 million. Financing Activities. Net cash provided by financing activities was $45.0 million during FY 2014, as compared to $31.1 million provided during FY 2013, an increase of $13.9 million. In FY 2014, cash provided from financing activities included borrowings of $51.1 million on the existing credit facilities to primarily fund our increasing investment in the container lease fleet and business acquisitions. In FY 2013, in connection with the refinancing at Pac-Van (see "Liquidity and Financial Condition" above), we fully repaid the PNC Credit Facility and Laminar Note for $79.2 million and borrowed a net $114.4 million on all of our credit facilities to also primarily fund our investment in the container lease fleet and business acquisitions. We also incurred deferred financing costs of $1.4 million in FY 2013, primarily in connection with the refinancing at Pac-Van, versus $0.7 million in FY 2014. In FY 2014 we paid preferred stock dividends of $2.6 million, versus only $0.1 million if FY 2013, an increase of $2.5 million due primarily to the issuance of our Series C Preferred Stock in May 2013, and in both FY 2014 and FY 2013, Royal Wolf paid capital stock dividends of $2.3 million to noncontrolling interests (see Note 3 of Notes to Condensed Consolidated Financial Statements). 32



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Asset Management

Receivables and inventories were $44.1 million and $36.6 million at March 31, 2014 and $34.4 million and $31.9 million at June 30, 2013, respectively. At March 31, 2014, days sales outstanding ("DSO") in trade receivables were 40 days and 55 days at Royal Wolf and Pac-Van, as compared to 44 days and 50 days at June 30, 2013, 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. The net book value of our total lease fleet increased to $340.3 million at March 31, 2014 from $290.2 million at June 30, 2013. At March 31, 2014, we had 59,562 units (20,180 units in retail operations in Australia, 10,717 units in national account group operations in Australia, 9,799 units in New Zealand, which are considered retail; and 18,866 units in North America) in our lease fleet, as compared 54,259 units (19,685 units in retail operations in Australia, 10,455 units in national account group operations in Australia, 9,043 units in New Zealand, which are considered retail; and 15,076 units in North America) at June 30, 2013. At those dates, 47,332 units (16,434 units in retail operations in Australia, 8,143 units in national account group operations in Australia, 8,829 units in New Zealand, which are considered retail; and 13,926 units in North America); and 42,262 units (16,054 units in retail operations in Australia, 6,756 units in national account group operations in Australia, 8,052 units in New Zealand, which are considered retail; and 11,400 units in North America) were on lease, respectively. In the Asia-Pacific area, the lease fleet was comprised of 36,443 storage and freight containers and 4,253 portable building containers at March 31, 2014; and 35,284 storage and freight containers and 3,899 portable building containers at June 30, 2013. At those dates, units on lease were comprised of 30,212 storage and freight containers and 3,194 portable building containers; and 28,192 storage and freight containers and 2,670 portable building containers, respectively. In North America, the lease fleet was comprised of 10,223 storage containers, 1,766 office containers (GLOs), 1,292 portable liquid storage tank containers, 4,604 mobile offices and 981 modular units at March 31, 2014; and 7,273 storage containers, 1,530 office containers (GLOs), 586 portable liquid storage tank containers, 4,703 mobile offices and 984 modular units at June 30, 2013. At those dates, units on lease were comprised of 7,329 storage containers, 1,520 office containers, 1,137 portable liquid storage tank containers, 3,225 mobile offices and 715 modular units; and 5,711 storage containers, 1,216 office containers, 524 portable liquid storage tank containers, 3,235 mobile offices and 714 modular units, respectively.



Off-Balance Sheet Arrangements

We do not maintain any off-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.



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 from mid-December to the end of January, followed by February being a short working day month. However, this reduction in sales typically is counterbalanced by the increased 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 of Pac-Van's customers can be seasonal, such as in the construction industry, which tends to increase leasing activity in the first and fourth quarters; while customers in the retail industry tend to lease more units in the second quarter. Our business at Southern Frac, which is significantly derived from the oil & gas industry, may decline in our second quarter month of December and our third quarter months of January and February. These months may have lower activity in parts of the country where inclement weather may delay, or suspend, a company's drilling projects.



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. 33



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Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed 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, we re-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. We believe the following are the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We are required to estimate the collectability of our trade receivables. Accordingly, we maintain allowances for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments. On a recurring basis, we evaluate a variety of factors in assessing the ultimate realization of these receivables, including the current credit-worthiness of our customers, days sales outstanding trends, a review of historical collection results and a review of specific past due receivables. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, resulting in decreased net income. To date, uncollectible accounts have been within the range of our expectations. We lease and sell storage, building, office and portable liquid storage tank containers, modular buildings and mobile offices to our customers. Leases to customers generally qualify as operating leases unless there is a bargain purchase option at the end of the lease term. Revenue is recognized as earned in accordance with the lease terms established by the lease agreements and when collectability is reasonably assured. Revenue from sales of equipment is recognized upon delivery and when collectability is reasonably assured, while revenue from the sales of manufactured units are recognized when title and risk of loss transfers to the purchaser, generally upon shipment. Certain arrangements to sell units under long-term construction-type sales contracts are accounted for under the percentage of completion method. Under this method, income is recognized in proportion to the incurred costs to date under the contract to estimated total costs. We have a fleet of storage, portable building, office and portable liquid storage tank containers, mobile offices, modular buildings and steps that we lease to customers under operating lease agreements with varying terms. The lease fleet (or lease or rental equipment) is recorded at cost and depreciated on the straight-line basis over the estimated useful life (5 - 20 years), after the date the units are put in service, down to their estimated residual values (up to 70% of cost). In our opinion, estimated residual values are at or below net realizable values. We periodically review these depreciation policies in light of various factors, including the practices of the larger competitors in the industry, and our own historical experience. For the issuances of stock options, we follow the fair value provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. FASB ASC Topic 718 requires recognition of employee share-based compensation expense in the statements of income over the vesting period based on the fair value of the stock option at the grant date. The pricing model we use for determining fair values of the purchase option is the Black-Scholes Pricing Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management's judgment and may impact net income. In particular, prior to July 1, 2009, we used volatility rates based upon a sample of comparable companies in our industry and we now use a volatility rate based on the performance of our common stock, which yields a higher rate. In addition we use a risk-free interest rate, which is the rate on U.S. Treasury instruments, for a security with a maturity that approximates the estimated remaining expected term of the stock option. We account for goodwill in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other. FASB ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite lives and requires these assets be reviewed for impairment at least annually or when events or circumstances indicate these assets might be impaired. We operate two reportable segments that include three operating units (Royal Wolf, Pac-Van and Southern Frac) and all of our goodwill was allocated between these three reporting units. Prior to July 1, 2012, we performed an annual impairment test on goodwill at year end using the quantitative two-step process under FASB ASC Topic 350. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Effective July 1, 2012, we adopted the new qualitative assessment now allowable under ASC Topic 350. It will no longer be required for us to calculate the fair value of a reporting unit unless 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. However, if we do determine that fair value is less than the carrying amount, the existing quantitative calculations in steps one and two under ASC Topic 350 continue to apply. Some factors we consider important in making this determination include (1) significant underperformance relative to historical, expected or projected future 34



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operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; (3) significant changes during the period in our market capitalization relative to net book value; and (4) significant negative industry or general economic trends. As of March 31, 2014, we determined that it was more likely than not that the fair values of our three reporting units were greater than their respective carrying amounts. Intangible assets include those with indefinite (trademark and trade name) and finite (primarily customer base and lists, non-compete agreements and deferred financing costs) useful lives. Customer base and lists and non-compete agreements are amortized on the straight-line basis over the expected period of benefit which range from one to ten years. Costs to obtaining long-term financing are deferred and amortized over the term of the related debt using the straight-line method. Amortizing the deferred financing costs using the straight-line method does not produce significantly different results than that of the effective interest method. We review intangibles (those assets resulting from acquisitions) at least annually for impairment or when events or circumstances indicate these assets might be impaired. We tested impairment using historical cash flows and other relevant facts and circumstances as the primary basis for its estimates of future cash flows. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. Effective July 1, 2012, we adopted the new qualitative factors now allowable under ASC Topic 350. If we determine, based on a qualitative assessment, that it is more likely than not (i.e., greater than 50%) that fair value is not impaired, then no further testing is necessary. However, if we determine that fair value is less than the carrying amount, then the existing quantitative calculations under ASC Topic 350 continue to apply. As of March 31, 2014, we determined that it was more likely than not that the fair values of intangible assets were greater than their carrying amounts. In preparing our consolidated financial statements, we recognize income taxes in each of the jurisdictions in which we operate. For each jurisdiction, we estimate the actual amount of taxes currently payable or receivable as well as deferred tax assets and liabilities attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets for which it is more likely than not that the related benefits will not be realized. In determining the amount of the valuation allowance, we consider estimated future taxable income as well as feasible tax planning strategies in each jurisdiction. If we determine that we will not realize all or a portion of our deferred tax assets, we would increase our valuation allowance with a charge to income tax expense or offset goodwill if the deferred tax asset was acquired in a business combination. Conversely, if we determine that we will ultimately be able to realize all or a portion of the related benefits for which a valuation allowance has been provided, all or a portion of the related valuation allowance would be reduced with a credit to income tax expense except if the valuation allowance was created in conjunction with a tax asset in a business combination.



Reference is made to Note 2 of Notes to Condensed Consolidated Financial Statements for a further discussion of our significant accounting policies.

Impact of Recently Issued Accounting Pronouncements

Reference is made to Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements that could potentially impact us.


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Source: Edgar Glimpses