Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

Commission file number 0-13292

 

 

McGRATH RENTCORP

(Exact name of registrant as specified in its Charter)

 

California   94-2579843

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5700 Las Positas Road, Livermore, CA 94551-7800

(Address of principal executive offices)

Registrant’s telephone number: (925) 606-9200

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer   ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

As of July 30, 2013, 25,622,596 shares of Registrant’s Common Stock were outstanding.

 

 

 


FORWARD LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, regarding McGrath RentCorp’s (the “Company’s”) business strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans and objectives are forward-looking statements. These forward-looking statements appear in a number of places and can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “hopes” or “certain” or the negative of these terms or other variations or comparable terminology.

Management cautions that forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties as set forth under “Risk Factors” in this form 10-Q.

Forward-looking statements are made only as of the date of this Form 10-Q and are based on management’s reasonable assumptions, however these assumptions can be wrong or affected by known or unknown risks and uncertainties. No forward-looking statement can be guaranteed and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. Readers should not place undue reliance on these forward-looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. Except as otherwise required by law, we are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

 

2


PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

McGrath RentCorp

We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp and subsidiaries (“the Company”) as of June 30, 2013, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2013 and 2012, and cash flows for the six-month periods ended June 30, 2013 and 2012. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2012, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and we expressed an unqualified opinion on those consolidated financial statements in our report dated February 22, 2013. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP

San Jose, California

July 31, 2013

 

3


MCGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

     Three Months Ended June 30,      Six Months Ended June 30,  
(in thousands, except per share amounts)    2013      2012      2013      2012  

REVENUES

           

Rental

   $ 63,043       $ 60,389       $ 123,644       $ 119,909   

Rental Related Services

     12,661         11,028         23,506         21,693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Rental Operations

     75,704         71,417         147,150         141,602   

Sales

     10,906         11,830         27,671         19,936   

Other

     523         518         1,025         1,156   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenues

     87,133         83,765         175,846         162,694   
  

 

 

    

 

 

    

 

 

    

 

 

 

COSTS AND EXPENSES

           

Direct Costs of Rental Operations

           

Depreciation of Rental Equipment

     16,626         15,672         33,228         31,073   

Rental Related Services

     9,391         9,011         18,313         17,564   

Other

     13,484         10,718         25,841         21,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Costs of Rental Operations

     39,501         35,401         77,382         69,795   

Costs of Sales

     7,486         7,584         19,320         12,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Costs of Revenues

     46,987         42,985         96,702         82,079   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit

     40,146         40,780         79,144         80,615   

Selling and Administrative Expenses

     21,792         21,163         43,430         42,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from Operations

     18,354         19,617         35,714         38,091   

Interest Expense

     2,157         2,382         4,360         4,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Provision for Income Taxes

     16,197         17,235         31,354         33,536   

Provision for Income Taxes

     6,349         6,756         12,291         13,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 9,848       $ 10,479       $ 19,063       $ 20,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Per Share:

           

Basic

   $ 0.39       $ 0.42       $ 0.76       $ 0.83   

Diluted

   $ 0.38       $ 0.42       $ 0.74       $ 0.81   

Shares Used in Per Share Calculation:

           

Basic

     25,354         24,765         25,180         24,702   

Diluted

     25,818         25,149         25,617         25,139   

Cash Dividends Declared Per Share

   $ 0.240       $ 0.235       $ 0.480       $ 0.470   

The accompanying notes are an integral part of these condensed consolidated financial statements

 

4


MCGRATH RENTCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     June 30,     December 31,  

(in thousands)

   2013     2012  

ASSETS

    

Cash

   $ 707      $ 1,612   

Accounts Receivable, net of allowance for doubtful accounts of $2,452 in 2013 and $3,000 in 2012

     87,286        92,256   

Rental Equipment, at cost:

    

Relocatable Modular Buildings

     570,352        551,101   

Electronic Test Equipment

     264,429        266,934   

Liquid and Solid Containment Tanks and Boxes

     269,437        254,810   
  

 

 

   

 

 

 
     1,104,218        1,072,845   

Less Accumulated Depreciation

     (366,582     (353,992
  

 

 

   

 

 

 

Rental Equipment, net

     737,636        718,853   
  

 

 

   

 

 

 

Property, Plant and Equipment, net

     101,183        101,031   

Prepaid Expenses and Other Assets

     19,675        19,507   

Intangible Assets, net

     11,075        11,487   

Goodwill

     27,700        27,700   
  

 

 

   

 

 

 

Total Assets

   $ 985,262      $ 972,446   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Liabilities:

    

Notes Payable

   $ 278,875      $ 302,000   

Accounts Payable and Accrued Liabilities

     62,538        52,220   

Deferred Income

     25,936        26,924   

Deferred Income Taxes, net

     230,134        226,564   
  

 

 

   

 

 

 

Total Liabilities

     597,483        607,708   
  

 

 

   

 

 

 

Shareholders’ Equity:

    

Common Stock, no par value -

    

Authorized — 40,000 shares

    

Issued and Outstanding — 25,623 shares in 2013 and 24,931 shares in 2012

     101,711        85,342   

Retained Earnings

     286,068        279,396   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     387,779        364,738   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 985,262      $ 972,446   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

5


MCGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended
June 30,
 

(in thousands)

   2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Income

   $ 19,063      $ 20,390   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

    

Depreciation and Amortization

     37,645        35,339   

Provision for Doubtful Accounts

     911        1,301   

Non-Cash Stock-Based Compensation

     2,255        2,077   

Gain on Sale of Used Rental Equipment

     (6,256     (5,968

Change In:

    

Accounts Receivable

     4,059        4,968   

Prepaid Expenses and Other Assets

     (168     (9,489

Accounts Payable and Accrued Liabilities

     6,148        3,761   

Deferred Income

     (988     3,647   

Deferred Income Taxes

     3,570        9,247   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     66,239        65,273   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of Rental Equipment

     (56,241     (73,281

Purchase of Property, Plant and Equipment

     (4,156     (8,883

Proceeds from Sale of Used Rental Equipment

     14,373        12,206   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (46,024     (69,958
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net Borrowings (Repayments) Under Bank Lines of Credit

     (23,125     11,500   

Proceeds from the Exercise of Stock Options

     12,716        3,086   

Excess Tax Benefit from Exercise and Disqualifying Disposition of Stock Options

     1,398        684   

Payment of Dividends

     (12,109     (11,474
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (21,120     3,796   
  

 

 

   

 

 

 

Net Decrease in Cash

     (905     (889

Cash Balance, beginning of period

     1,612        1,229   
  

 

 

   

 

 

 

Cash Balance, end of period

   $ 707      $ 340   
  

 

 

   

 

 

 

Interest Paid, during the period

   $ 4,331      $ 4,616   
  

 

 

   

 

 

 

Net Income Taxes Paid, during the period

   $ 6,779      $ 3,216   
  

 

 

   

 

 

 

Dividends Accrued, during the period, not yet paid

   $ 6,327      $ 6,057   
  

 

 

   

 

 

 

Rental Equipment Acquisitions, not yet paid

   $ 3,887      $ 9,989   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

6


MCGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2013

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three and six months ended June 30, 2013 and 2012 have not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals, consolidating and eliminating entries) necessary for the fair presentation of the consolidated financial positions, results of operations and cash flows of McGrath RentCorp (the “Company”) have been made. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated results for the six months ended June 30, 2013 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 22, 2013 for the year ended December 31, 2012 (the “2012 Annual Report”).

Comprehensive income is equivalent to net income for all periods presented.

 

NOTE 2. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed as net income divided by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed assuming conversion of all potentially dilutive securities including the dilutive effect of stock options, unvested restricted stock awards and other potentially dilutive securities. The table below presents the weighted-average number of shares of common stock used to calculate basic and diluted earnings per share:

 

                                                                           
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

   2013      2012      2013      2012  

Weighted-average number of shares of common stock for calculating basic earnings per share

     25,354         24,765         25,180         24,702   

Effect of potentially dilutive securities from equity-based compensation

     464         384         437         437   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average number of shares of common stock for calculating diluted earnings per share

     25,818         25,149         25,617         25,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following securities were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive:

 

                                                               
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(in thousands)

   2013      2012      2013      2012  

Options to purchase shares of common stock

     43         1,049         465         1,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


NOTE 3. RELATED PARTY TRANSACTIONS

The Company acquired liquid and solid containment tanks totaling $5.5 million and $8.0 million during the three months ended June 30, 2013 and 2012, respectively, and $9.5 million and $21.8 million during the six months ended June 30, 2013 and 2012, respectively, from Sabre Manufacturing, LLC (“Sabre”), which is controlled by the President of Adler Tank Rentals, LLC, a wholly-owned subsidiary of the Company. In addition, the Company receives certain support services from Sabre, which were insignificant in the three and six months ended June 30, 2013 and 2012. Amounts due to Sabre at June 30, 2013 and 2012 were $0.4 million and $2.0 million, respectively.

 

NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

   Estimated
Useful Life
In Years
   June 30,
2013
    December 31,
2012
 

Trade Name

   Indefinite    $ 5,700      $ 5,700   

Customer Relationships

   11      9,100        9,100   
     

 

 

   

 

 

 
        14,800        14,800   

Less Accumulated Amortization

        (3,725     (3,313
     

 

 

   

 

 

 
      $ 11,075      $ 11,487   

The Company assesses potential impairment of its goodwill and intangible assets when there is evidence that events or circumstances have occurred that would indicate the recovery of an asset’s carrying value is unlikely. The Company also assesses potential impairment of its goodwill and identifiable indefinite-lived intangible assets on an annual basis regardless of whether there is evidence of impairment. If indicators of impairment were to be present in intangible assets used in operations and future discounted cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss that would be recognized is the excess of the asset’s carrying value over its fair value. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results.

The Company typically conducts its annual impairment analysis in the fourth quarter of its fiscal year. The impairment analysis did not result in an impairment charge for the fiscal year ended December 31, 2012. Determining the fair value of a reporting unit requires judgment and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.

Intangible assets with finite useful lives are amortized over their respective useful lives. Based on the carrying values at June 30, 2013 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $0.4 million for the remainder of fiscal year 2013 and $0.8 million in each of the fiscal years 2014 through 2018.

 

8


NOTE 5. SEGMENT REPORTING

The Company’s four reportable segments are (1) its modular building rental division (“Mobile Modular”); (2) its electronic test equipment rental division (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids division (“Adler Tanks”); and (4) its classroom manufacturing division selling modular buildings used primarily as classrooms in California (“Enviroplex”). The operations of each of these segments are described in Part I – Item 1, “Business,” and the accounting policies of the segments are described in “Note 2 – Significant Accounting Policies” in the Company’s annual report on Form 10-K for the year ended December 31, 2012. Management focuses on several key measures to evaluate and assess each segment’s performance, including rental revenue growth, gross profit, income from operations and income before provision for income taxes. Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are generally allocated to Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of direct revenues. Interest expense is allocated among Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental equipment at cost, intangible assets, accounts receivable, deferred income and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the six months ended June 30, 2013 and 2012 for the Company’s reportable segments is shown in the following table:

 

9


(dollar amounts in thousands)

   Mobile
Modular
    TRS-RenTelco     Adler
Tanks
    Enviroplex 1     Consolidated  

Six Months Ended June 30,

          

2013

          

Rental Revenues

   $ 39,288      $ 50,179      $ 34,177      $ —        $ 123,644   

Rental Related Services Revenues

     12,491        1,412        9,603        —          23,506   

Sales and Other Revenues

     6,715        14,200        1,354        6,427        28,696   

Total Revenues

     58,494        65,791        45,134        6,427        175,846   

Depreciation of Rental Equipment

     7,089        19,474        6,665        —          33,228   

Gross Profit

     22,894        30,958        24,557        735        79,144   

Selling and Administrative Expenses

     17,371        12,400        12,097        1,562        43,430   

Income (Loss) from Operations

     5,523        18,558        12,460        (827     35,714   

Interest Expense (Income) Allocation

     2,158        1,089        1,213        (100     4,360   

Income (Loss) before Provision for Income Taxes

     3,365        17,469        11,247        (727     31,354   

Rental Equipment Acquisitions

     21,521        22,655        15,853        —          60,029   

Accounts Receivable, net (period end)

     37,573        22,750        24,139        2,824        87,286   

Rental Equipment, at cost (period end)

     570,352        264,429        269,437        —          1,104,218   

Rental Equipment, net book value (period end)

     397,702        105,869        234,065        —          737,636   

Utilization (period end) 2

     67.6     63.3     68.7    

Average Utilization 2

     66.7     63.7 %     65.5    

2012

          

Rental Revenues

   $ 39,413      $ 48,267      $ 32,229      $ —        $ 119,909   

Rental Related Services Revenues

     12,200        1,684        7,809        —          21,693   

Sales and Other Revenues

     4,522        11,151        696        4,723        21,092   

Total Revenues

     56,135        61,102        40,734        4,723        162,694   

Depreciation of Rental Equipment

     6,959        18,610        5,504        —          31,073   

Gross Profit

     24,505        28,842        26,004        1,264        80,615   

Selling and Administrative Expenses

     16,779        13,105        10,409        2,231        42,524   

Income (Loss) from Operations

     7,726        15,737        15,595        (967     38,091   

Interest Expense (Income) Allocation

     2,294        1,198        1,134        (71     4,555   

Income (Loss) before Provision for Income Taxes

     5,432        14,539        14,461        (896     33,536   

Rental Equipment Acquisitions

     11,702        29,379        34,041        —          75,122   

Accounts Receivable, net (period end)

     34,762        23,120        20,169        8,351        86,402   

Rental Equipment, at cost (period end)

     547,248        270,747        235,022        —          1,053,017   

Rental Equipment, net book value (period end)

     385,901        112,922        212,095        —          710,918   

Utilization (period end) 2

     65.6     65.7     67.5    

Average Utilization 2

     66.2     65.9     73.3    

 

1. Gross Enviroplex sales revenues were $6,430 and $4,723 for the six months ended June 30, 2013 and 2012, respectively. The 2013 period includes inter-segment sales to Mobile Modular of $3 which have been eliminated in consolidation. There were no inter-segment sales to Mobile Modular in the 2012 period, which required elimination in consolidation.
2. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment and for Mobile Modular and Adler Tanks excluding new equipment inventory. The Average Utilization for the period is calculated using the average costs of rental equipment.

No single customer accounted for more than 10% of total revenues for the six months ended June 30, 2013 and 2012. Revenues from foreign country customers accounted for 8% and 11% of the Company’s total revenues, respectively, for the same periods.

 

10


ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors. These factors include, but are not limited to, those set forth under this Item, those discussed in Part II—Item 1A, “Risk Factors” and elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on February 22, 2013 (the “2012 Annual Report”) and those that may be identified from time to time in our reports and registration statements filed with the SEC.

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Part I—Item 1 of this Form 10-Q and the Consolidated Financial Statements and related Notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2012 Annual Report. In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2012 Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Form 10-Q to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

    General

The Company, incorporated in 1979, is a leading rental provider of relocatable modular buildings for classroom and office space, electronic test equipment for general purpose and communications needs, and liquid and solid containment tanks and boxes. The Company’s primary emphasis is on equipment rentals. The Company is comprised of four business segments: (1) its modular building rental division (“Mobile Modular”); (2) its electronic test equipment rental division (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids division (“Adler Tanks”); and (4) its classroom manufacturing division selling modular buildings used primarily as classrooms in California (“Enviroplex”).

The Mobile Modular segment includes the results of operations of Mobile Modular Portable Storage, which represented less than 4% of the Company’s total revenues in the six months ended June 30, 2013. Mobile Modular Portable Storage commenced operations in 2008 and offers portable storage units and high security portable office units for rent, lease and purchase.

In the six months ended June 30, 2013, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 11%, 56%, 36% and negative 3% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 16%, 44%, 43% and negative 3% for the same period in 2012. Although managed as a separate business unit, Enviroplex’s revenues, pretax income contribution and total assets are not significant relative to the Company’s consolidated financial position. Accordingly, we have not presented a separate discussion of Enviroplex’s results of operations in this MD&A.

The Company generates its revenues primarily from the rental of its equipment on operating leases and from sales of equipment occurring in the normal course of business. The Company requires significant capital outlay to purchase its rental inventory and recovers its investment through rental and sales revenues. Rental revenues and certain other service revenues negotiated as part of lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the leases. Sales revenues and related costs are recognized upon delivery and installation of the equipment to customers. Sales revenues are less predictable and can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Generally, rental revenues recover the equipment’s capitalized cost in a short period of time relative to the equipment’s potential rental life and when sold, sale proceeds usually recover a high percentage of its capitalized cost.

The Company’s modular revenues (consisting of revenues from Mobile Modular, Mobile Modular Portable Storage and Enviroplex) are derived from rentals and sales to education and commercial customers, with a majority of revenues generated by education customers. Modular revenues are primarily affected by demand for classrooms, which in turn is affected by shifting and fluctuating school populations, the levels of state funding to public schools, the need for temporary classroom space during reconstruction of older schools and changes in

 

11


policies regarding class size. As a result of any reduced funding, lower expenditures by these schools may result in certain planned programs to increase the number of classrooms, such as those that the Company provides, to be postponed or terminated. However, reduced expenditures may also result in schools reducing their long-term facility construction projects in favor of using the Company’s modular classroom solutions. At this time, the Company can provide no assurances as to whether public schools will either reduce or increase their demand for the Company’s modular classrooms as a result of fluctuations in state funding of public schools. Looking forward, the Company believes that any interruption in the passage of facility bonds or contraction of class size reduction programs by public schools may have a material adverse effect on both rental and sales revenues of the Company. (For more information, see “Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12)” in the Company’s 2012 Annual Report and “Item 1A. Risk Factors – Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability” in Part II Other Information of this Form 10-Q.)

Revenues of TRS-RenTelco are derived from the rental and sale of general purpose, communications and environmental test equipment to a broad range of companies, from Fortune 500 to middle and smaller market companies primarily in the electronics, communications, aerospace and defense industries. Electronic test equipment revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance.

Revenues of Adler Tanks are derived from the rental and sale of fixed axle tanks (“tanks”) and vacuum containers, dewatering containers and roll-off containers (collectively referred to as “boxes”). These tanks and boxes are rented to a broad range of industries and applications including oil and gas exploration and field services, refinery, chemical and industrial plant maintenance, environmental remediation and field services, infrastructures, building construction, marine services, pipeline construction and maintenance, tank terminals services, wastewater treatment, and waste management and landfill services for the containment of hazardous and non-hazardous liquids and solids. The liquid and solid containment tanks and boxes rental business was acquired through the acquisition of Adler Tank Rentals, LLC on December 11, 2008.

The Company’s rental operations include rental and rental related service revenues which comprised approximately 84% and 87% of consolidated revenues in the six months ended June 30, 2013 and 2012, respectively. Of the total rental operations revenues for the six months ended June 30, 2013, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 35%, 35% and 30%, respectively, compared to 37%, 35% and 28%, respectively, in the same period of 2012. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment (if any), and other direct costs of rental operations, which include direct labor costs, supplies, repairs, insurance, property taxes, license fees, cost of subrentals and amortization of certain lease costs.

The Company’s Mobile Modular, TRS-RenTelco and Adler Tanks business segments sell modular units, electronic test equipment and liquid and solid containment tanks and boxes, respectively, which are either new or previously rented. In addition, Enviroplex sells new modular buildings used primarily as classrooms in California. For the six months ended June 30, 2013 and 2012, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 16% and 13%, respectively, of the Company’s consolidated revenues. Of the total sales and other revenues for the six months ended June 30, 2013 and 2012, Mobile Modular and Enviroplex together comprised 46% and 44%, respectively, and TRS-RenTelco comprised 50% and 53%, respectively. Adler Tanks sales and other revenues for the six months ended June 30, 2013 and 2012 were 4% and 3%, respectively, of the Company’s total sales and other revenues. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold, such as delivery, installation, modifications and related site work.

Selling and administrative expenses primarily include personnel and benefit costs, which include non-cash stock-based compensation, depreciation and amortization, bad debt expense, advertising costs, and professional service fees. The Company believes that sharing of common facilities, financing, senior management, and operating and accounting systems by all of the Company’s operations results in an efficient use of overhead. Historically, the Company’s operating margins have been impacted favorably to the extent its costs and expenses are leveraged over a large installed customer base. However, there can be no assurance as to the Company’s ability to maintain a large installed customer base or ability to sustain its historical operating margins.

 

12


Adjusted EBITDA

To supplement the Company’s financial data presented on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”), the Company presents “Adjusted EBITDA”, which is defined by the Company as net income before interest expense, provision for income taxes, depreciation, amortization, and non-cash stock-based compensation. The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the Company.

Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, compliance with financial covenants in the Company’s revolving lines of credit and senior notes and the Company’s ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including stock-based compensation, is useful in measuring the Company’s cash available for operations and performance of the Company. Because management finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance.

Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non-GAAP measures used by other companies. Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include stock-based compensation charges. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison. The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation. Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance. Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP.

Reconciliation of Net Income to Adjusted EBITDA

 

(dollar amounts in thousands)    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Twelve Months Ended
June  30,
 
   2013     2012     2013     2012     2013     2012  

Net Income

   $ 9,848      $ 10,479      $ 19,063      $ 20,390      $ 43,450      $  48,972   

Provision for Income Taxes

     6,349        6,756        12,291        13,146        27,235        31,050   

Interest

     2,157        2,382        4,360        4,555        8,954        8,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from Operations

     18,354        19,617        35,714        38,091        79,639        88,747   

Depreciation and Amortization

     18,837        17,823        37,645        35,339        74,782        70,098   

Non-Cash Stock-Based Compensation

     1,129        1,083        2,255        2,077        4,018        5,171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA 1

   $ 38,320      $ 38,523      $ 75,614      $ 75,507      $ 158,439      $ 164,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin 2

     44     46     43     46     42     46

 

13


Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities

 

(dollar amounts in thousands)    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Twelve Months Ended
June  30,
 
   2013     2012     2013     2012     2013     2012  

Adjusted EBITDA 1

   $ 38,320      $ 38,523      $ 75,614      $ 75,507      $ 158,439      $ 164,016   

Interest Paid

     (3,055     (3,545     (4,331     (4,616     (8,822     (8,835

Net Income Taxes Paid

     (5,260     (2,017     (6,779     (3,216     (9,405     (5,334

Gain on Sale of Used Rental Equipment

     (2,922     (2,895     (6,256     (5,968     (12,677     (11,916

Change in certain assets and liabilities:

            

Accounts Receivable, net

     436        (1,449     4,970        6,269        (1,174     (7,572

Prepaid Expenses and Other Assets

     (5,696     (5,333     (168     (9,489     6,984        (3,894

Accounts Payable and Other Liabilities

     (2,498     4,836        4,177        3,139        (2,679     (1,064

Deferred Income

     5,294        1,658        (988     3,647        (2,778     (2,267
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Provided by Operating Activities

   $ 24,619      $ 29,778      $ 66,239      $ 65,273      $ 127,348      $ 123,134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation, amortization, and non-cash stock-based compensation.
2. Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by total revenues for the period.

Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Amended Credit Facility (as defined and more fully described under the heading “Liquidity and Capital Resources – Unsecured Revolving Lines of Credit”) and Senior Notes (as defined and more fully described under the heading “Liquidity and Capital Resources – 4.03% Senior Notes Due in 2018” in this MD&A). These instruments contain financial covenants requiring the Company to not:

 

   

Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility and the Note Purchase Agreement (as defined and more fully described under the heading “Liquidity and Capital Resources – 4.03% Senior Notes Due in 2018” in this MD&A)) of Adjusted EBITDA (as defined in the Amended Credit Facility and the Note Purchase Agreement) to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At June 30, 2013, the actual ratio was 4.01 to 1.

 

   

Permit the Consolidated Leverage Ratio of funded debt (as defined in the Amended Credit Facility and the Note Purchase Agreement) to Adjusted EBITDA at any time during any period of four consecutive quarters to be greater than 2.75 to 1. At June 30, 2013, the actual ratio was 1.76 to 1.

At June 30, 2013, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, though, significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants.

Recent Developments

On June 12, 2013, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.24 per common share for the quarter ended June 30, 2013, an increase of 2% over the prior year’s comparable quarter.

 

14


Results of Operations

Three Months Ended June 30, 2013 Compared to

Three Months Ended June 30, 2012

Overview

Consolidated revenues for the three months ended June 30, 2013 increased 4% to $87.1 million, from $83.8 million for the same period in 2012. Consolidated net income for the three months ended June 30, 2013 decreased 6% to $9.8 million, from $10.5 million for the same period in 2012. Earnings per diluted share for the three months ended June 30, 2013 decreased 10% to $0.38 from $0.42 for the same period in 2012.

For the three months ended June 30, 2013, on a consolidated basis:

 

   

Gross profit decreased $0.6 million, or 2%, to $40.1 million from $40.8 million for the same period in 2012. Enviroplex gross profit decreased $1.1 to $0.1 million, primarily due to lower sales revenues. Mobile Modular gross profit decreased $0.8 million, or 7%, due to lower gross profit on rental revenues, partly offset by higher gross profit on rental related services and sales revenues. TRS-RenTelco gross profit increased $0.6 million, or 4%, due to higher gross profit on rental, rental related services and sales revenues. Adler Tanks gross profit increased $0.7 million, or 6%, due to higher gross profit on rental and rental related services revenues.

 

   

Selling and administrative expenses increased 3% to $21.8 million from $21.2 million in the same period in 2012, primarily due to $0.8 million higher salaries and employee benefit costs and $0.5 million higher marketing and administrative expenses, partly offset by $0.7 million lower bad debt expense.

 

   

Interest expense decreased 9% to $2.2 million from $2.4 million in the same period in 2012, due to 6% lower average debt levels of the Company and 3% lower net average interest rates of 3.0% in 2013 compared to 3.1% in 2012.

 

   

Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 10%, 53% and 41%, respectively, compared to 15%, 45% and 39%, respectively, for the comparable 2012 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was a negative 4% compared to 1% in 2012.

 

   

Adjusted EBITDA decreased 1% to $38.3 million, compared to $38.5 million in 2012.

 

15


Mobile Modular

For the three months ended June 30, 2013, Mobile Modular’s total revenues increased $1.7 million to $29.5 million compared to the same period in 2012, primarily due to higher sales, rental related services and rental revenues. The revenue increase, offset by lower gross margin on rental revenues and sales, and higher selling and administrative expenses, resulted in a 37% decrease in pre-tax income to $1.6 million for the three months ended June 30, 2013, from $2.5 million for the same period in 2012.

The following table summarizes quarterly results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.

Mobile Modular – Three Months Ended 6/30/13 compared to Three Months Ended 6/30/12 (Unaudited)

 

                                                               
(dollar amounts in thousands)    Three Months Ended
June 30,
    Increase (Decrease)  
   2013     2012     $     %  

Revenues

      

Rental

   $ 19,959      $ 19,522      $ 437        2

Rental Related Services

     6,577        6,080        497        8
  

 

 

   

 

 

   

 

 

   

Rental Operations

     26,536        25,602        934        4

Sales

     2,839        2,061        778        38

Other

     128        117        11        9
  

 

 

   

 

 

   

 

 

   

Total Revenues

     29,503        27,780        1,723        6
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

      

Direct Costs of Rental Operations:

      

Depreciation of Rental Equipment

     3,571        3,485        86        2

Rental Related Services

     4,826        5,034        (208     -4

Other

     7,676        5,706        1,970        35
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     16,073        14,225        1,848        13

Costs of Sales

     2,198        1,531        667        44
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     18,271        15,756        2,515        16
  

 

 

   

 

 

   

 

 

   

Gross Profit

      

Rental

     8,712        10,331        (1,619     -16

Rental Related Services

     1,751        1,046        705        67
  

 

 

   

 

 

   

 

 

   

Rental Operations

     10,463        11,377        (914     -8

Sales

     641        530        111        21

Other

     128        117        11        9
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     11,232        12,024        (792     -7

Selling and Administrative Expenses

     8,571        8,292        279        3
  

 

 

   

 

 

   

 

 

   

Income from Operations

     2,661        3,732        (1,071     -29

Interest Expense Allocation

     1,065        1,191        (126     -11
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 1,596      $ 2,541      $ (945     -37
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 540,805      $ 520,569      $ 20,236        4

Average Rental Equipment on Rent

   $ 361,153      $ 342,438      $ 18,715        5

Average Monthly Total Yield 2

     1.23     1.25       -2

Average Utilization 3

     66.8     65.8       2

Average Monthly Rental Rate 4

     1.84     1.90       -3

Period End Rental Equipment 1

   $ 546,278      $ 523,602      $ 22,676        4

Period End Utilization 3

     67.6     65.6       3

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average cost of rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

 

16


Mobile Modular’s gross profit for the three months ended June 30, 2013 decreased 7%, to $11.2 million from $12.0 million for the same period in 2012. For the three months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues increased $0.4 million, or 2%, compared to 2012, primarily due to 5% higher average rental equipment on rent, partly offset by 3% lower average monthly rental rates in 2013 as compared to 2012. As a percentage of rental revenues, depreciation was 18% in 2013 and 2012, and other direct costs were 38% in 2013 compared to 29% in 2012, which resulted in gross margin percentages of 44% in 2013 and 53% in 2012. The increase in other direct costs was due to higher material and labor costs to prepare equipment for shipment to customers. The lower rental margin partly offset by higher rental revenues resulted in gross profit on rental revenues decreasing $1.6 million, to $8.7 million in 2013.

 

   

Gross Profit on Rental Related Services – Rental related services revenues increased $0.5 million, or 8%, compared to 2012. Most of these service revenues are negotiated with the initial lease and are recognized on a straight-line basis with the associated costs over the initial term of the lease. The increase in rental related services revenues was primarily attributable to higher delivery and return delivery revenues at Mobile Modular Portable Storage. The higher revenues, together with higher gross margin percentage of 27% in 2013 compared to 17% in 2012, resulted in rental related services gross profit increasing to $1.8 million in 2013 compared to $1.0 million in 2012.

 

   

Gross Profit on Sales – Sales revenues increased $0.8 million, or 38%, compared to 2012. Gross profit on sales increased 21% to $0.6 million with gross margin percentage decreasing to 23% from 26% in 2012, due to lower margins on new equipment sales in 2013. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding.

For the three months ended June 30, 2013, selling and administrative expenses increased 3%, to $8.6 million from $8.3 million in the same period in 2012, primarily due to increased personnel and benefit costs.

 

17


TRS-RenTelco

For the three months ended June 30, 2013, TRS-RenTelco’s total revenues increased $2.5 million, or 8%, to $33.1 million compared to the same period in 2012, primarily due to higher sales and rental revenues. Pre-tax income increased 10% to $8.5 million for the three months ended June 30, 2013 from $7.8 million for the same period in 2012, primarily due to higher gross profit on rental, rental related services and sales revenues, and lower selling and administrative expenses.

The following table summarizes quarterly results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.

TRS-RenTelco – Three Months Ended 6/30/13 compared to Three Months Ended 6/30/12 (Unaudited)

 

(dollar amounts in thousands)    Three Months Ended
June 30,
    Increase (Decrease)  
   2013     2012     $     %  

Revenues

        

Rental

   $ 25,338      $ 24,855      $ 483        2

Rental Related Services

     746        855        (109     -13
  

 

 

   

 

 

   

 

 

   

Rental Operations

     26,084        25,710        374        1

Sales

     6,634        4,524        2,110        47

Other

     359        371        (12     -3
  

 

 

   

 

 

   

 

 

   

Total Revenues

     33,077        30,605        2,472        8
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

        

Direct Costs of Rental Operations:

        

Depreciation of Rental Equipment

     9,658        9,326        332        4

Rental Related Services

     704        906        (202     -22

Other

     3,255        3,360        (105     -3
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     13,617        13,592        25        0

Costs of Sales

     4,096        2,225        1,871        84
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     17,713        15,817        1,896        12
  

 

 

   

 

 

   

 

 

   

Gross Profit (Loss)

        

Rental

     12,425        12,169        256        2

Rental Related Services

     42        (51     93        182
  

 

 

   

 

 

   

 

 

   

Rental Operations

     12,467        12,118        349        3

Sales

     2,538        2,299        239        10

Other

     359        371        (12     -3
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     15,364        14,788        576        4

Selling and Administrative Expenses

     6,306        6,409        (103     -2
  

 

 

   

 

 

   

 

 

   

Income from Operations

     9,058        8,379        679        8

Interest Expense Allocation

     532        620        (88     -14
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 8,526      $ 7,759      $ 767        10
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 264,472      $ 265,793      $ (1,321     -1

Average Rental Equipment on Rent

   $ 167,993      $ 175,524      $ (7,531     -4

Average Monthly Total Yield 2

     3.19     3.12       2

Average Utilization 3

     63.5     66.0       -4

Average Monthly Rental Rate 4

     5.03     4.72       7

Period End Rental Equipment 1

   $ 264,110      $ 269,714      $ (5,604     -2

Period End Utilization 3

     63.3     65.7       -4

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment. Average utilization for the period is calculated using the average cost of rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

 

18


TRS-RenTelco’s gross profit for the three months ended June 30, 2013 increased 4% to $15.4 million from $14.8 million for the same period in 2012. For the three months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues increased $0.5 million, or 2%, as compared to 2012, with depreciation expense increasing $0.3 million, or 4%, resulting in increased gross profit on rental revenues of $0.3 million, or 2%, to $12.4 million as compared to 2012. As a percentage of rental revenues, depreciation was 38% in 2013 and 2012 and other direct costs were 13% in 2013 and 2012, which resulted in a gross margin percentage of 49% in 2013 and 2012. The rental revenues increase was due to 7% higher average monthly rental rates, partly offset by 4% lower average rental equipment on rent in 2013 as compared to 2012.

 

   

Gross Profit on Sales – Sales revenues increased 47% to $6.6 million in 2013. Gross profit on sales increased 10% to $2.5 million with gross margin percentage decreasing to 38% from 51% in 2012, primarily due to lower margins on used equipment sales. Sales occur as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements and related mix of equipment sold, equipment availability and funding.

For the three months ended June 30, 2013, selling and administrative expenses decreased 2%, to $6.3 million from $6.4 million in the same period in 2012, primarily due to decreased salary and benefit costs related to the exit of the environmental test equipment business in November 2012.

 

19


Adler Tanks

For the three months ended June 30, 2013, Adler Tanks’ total revenues increased $3.7 million, or 18%, to $24.3 million compared to the same period in 2012, due to higher rental, rental related services and sales revenues. The revenue increase, offset by lower gross margin on rental revenues and higher selling and administrative expenses, resulted in a $0.1 million decrease in pre-tax income to $6.7 million for the three months ended June 30, 2013, compared to the same period in 2012.

The following table summarizes quarterly results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.

Adler Tanks – Three Months Ended 6/30/13 compared to Three Months Ended 6/30/12 (Unaudited)

 

                                                           
(dollar amounts in thousands)    Three Months Ended
June 30,
    Increase (Decrease)  
   2013     2012     $     %  

Revenues

      

Rental

   $ 17,746      $ 16,012      $ 1,734        11

Rental Related Services

     5,338        4,093        1,245        30
  

 

 

   

 

 

   

 

 

   

Rental Operations

     23,084        20,105        2,979        15

Sales

     1,199        529        670        127

Other

     36        30        6        20
  

 

 

   

 

 

   

 

 

   

Total Revenues

     24,319        20,664        3,655        18
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

      

Direct Costs of Rental Operations:

      

Depreciation of Rental Equipment

     3,397        2,861        536        19

Rental Related Services

     3,861        3,071        790        26

Other

     2,553        1,652        901        55
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     9,811        7,584        2,227        29

Costs of Sales

     1,094        382        712        186
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     10,905        7,966        2,939        37
  

 

 

   

 

 

   

 

 

   

Gross Profit

      

Rental

     11,796        11,499        297        3

Rental Related Services

     1,477        1,022        455        45
  

 

 

   

 

 

   

 

 

   

Rental Operations

     13,273        12,521        752        6

Sales

     105        147        (42     -29

Other

     36        30        6        20
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     13,414        12,698        716        6

Selling and Administrative Expenses

     6,105        5,312        793        15
  

 

 

   

 

 

   

 

 

   

Income from Operations

     7,309        7,386        (77     -1

Interest Expense Allocation

     604        603        1        0
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 6,705      $ 6,783      $ (78     -1
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 260,346      $ 218,466      $ 41,880        19

Average Rental Equipment on Rent

   $ 171,383      $ 153,580      $ 17,803        12

Average Monthly Total Yield 2

     2.27     2.44       -7

Average Utilization 3

     65.8     70.3       -6

Average Monthly Rental Rate 4

     3.45     3.48       -1

Period End Rental Equipment 1

   $ 264,039      $ 226,626      $ 37,413        17

Period End Utilization 3

     68.7     67.5       2

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average Utilization for the period is calculated using the average cost of rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period.

 

20


Adler Tanks’ gross profit for the three months ended June 30, 2013 increased 6% to $13.4 million from $12.7 million for the same period in 2012. For the three months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues increased $1.7 million, or 11%, compared to 2012, due to 12% higher average rental equipment on rent, partly offset by 1% lower average rental rates in 2013 as compared to 2012. As a percentage of rental revenues, depreciation was 19% and 18% in 2013 and 2012, respectively, and other direct costs were 14% in 2013 compared to 10% in 2012, which resulted in gross margin percentages of 67% and 72% in 2013 and 2012, respectively. The higher rental revenues, partly offset by lower rental margins resulted in gross profit on rental revenues increasing $0.3 million, or 3%, to $11.8 million in 2013.

 

   

Gross Profit on Rental Related Services – Rental related services revenues increased $1.2 million, or 30%, compared to 2012. The higher revenues and higher gross margin percentage of 28% in 2013 compared to 25% in 2012 resulted in rental related services gross profit increasing 45% to $1.5 million in 2013.

For the three months ended June 30, 2012, selling and administrative expenses increased 15% to $6.1 million from $5.3 million in the same period in 2012, primarily due to increased personnel and benefit costs.

 

21


Six Months Ended June 30, 2013 Compared to

Six Months Ended June 30, 2012

Overview

Consolidated revenues for the six months ended June 30, 2013 increased 8%, to $175.8 million from $162.7 million for the same period in 2012. Consolidated net income for the six months ended June 30, 2013 decreased 7% to $19.1 million, from $20.4 million for the same period in 2012. Earnings per diluted share for the six months ended June 30, 2013 decreased 9% to $0.74 from $0.81 for the same period in 2012.

For the six months ended June 30, 2013, on a consolidated basis:

 

   

Gross profit decreased $1.5 million, or 2%, to $79.1 million from $80.6 million for the same period in 2012. Gross profit of Mobile Modular decreased $1.6 million, or 7%, primarily due to lower gross profit on rental revenues, partly offset by higher gross profit on rental related services and sales revenues. Adler Tanks gross profit decreased $1.5 million, or 6%, primarily due to lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental related services revenues. Enviroplex gross profit decreased $0.5 million, or 42%, due to lower gross margins on sales. TRS-RenTelco gross profit increased $2.1 million, or 7%, primarily due to higher gross profit on rental, rental related services and sales revenues.

 

   

Selling and administrative expenses increased 2% to $43.4 million from $42.5 million for the same period in 2012, primarily due to $1.1 million higher salary and employee benefit costs, partly offset by $0.4 million lower bad debt expense.

 

   

Interest expense decreased 4% to $4.4 million, due to 4% lower average debt levels of the Company and flat net average interest rates of 3.0% in 2013 and 2012.

 

   

Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 11%, 56% and 36%, respectively, compared to 16%, 44% and 43%, respectively, for the comparable 2012 period. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex was negative 3% in 2013 and 2012.

 

   

Adjusted EBITDA increased $0.1 million to $75.6 million compared to $75.5 million in 2012.

 

22


Mobile Modular

For the six months ended June 30, 2013, Mobile Modular’s total revenues increased $2.4 million, or 4%, to $58.5 million compared to the same period in 2012, primarily due to higher sales and rental related services revenues, partly offset by lower rental revenues during the period. The revenue increase, offset by lower gross margin on rental and sales revenues, and higher selling and administrative expenses, resulted in a 38% decrease in pre-tax income to $3.4 million for the six months ended June 30, 2013, from $5.4 million for the same period in 2012.

The following table summarizes quarterly results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

Mobile Modular – Six Months Ended 6/30/13 compared to Six Months Ended 6/30/12 (Unaudited)

 

                                                               
      Six Months Ended
June 30,
    Increase (Decrease)  
(dollar amounts in thousands)    2013     2012     $     %  

Revenues

        

Rental

   $ 39,288      $ 39,413      $ (125     0

Rental Related Services

     12,491        12,200        291        2
  

 

 

   

 

 

   

 

 

   

Rental Operations

     51,779        51,613        166        0

Sales

     6,483        4,288        2,195        51

Other

     232        234        (2     -1
  

 

 

   

 

 

   

 

 

   

Total Revenues

     58,494        56,135        2,359        4
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

        

Direct Costs of Rental Operations:

        

Depreciation of Rental Equipment

     7,089        6,959        130        2

Rental Related Services

     9,571        9,925        (354     -4

Other

     14,043        11,647        2,396        21
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     30,703        28,531        2,172        8

Costs of Sales

     4,897        3,099        1,798        58
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     35,600        31,630        3,970        13
  

 

 

   

 

 

   

 

 

   

Gross Profit

        

Rental

     18,156        20,807        (2,651     -13

Rental Related Services

     2,920        2,275        645        28
  

 

 

   

 

 

   

 

 

   

Rental Operations

     21,076        23,082        (2,006     -9

Sales

     1,586        1,189        397        33

Other

     232        234        (2     -1
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     22,894        24,505        (1,611     -7

Selling and Administrative Expenses

     17,371        16,779        592        4
  

 

 

   

 

 

   

 

 

   

Income from Operations

     5,523        7,726        (2,203     -29

Interest Expense Allocation

     2,158        2,294        (136     -6
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 3,365      $ 5,432      $ (2,067     -38
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 538,147      $ 518,756      $ 19,391        4

Average Rental Equipment on Rent

   $ 358,827      $ 343,333      $ 15,494        5

Average Monthly Total Yield 2

     1.22     1.27       -4

Average Utilization 3

     66.7     66.2       1

Average Monthly Rental Rate 4

     1.82     1.91       -5

Period End Rental Equipment 1

   $ 546,278      $ 523,602      $ 22,676        4

Period End Utilization 3

     67.6     65.6       3

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average costs of the rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent for the period.

 

23


Mobile Modular’s gross profit for the six months ended June 30, 2013 decreased $1.6 million, to $22.9 million from $24.5 million for the same period in 2012. For the six months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues decreased $0.1 million, primarily due to 5% lower average monthly rental rates, partly offset by 5% higher average rental equipment on rent. As a percentage of rental revenues, depreciation was 18% in 2013 and 2012 and other direct costs were 36% in 2013 and 29% in 2012, which resulted in gross margin percentage of 46% in 2013 and 53% in 2012. The increase in other direct costs was due to higher material and labor costs to prepare equipment for shipment to customers. The lower rental revenues, combined with lower rental margins, resulted in gross profit on rental revenues decreasing $2.7 million, or 13%, to $18.2 million in 2013.

 

   

Gross Profit on Rental Related Services – Rental related services revenues increased $0.3 million, or 2%, compared to 2012. Most of these service revenues are negotiated with the initial lease and are recognized on a straight-line basis with the associated costs over the initial term of the lease. The increase in rental related services revenues was primarily attributable to higher delivery and return delivery at Mobile Modular Portable Storage. The higher revenues, together with higher gross margin percentage of 23% in 2013 compared to 19% in 2012, resulted in rental related services gross profit increasing 28% to $2.9 million from $2.3 million in 2012.

 

   

Gross Profit on Sales – Sales revenues increased $2.2 million, or 51%, compared to 2012, which resulted in sales gross profit increasing 33% to $1.6 million from $1.2 million in 2012. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding.

For the six months ended June 30, 2013, selling and administrative expenses increased $0.6 million, or 4%, to $17.4 million from $16.8 million in the same period in 2012, primarily as a result of increased personnel and benefits costs.

 

24


TRS-RenTelco

For the six months ended June 30, 2013, TRS-RenTelco’s total revenues increased $4.7 million, or 8%, to $65.8 million compared to the same period in 2012, due to higher sales and rental revenues, partly offset by lower rental related services revenues. Pre-tax income increased $2.9 million, or 20%, to $17.5 million for the six months ended June 30, 2013 compared to $14.5 million for the same period in 2012, primarily due to higher gross profit on rental and sales revenues.

The following table summarizes quarterly results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

TRS-RenTelco – Six Months Ended 6/30/13 compared to Six Months Ended 6/30/12 (Unaudited)

 

                                                           
(dollar amounts in thousands)    Six Months Ended
June 30,
    Increase (Decrease)  
   2013     2012     $     %  

Revenues

        

Rental

   $ 50,179      $ 48,267      $ 1,912        4

Rental Related Services

     1,412        1,684        (272     -16
  

 

 

   

 

 

   

 

 

   

Rental Operations

     51,591        49,951        1,640        3

Sales

     13,476        10,289        3,187        31

Other

     724        862        (138     -16
  

 

 

   

 

 

   

 

 

   

Total Revenues

     65,791        61,102        4,689        8
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

        

Direct Costs of Rental Operations:

        

Depreciation of Rental Equipment

     19,474        18,610        864        5

Rental Related Services

     1,328        1,749        (421     -24

Other

     6,480        6,599        (119     -2
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     27,282        26,958        324        1

Costs of Sales

     7,551        5,302        2,249        42
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     34,833        32,260        2,573        8
  

 

 

   

 

 

   

 

 

   

Gross Profit (Loss)

        

Rental

     24,225        23,058        1,167        5

Rental Related Services

     84        (65     149        229
  

 

 

   

 

 

   

 

 

   

Rental Operations

     24,309        22,993        1,316        6

Sales

     5,925        4,987        938        19

Other

     724        862        (138     -16
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     30,958        28,842        2,116        7

Selling and Administrative Expenses

     12,400        13,105        (705     -5
  

 

 

   

 

 

   

 

 

   

Income from Operations

     18,558        15,737        2,821        18

Interest Expense Allocation

     1,089        1,198        (109     -9
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 17,469      $ 14,539      $ 2,930        20
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 265,122      $ 263,324      $ 1,798        1

Average Rental Equipment on Rent

   $ 168,900      $ 173,441      $ (4,541     -3

Average Monthly Total Yield 2

     3.15     3.07       3

Average Utilization 3

     63.7     65.9       -3

Average Monthly Rental Rate 4

     4.95     4.66       6

Period End Rental Equipment 1

   $ 264,110      $ 269,714      $ (5,604     -2

Period End Utilization 3

     63.3     65.7       -4

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment. Average Utilization for the period is calculated using the average costs of the rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent for the period.

 

25


TRS-RenTelco’s gross profit for the six months ended June 30, 2013 increased 7% to $31.0 million from $28.8 million for the same period in 2012. For the six months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues increased $1.9 million, or 4%, with depreciation expenses increasing $0.9 million, or 5%, and other direct costs decreasing $0.1 million, or 2%, to $6.5 million, resulting in increased gross profit on rental revenues of $1.2 million, or 5%, to $24.2 million. As a percentage of rental revenues, depreciation was 39% in 2013 and 2012 and other direct costs were 13% in 2013 and 2012, which resulted in a gross margin percentage of 48% in 2013 and 2012. The rental revenues increase was due to 6% higher average monthly rental rates, partly offset by 3% lower average rental equipment on rent compared to 2012.

 

   

Gross Profit on Sales – Sales revenues increased $3.2 million, or 31%, to $13.5 million in 2013, compared to $10.3 million in 2012. Higher sales revenue, partly offset by lower gross margin percentage of 44% in 2013 compared to 48% in 2012, primarily due to lower gross margin on used equipment sales resulted in gross profit on sales increasing $0.9 million, or 19%, to $5.9 million from $5.0 million in 2012. Sales occur routinely as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements, equipment availability and funding.

For the six months ended June 30, 2013, selling and administrative expenses decreased $0.7 million, or 5%, to $12.4 million from $13.1 million in the same period in 2012, primarily due to decreased salary and benefit costs related to the exit of the environmental test equipment business in November 2012.

 

26


Adler Tanks

For the six months ended June 30, 2013, Adler Tanks’ total revenues increased $4.4 million, or 11%, to $45.1 million compared to the same period in 2012, primarily due to higher rental and rental related services revenues during the period. The revenue increase, offset by lower gross margin on rental and rental related services revenues, and higher selling and administrative expenses, resulted in pre-tax income of $11.2 million for the six months ended June 30, 2013, a decrease of 22% compared to 2012.

The following table summarizes quarter results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

Adler Tanks – Six Months Ended 6/30/13 compared to Six Months Ended 6/30/12 (Unaudited)

 

                                                               
      Six Months Ended
June 30,
    Increase (Decrease)  
(dollar amounts in thousands)    2013     2012     $     %  

Revenues

        

Rental

   $ 34,177      $ 32,229      $ 1,948        6

Rental Related Services

     9,603        7,809        1,794        23
  

 

 

   

 

 

   

 

 

   

Rental Operations

     43,780        40,038        3,742        9

Sales

     1,285        636        649        102

Other

     69        60        9        15
  

 

 

   

 

 

   

 

 

   

Total Revenues

     45,134        40,734        4,400        11
  

 

 

   

 

 

   

 

 

   

Costs and Expenses

        

Direct Costs of Rental Operations:

        

Depreciation of Rental Equipment

     6,665        5,504        1,161        21

Rental Related Services

     7,414        5,890        1,524        26

Other

     5,318        2,912        2,406        83
  

 

 

   

 

 

   

 

 

   

Total Direct Costs of Rental Operations

     19,397        14,306        5,091        36

Costs of Sales

     1,180        424        756        178
  

 

 

   

 

 

   

 

 

   

Total Costs of Revenues

     20,577        14,730        5,847        40
  

 

 

   

 

 

   

 

 

   

Gross Profit

        

Rental

     22,194        23,813        (1,619     -7

Rental Related Services

     2,189        1,919        270        14
  

 

 

   

 

 

   

 

 

   

Rental Operations

     24,383        25,732        (1,349     -5

Sales

     105        212        (107     -50

Other

     69        60        9        15
  

 

 

   

 

 

   

 

 

   

Total Gross Profit

     24,557        26,004        (1,447     -6

Selling and Administrative Expenses

     12,097        10,409        1,688        16
  

 

 

   

 

 

   

 

 

   

Income from Operations

     12,460        15,595        (3,135     -20

Interest Expense Allocation

     1,213        1,134        79        7
  

 

 

   

 

 

   

 

 

   

Pre-tax Income

   $ 11,247      $ 14,461      $ (3,214     -22
  

 

 

   

 

 

   

 

 

   

Other Information

        

Average Rental Equipment 1

   $ 256,300      $ 209,808      $ 46,492        22

Average Rental Equipment on Rent

   $ 167,892      $ 153,784      $ 14,108        9

Average Monthly Total Yield 2

     2.23     2.56       -13

Average Utilization 3

     65.5     73.3       -11

Average Monthly Rental Rate 4

     3.40     3.49       -3

Period End Rental Equipment 1

   $ 264,039      $ 226,626      $ 37,413        17

Period End Utilization 3

     68.7     67.5       2

 

1. Average and Period End Rental Equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
2. Average Monthly Total Yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
3. Period End Utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory and accessory equipment. Average Utilization for the period is calculated using the average costs of the rental equipment.
4. Average Monthly Rental Rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent for the period.

 

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Adler Tanks’ gross profit for the six months ended June 30, 2013 decreased 6% to $24.6 million from $26.0 million for the same period in 2012. For the six months ended June 30, 2013 compared to the same period in 2012:

 

   

Gross Profit on Rental Revenues – Rental revenues increased $1.9 million, or 6%, due to 9% higher average rental equipment on rent, partly offset by 3% lower average rental rates in 2013 as compared to 2012. As a percentage of rental revenues, depreciation was 19% and 17% in 2013 and 2012, respectively, and other direct costs were 16% and 9%, respectively, in 2013 and 2012, which resulted in gross margin percentages of 65% in 2013 and 74% in 2012. The higher rental revenues, offset by lower rental margins resulted in gross profit on rental revenues decreasing $1.6 million, or 7%, to $22.2 million in 2013.

 

   

Gross Profit on Rental Related Services – Rental related services revenues increased $1.8 million, or 23%, compared to 2012. The higher revenues, partly offset by lower gross margin percentage of 23% in 2012 compared to 25% in 2012, resulted in rental related services gross profit increasing $0.3 million, or 14%, to $2.2 million from $1.9 million in 2012.

For the six months ended June 30, 2013, selling and administrative expenses increased 16% to $12.1 million from $10.4 million in the same period in 2012, primarily due to higher personnel and benefit costs and higher marketing and administrative expenses.

 

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Liquidity and Capital Resources

The Company’s rental businesses are capital intensive and generate significant cash flows. The Company finances its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and borrowings from banks and institutional lenders. Cash flows for the Company for the six months ended June 30, 2013 compared to the same period in 2012 are summarized as follows:

Cash Flows from Operating Activities: The Company’s operations provided net cash of $66.2 million compared to $65.3 million in 2012. The 1% increase in net cash provided by operating activities was primarily attributable to a lower increase in prepaid expenses and other assets, partly offset by lower income from operations and the other balance sheet changes.

Cash Flows from Investing Activities: Net cash used in investing activities was $46.0 million in 2013, compared to $70.0 million in 2012. The decrease was primarily due to $17.0 million lower purchases of rental equipment of $56.2 million in 2013, compared to $73.3 million in 2012, $4.7 million lower purchases of property, plant and equipment in 2013 of $4.2 million, compared to $8.9 million in 2012, and $2.2 million higher proceeds from sale of used rental equipment in 2013 of $14.4 million, compared to $12.2 million in 2012.

Cash Flows from Financing Activities: Net cash used in financing activities was $21.1 million in 2013, compared to net cash provided by financing of $3.8 million in 2012. The $24.9 million change in net cash flows from financing activities was primarily due to $34.6 million higher net repayments on the Company’s bank lines of credit, partly offset by $10.3 million higher proceeds and excess tax benefit from the exercise of stock options.

Significant capital expenditures are required to maintain and grow the Company’s rental assets. During the last three years, the Company has financed its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and from bank borrowings. Sales occur routinely as a normal part of the Company’s rental business. However, these sales can fluctuate from period to period depending on customer requirements and funding. Although the net proceeds received from sales may fluctuate from period to period, the Company believes its liquidity will not be adversely impacted from lower sales in any given year because it believes it has the ability to increase its bank borrowings and conserve its cash in the future by reducing the amount of cash it uses to purchase rental equipment, pay dividends, or repurchase the Company’s common stock.

Unsecured Revolving Lines of Credit

In June 2012, the Company entered into an amended and restated credit agreement with a syndicate of banks (the “Amended Credit Facility”). The five-year facility matures on June 15, 2017 and replaced the Company’s prior $350.0 million unsecured revolving credit facility. The Amended Credit Facility provides for a $420.0 million unsecured revolving credit facility (which may be increased to $450.0 million with $30.0 million of additional commitments), which includes a $25.0 million sublimit for the issuance of standby letters of credit and a $10.0 million sublimit for swingline loans.

In June 2012, the Company entered into a Credit Facility Letter Agreement and a Credit Line Note in favor of Union Bank, N.A., extending its line of credit facility related to its cash management services (“Sweep Service Facility”) and increasing the facility size from $5.0 million to $10.0 million. The Sweep Service Facility matures on the earlier of June 15, 2017, or the date the Company ceases to utilize Union Bank, N.A. for its cash management services.

At June 30, 2013, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up to $430.0 million of which $178.9 million was outstanding, and had capacity to borrow up to an additional $251.1 million. The Amended Credit Facility contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Amended Credit Facility):

 

   

Permit the Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than 2.50 to 1. At June 30, 2013, the actual ratio was 4.01 to 1.

 

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Permit the Consolidated Leverage Ratio at any time during any period of four consecutive fiscal quarters to be greater than 2.75 to 1. At June 30, 2013, the actual ratio was 1.76 to 1.

 

   

Permit Tangible Net Worth as of the end of any fiscal quarter of the Company to be less than the sum of (i) $246.1 million plus (ii) 25% of the Company’s Consolidated Net Income (as defined in the Amended Credit Facility) (but only if a positive number) for each fiscal quarter ended subsequent to December 31, 2011 plus (iii) 90% of the net cash proceeds from the issuance of the Company’s capital stock after December 31, 2011. At June 30, 2013, such sum was $278.4 million and the actual Tangible Net Worth of the Company was $349.0 million.

At June 30, 2013, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants.

4.03% Senior Notes Due in 2018

On April 21, 2011, the Company entered into a Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with Prudential Investment Management, Inc., The Prudential Insurance Company of America and Prudential Retirement Insurance and Annuity Company (collectively, the “Purchaser”), pursuant to which the Company agreed to sell an aggregate principal amount of $100 million of its 4.03% Series A Senior Notes (the “Senior Notes”) to the Purchaser. The Senior Notes are an unsecured obligation of the Company, due on April 21, 2018. Interest on these notes is due semi-annually in arrears and the principal is due in five equal annual installments, with the first payment due on April 21, 2014. In addition, the Note Purchase Agreement allows for the issuance and sale of additional senior notes to the Purchaser (the “Shelf Notes”) in the aggregate principal amount of $100 million, to mature no more than 12 years after the date of original issuance thereof, to have an average life of no more than 10 years and to bear interest on the unpaid balance. Among other restrictions, the Note Purchase Agreement, under which the Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement):

 

   

Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At June 30, 2013, the actual ratio was 4.01 to 1.

 

   

Permit the Consolidated Leverage Ratio of funded debt to EBITDA at any time during any period of four consecutive quarters to be greater than 2.75 to 1. At June 30, 2013, the actual ratio was 1.76 to 1.

 

   

Permit Tangible Net Worth, calculated as of the last day of each fiscal quarter, to be less than the sum of (i) $229.0 million, plus (ii) 25% of net income for such fiscal quarter subsequent to December 31, 2010, plus (iii) 90% of the net cash proceeds from the issuance of the Company’s capital stock after December 31, 2010. At June 30, 2013, such sum was $278.5 million and the actual Tangible Net Worth of the Company was $349.0 million.

At June 30, 2013, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants.

Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit and issue senior notes adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment.

 

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Common Stock Purchase

The Company has in the past made purchases of shares of its common stock from time to time on the NASDAQ and/or through privately negotiated, large block transactions under an authorization of the Company’s Board of Directors. Shares repurchased by the Company are cancelled and returned to the status of authorized but unissued stock. On May 14, 2008, the Company’s Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the Company’s outstanding common stock. There were no repurchases of common stock during the six months ended June 30, 2013 and 2012. As of June 30, 2013, 2,000,000 shares remain authorized for repurchase.

Contractual Obligations

We do not believe that our contractual obligations have changed materially from those included in our 2012 Annual Report.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2013.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s market risk exposures from those reported in our 2012 Annual Report.

 

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), the Company’s principal executive officer and principal financial officer, respectively, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2013. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that have materially affected, or would reasonably be likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in the current proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, operating results or cash flows.

 

ITEM 1A. RISK FACTORS

You should carefully consider the following discussion of various risks and uncertainties. We believe these risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Our business, financial condition, and results of operations could be seriously harmed if any of these risks or uncertainties actually occur or materialize. In that event, the market price for our common stock could decline, and you may lose all or part of your investment.

The effects of a recession and tightened credit markets in the U.S. and other countries may adversely impact our business and financial condition and may negatively impact our ability to access financing.

Demand for our rental products depends on continued industrial and business activity and state government funding. The effects of the recent credit crisis and economic recession in the U.S. and general global economic downturn have had and may continue to have an adverse effect on our customers, including local school districts that are subject to budgetary constraints, which has resulted and could continue to result in decreased demand for the products we rent. The U.S. economy continues to experience some weakness following a severe credit crisis and recession. While the U.S. economy has emerged from the recession, if the economy experiences another recession, reduced demand for our rental products and deflation could increase price competition and could have a material adverse effect on our revenue and profitability. In 2012 we experienced decreased demand and lower pricing in our California modular operations.

The continuing instability in the global financial system may also have an impact on our business and our financial condition. General economic conditions and the tightening credit markets have significantly affected the ability of many companies to raise new capital or refinance existing indebtedness. While we intend to finance expansion with cash flow from operations and borrowing under our unsecured revolving line of credit under our Amended Credit Facility (as defined and more fully described under the heading “Liquidity and Capital Resources – Unsecured Revolving Lines of Credit”), we may require additional financing to support our continued growth. Due to constriction in the capital markets, should we need to access the market for additional funds or to refinance our existing indebtedness, we may not be able to obtain such additional funds on terms acceptable to the Company or at all. All of these factors could impact our business, resulting in lower revenues and lower levels of earnings in future periods. At the current time we are uncertain as to the magnitude, or duration, of such changes in our business.

Our stock price has fluctuated and may continue to fluctuate in the future, which may result in a decline in the value of your investment in our common stock.

The market price of our common stock fluctuates on the NASDAQ Global Select Market and is likely to be affected by a number of factors including but not limited to:

 

   

our operating performance and the performance of our competitors, and in particular any variations in our operating results or dividend rate from our stated guidance or from investors’ expectations;

 

   

any changes in general conditions in the global economy, the industries in which we operate or the global financial markets;

 

   

investors’ reaction to our press releases, public announcements or filings with the SEC;

 

   

the stock price performance of our competitors or other comparable companies;

 

   

any changes in research analysts’ coverage, recommendations or earnings estimates for us or for the stocks of other companies in our industry;

 

   

any sales of common stock by our directors, executive officers and our other large shareholders, particularly in light of the limited trading volume of our stock;

 

   

any merger and acquisition activity that involves us or our competitors; and

 

   

other announcements or developments affecting us, our industry, customers, suppliers or competitors.

 

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In addition, in recent years the U.S. stock market has experienced significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. More recently, the global credit crisis adversely affected the prices of publicly traded stocks across the board as many stockholders have become more willing to divest their stock holdings at lower values to increase their cash flow and reduce exposure to such fluctuations. These broad market fluctuations and any other negative economic trends may cause declines in the market price of our common stock and may be based upon factors that have little or nothing to do with our Company or its performance, and these fluctuations and trends could materially reduce our stock price.

Our future operating results may fluctuate, fail to match past performance or fail to meet expectations, which may result in a decrease in our stock price.

Our operating results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of a number of factors, some of which are beyond our control including but not limited to:

 

   

general economic conditions in the geographies and industries where we rent and sell our products;

 

   

legislative and educational policies where we rent and sell our products;

 

   

the budgetary constraints of our customers;

 

   

seasonality of our rental businesses and our end-markets;

 

   

success of our strategic growth initiatives;

 

   

costs associated with the launching or integration of new or acquired businesses;

 

   

the timing and type of equipment purchases, rentals and sales;

 

   

the nature and duration of the equipment needs of our customers;

 

   

the timing of new product introductions by us, our suppliers and our competitors;

 

   

the volume, timing and mix of maintenance and repair work on our rental equipment;

 

   

our equipment mix, availability, utilization and pricing;

 

   

the mix, by state and country, of our revenues, personnel and assets;

 

   

rental equipment impairment from excess, obsolete or damaged equipment;

 

   

movements in interest rates or tax rates;

 

   

changes in, and application of, accounting rules;

 

   

changes in the regulations applicable to us; and

 

   

litigation matters.

As a result of these factors, our historical financial results are not necessarily indicative of our future results or stock price.

Our ability to retain our executive management and to recruit, retain and motivate key employees is critical to the success of our business.

If we cannot successfully recruit and retain qualified personnel, our operating results and stock price may suffer. We believe that our success is directly linked to the competent people in our organization, including our executive officers, senior managers and other key personnel, and in particular, Dennis Kakures, our Chief Executive Officer. Personnel turnover can be costly and could materially and adversely impact our operating results and can potentially jeopardize the success of our current strategic initiatives. We need to attract and retain highly qualified personnel to replace personnel when turnover occurs, as well as add to our staff levels as growth occurs. Our business and stock price likely will suffer if we are unable to fill, or experience delays in filling open positions, or fail to retain key personnel.

Failure by third parties to manufacture and deliver our products to our specifications or on a timely basis may harm our reputation and financial condition.

We depend on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. In the future, we may be limited as to the number of third-party suppliers for some of our products. Although in general we make advance purchases of some products to help ensure an adequate supply, currently we do not have any long-term purchase contracts with any third-party supplier. We may

 

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experience supply problems as a result of financial or operating difficulties or failure of our suppliers, or shortages and discontinuations resulting from product obsolescence or other shortages or allocations by our suppliers. Unfavorable economic conditions may also adversely affect our suppliers or the terms on which we purchase products. In the future, we may not be able to negotiate arrangements with third parties to secure products that we require in sufficient quantities or on reasonable terms. If we cannot negotiate arrangements with third parties to produce our products or if the third parties fail to produce our products to our specifications or in a timely manner, our reputation and financial condition could be harmed.

Disruptions in our information technology systems or failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail, become unavailable for any period of time or are not upgraded, this could limit our ability to effectively monitor and control our operations and adversely affect our operations.

Our information technology systems facilitate our ability to monitor and control our operations and adjust to changing market conditions. Any disruption in our information technology systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively transact business, monitor and control our operations and adjust to changing market conditions in a timely manner.

In addition, because of recent advances in technology and well-known efforts on the part of computer hackers and cyber terrorists to breach data security of companies, we face risks associated with potential failure to adequately protect critical corporate, client and employee data, which, if released, could adversely impact our client relationships, our reputation, and even violate privacy laws. As part of our business, we develop, receive and retain confidential data about our company and our customers.

Further, the delay or failure to implement information system upgrades and new systems effectively, such as our current implementation to support our Adler Tanks division, could disrupt our business, distract management’s focus and attention from our business operations and growth initiatives, and increase our implementation and operating costs, any of which could negatively impact our operations and operating results.

We have engaged in acquisitions and may engage in future acquisitions that could negatively impact our results of operations, financial condition and business.

In 2004, we acquired TRS, an electronic test equipment rental business and in 2008 we acquired Adler Tanks, a liquid and solid containment rental business. We anticipate that we will continue to consider acquisitions in the future that meet our strategic growth plans. We are unable to predict whether or when any prospective acquisition will be completed. Acquisitions involve numerous risks, including the following:

 

   

difficulties in integrating the operations, technologies, products and personnel of the acquired companies;

 

   

diversion of management’s attention from normal daily operations of our business;

 

   

difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets may have stronger market positions;

 

   

difficulties in complying with regulations applicable to any acquired business, such as environmental regulations, and managing risks related to an acquired business;

 

   

timely completion of necessary financing and required amendments, if any, to existing agreements;

 

   

an inability to implement uniform standards, controls, procedures and policies;

 

   

undiscovered and unknown problems, defects, damaged assets liabilities, or other issues related to any acquisition that become known to us only after the acquisition;

 

   

negative reactions from our customers to an acquisition;

 

   

disruptions among employees related to any acquisition which may erode employee morale;

 

   

loss of key employees, including costly litigation resulting from the termination of those employees;

 

   

an inability to realize cost efficiencies or synergies that we may anticipate when selecting acquisition candidates;

 

   

recording of goodwill and non-amortizable intangible assets that will be subject to future impairment testing and potential periodic impairment charges;

 

   

incur amortization expenses related to certain intangible assets; and

 

   

become subject to litigation.

 

34


Acquisitions are inherently risky, and no assurance can be given that our future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. The success of our acquisition strategy depends upon our ability to successfully complete acquisitions and integrate any businesses that we acquire into our existing business. The difficulties of integration could be increased by the necessity of coordinating geographically dispersed organizations; maintaining acceptable standards, controls, procedures and policies; integrating personnel with disparate business backgrounds; combining different corporate cultures; and the impairment of relationships with employees and customers as a result of any integration of new management and other personnel. In addition, if we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing shareholders’ ownership could be diluted significantly. If we were to proceed with one or more significant future acquisitions in which the consideration included cash, we could be required to use, to the extent available, a substantial portion of our Amended Credit Facility. If we increase the amount borrowed against our available credit line, we would increase the risk of breaching the covenants under our credit facilities with our lenders. In addition, it would limit our ability to make other investments, or we may be required to seek additional debt or equity financing. Any of these items could adversely affect our results of operations.

If we determine that our goodwill and intangible assets have become impaired, we may incur impairment charges, which would negatively impact our operating results.

At June 30, 2013, we had $38.8 million of goodwill and intangible assets, net, on our consolidated balance sheets. Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Under accounting principles generally accepted in the United States of America, we assess potential impairment of our goodwill and intangible assets at least annually, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value of any of our businesses below book value. Impairment may result from significant changes in the manner of use of the acquired asset, negative industry or economic trends and significant underperformance relative to historic or projected operating results.

If we do not effectively manage our credit risk, collect on our accounts receivable or recover our rental equipment from our customers’ sites, it could have a material adverse effect on our operating results.

We generally rent and sell to customers on 30 day payment terms, individually perform credit evaluation procedures on our customers for each transaction and require security deposits or other forms of security from our customers when a significant credit risk is identified. Historically, accounts receivable write-offs and write-offs related to equipment not returned by customers have not been significant and have averaged less than 1% of total revenues over the last five years. If economic conditions deteriorate, we may see an increase in bad debt relative to historical levels, which may materially and adversely affect our operations. Our fastest growing business segments, notably Adler Tanks, may have increased credit risks as we increase the number of new customers and markets served. Failure to manage our credit risk and receive timely payments on our customer accounts receivable may result in write-offs and/or loss of equipment, particularly electronic test equipment. If we are not able to effectively manage credit risk issues, or if a large number of our customers should have financial difficulties at the same time, our receivables and equipment losses could increase above historical levels. If this should occur, our results of operations may be materially and adversely affected.

Effective management of our rental assets is vital to our business. If we are not successful in these efforts, it could have a material adverse impact on our result of operations.

Our modular, electronics and liquid and solid containment rental products have long useful lives and managing those assets is a critical element to each of our rental businesses. Generally, we design units and find manufacturers to build them to our specifications for our modular and liquid and solid containment tanks and boxes. Modular asset management requires designing and building the product for a long life that anticipates the needs of our customers, including anticipating potential changes in legislation, regulations, building codes and local permitting in the various markets in which the Company operates. Electronic test equipment asset management requires understanding, selecting and investing in equipment technologies that support market demand, including anticipating technological advances and changes in manufacturers’ selling prices. Liquid and solid containment asset management requires designing and building the product for a long life, using quality components and repairing and maintaining the products to prevent leaks. For each of our modular, electronic test equipment and liquid and solid containment assets, we must successfully maintain and repair this equipment cost-effectively to maximize the useful life of the products and the level of proceeds from the sale of such products. To the extent that we are unable to do so, our result of operations could be materially adversely affected.

 

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The nature of our businesses, including the ownership of industrial property, exposes us to the risk of litigation and liability under environmental, health and safety and products liability laws. Violations of environmental or health and safety related laws or associated liability could have a material adverse effect on our business, financial condition and results of operations.

We are subject to national, state, provincial and local environmental laws and regulations concerning, among other things, solid and liquid waste and hazardous substances handling, storage and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with applicable environmental or health and safety laws. We also could incur costs or liabilities related to waste disposal or remediating soil or groundwater contamination at our properties, at our customers’ properties or at third party landfill and disposal sites. These liabilities can be imposed on the parties generating, transporting or disposing of such substances or on the owner or operator of any affected property, often without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances.

Several aspects of our businesses involve risks of environmental and health and safety liability. For example, our operations involve the use of petroleum products, solvents and other hazardous substances in the construction and maintaining of modular buildings and for fueling and maintaining our delivery trucks and vehicles. We also own, transport and rent tanks and boxes in which waste materials are placed by our customers. The historical operations at some of our previously or currently owned or leased and newly acquired or leased properties may have resulted in undiscovered soil or groundwater contamination or historical non-compliance by third parties for which we could be held liable. Future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination or non-compliance, may also give rise to liabilities or other claims based on these operations that may be material. In addition, compliance with future environmental or health and safety laws and regulations may require significant capital or operational expenditures or changes to our operations.

Accordingly, in addition to potential penalties for non-compliance, we may become liable, either contractually or by operation of law, for investigation, remediation and monitoring costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property. In addition, certain parties may be held liable for more than their “fair” share of environmental investigation and cleanup costs. Contamination and exposure to hazardous substances or other contaminants such as mold can also result in claims for remediation or damages, including personal injury, property damage, and natural resources damage claims. Although expenses related to environmental compliance, health and safety issues, and related matters, have not been material to date, we cannot assure that we will not have to make significant expenditures in the future in order to comply with applicable laws and regulations. Violations of environmental or health and safety related laws or associated liability could have a material adverse effect on our business, financial condition and results of operations.

In general, litigation in the industries in which we operate, including class actions that seek substantial damages, arises with increasing frequency. Enforcement of environmental and health and safety requirements is also frequent. Such proceedings are invariably expensive, regardless of the merit of the plaintiffs’ or prosecutors’ claims. We may be named as a defendant in the future, and there can be no assurance, irrespective of the merit of such future actions, that we will not be required to make substantial settlement payments in the future. Further, a significant portion of our business is conducted in California which is one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than companies with a less significant California presence.

The nature of our business also subjects us to property damage and product liability claims, especially in connection with our modular buildings and tank and box rental businesses. Although we maintain liability coverage that we believe is commercially reasonable, an unusually large property damage or product liability claim or a series of claims could exceed our insurance coverage or result in damage to our reputation.

Our routine business activities expose us to risk of litigation from employees, vendors and other third parties, which could have a material adverse effect on our results of operations.

We may be subject to claims arising from disputes with employees, vendors and other third parties in the normal course of our business; these risks may be difficult to assess or quantify and their existence and magnitude may remain unknown for substantial periods of time. If the plaintiffs in any suits against us were to successfully prosecute their claims, or if we were to settle any such suits by making significant payments to the plaintiffs, our operating results and financial condition would be harmed. Even if the outcome of a claim proves favorable to us,

 

36


litigation can be time consuming and costly and may divert management resources. In addition, our organizational documents require us to indemnify our senior executives to the maximum extent permitted by California law. We maintain directors’ and officers’ liability insurance that we believe is commercially reasonable in connection with such obligations, but if our senior executives were named in any lawsuit, our indemnification obligations could magnify the costs of these suits and/or exceed the coverage of such policies.

If we suffer loss to our facilities, equipment or distribution system due to catastrophe, our insurance policies could be inadequate or depleted, our operations could be seriously harmed, which could negatively affect our operating results.

Our facilities, rental equipment and distribution systems may be subject to catastrophic loss due to fire, flood, hurricane, earthquake, terrorism or other natural or man-made disasters. In particular, our headquarters, three operating facilities, and certain of our rental equipment are located in areas of California, with above average seismic activity and could be subject to a catastrophic loss caused by an earthquake. Our rental equipment and facilities in Texas, Florida, North Carolina and Georgia are located in areas subject to hurricanes and other tropical storms. In addition to customers’ insurance on rented equipment, we carry property insurance on our rental equipment in inventory and operating facilities as well as business interruption insurance. We believe our insurance policies have adequate limits and deductibles to mitigate the potential loss exposure of our business. We do not maintain financial reserves for policy deductibles and our insurance policies contain exclusions that are customary for our industry, including exclusions for earthquakes, flood and terrorism. If any of our facilities or a significant amount or our rental equipment were to experience a catastrophic loss, it could disrupt our operations, delay orders, shipments and revenue recognition and result in expenses to repair or replace the damaged rental equipment and facility not covered by insurance, which could have a material adverse effect on our results of operations.

Our debt instruments contain covenants that restrict or prohibit our ability to enter into a variety of transactions and may limit our ability to finance future operations or capital needs. If we had an event of default under these instruments, our indebtedness could be accelerated and we may not be able to refinance such indebtedness or make the required accelerated payments.

The agreements governing our Senior Notes (as defined and more fully described under the heading “Liquidity and Capital Resources – 4.03% Senior Note due 2018”) and our Amended Credit Facility contain various covenants that limit our discretion in operating our business. In particular, we are limited in our ability to merge, consolidate, reorganize or transfer substantially all of our assets, make investments, pay dividends or distributions, redeem or repurchase stock, change the nature of our business, enter into transactions with affiliates, incur indebtedness and create liens on our assets to secure debt. In addition, we are required to meet certain financial covenants under these instruments. These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise.

A failure to comply with the restrictions contained in these agreements could lead to an event of default, which could result in an acceleration of our indebtedness. In the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any required accelerated payments. If we default on our indebtedness, our business financial condition and results of operation could be materially and adversely affected.

The majority of our indebtedness is subject to variable interest rates, which makes us vulnerable to increases in interest rates, which could negatively affect our net income.

Our indebtedness exposes us to interest rate increases because the majority of our indebtedness is subject to variable rates. At present, we do not have any derivative financial instruments such as interest rate swaps or hedges to mitigate interest rate variability. The interest rates under our credit facilities are reset at varying periods. These interest rate adjustments could cause periodic fluctuations in our operating results and cash flows. Our annual debt service obligations increase by approximately $1.8 million per year for each 1% increase in the average interest rate we pay, based on the $178.9 million balance of variable rate debt outstanding at June 30, 2013. If interest rates rise in the future, and particularly, if they rise significantly, interest expense will increase and our net income will be negatively affected.

 

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Our effective tax rate may change and become less predictable as our business expands, making our future earnings less predictable.

We continue to consider expansion opportunities domestically and internationally for our rental businesses, such as the organic expansion of our modular business in North Carolina, Georgia, Maryland, Virginia and Washington, D.C., recent expansion into the portable storage business and our expansion in 2008 into the liquid and solid containment business. Since the Company’s effective tax rate depends on business levels, personnel and assets located in various jurisdictions, further expansion into new markets or acquisitions may change the effective tax rate in the future and may make it, and consequently our earnings, less predictable going forward. In addition, the enactment of future tax law changes by federal and state taxing authorities may impact the Company’s current period tax provision and its deferred tax liabilities.

Changes in financial accounting standards may cause lower than expected operating results and affect our reported results of operations.

Changes in accounting standards and their application may have a significant effect on our reported results on a going-forward basis and may also affect the recording and disclosure of previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred in the past and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively impact our stock price.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404, and the related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements. Compliance with Section 404 and other related requirements has increased our costs and will continue to require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements. While our management concluded that our internal control over financial reporting as of June 30, 2013 was effective, there is no assurance that future assessments of the adequacy of our internal controls over financial reporting will be favorable. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.

SPECIFIC RISKS RELATED TO OUR RELOCATABLE MODULAR BUILDINGS BUSINESS SEGMENT:

Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability.

Rentals and sales of modular buildings to public school districts for use as classrooms, restroom buildings, and administrative offices for K-12 represent a significant portion of Mobile Modular’s rental and sales revenues. Funding for public school facilities is derived from a variety of sources including the passage of both statewide and local facility bond measures, developer fees and various taxes levied to support school operating budgets. Many of these funding sources are subject to financial and political considerations, which vary from district to district and are not tied to demand. Historically, we have benefited from the passage of facility bond measures and believe these are essential to our business.

The state of California is our largest market for classroom rentals. The strength of this market depends heavily on public funding from voter passage of both state and local facility bond measures, and the ability of the state to sell such bonds in the public market. A lack of passage of state and local facility bond measures, or the inability to sell bonds in the public markets in the future could reduce our revenues and operating income, and consequently have a material adverse effect on the Company’s financial condition. Furthermore, even if voters have approved facility bond measures and the state has raised bond funds, there is no guarantee that individual school projects will be funded in a timely manner.

As a consequence of the recent economic recession, many states and local governments have experienced large budget deficits resulting in severe budgetary constraints among public school districts. To the extent public school districts’ funding is reduced for the rental and purchase of modular buildings, our business could be harmed

 

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and our results of operations negatively impacted. We believe that interruptions or delays in the passage of facility bond measures or completion of state budgets, an insufficient amount of state funding, a significant reduction of funding to public schools, or changes negatively impacting enrollment may reduce the rental and sale demand for our educational products. Any reductions in funding available to the school districts from the states in which we do business may cause school districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations, class size reduction initiatives and modernization and reconstruction project needs, which could reduce our revenues and operating income and consequently have a material adverse effect on the Company’s financial condition.

Public policies that create demand for our products and services may change, resulting in decreased demand for or the pricing of our products and services, which could negatively affect our revenues and operating income.

In California a law was enacted in 1996 to provide funding for school districts for the reduction of class sizes for kindergarten through third grade. In Florida, a state constitutional amendment was passed in 2002 to limit the number of students that may be grouped in a single classroom for pre-kindergarten through grade twelve. School districts with class sizes in excess of state limits have been and continue to be a significant source of our demand for modular classrooms. Further, in California, efforts to address aging infrastructure and deferred maintenance have resulted in modernization and reconstruction projects by public school districts including seismic retrofitting, asbestos abatement and various building repairs and upgrades, which has been another source of demand for our modular classrooms. The recent economic recession has caused state and local budget shortfalls, which have reduced school districts’ funding and their ability to comply with state class size reduction requirements in California and Florida. If educational priorities and policies shift away from class-size reduction or modernization and reconstruction projects, demand and pricing for our products and services may decline, not grow as quickly as, or reach the levels that we anticipate. Significant equipment returns may result in lower utilization until equipment can be redeployed or sold, which may cause rental rates to decline and negatively affect our revenues and operating income.

Failure to comply with applicable regulations could harm our business and financial condition, resulting in lower operating results and cash flows.

Similar to conventionally constructed buildings, the modular building industry, including the manufacturers and lessors of portable classrooms, are subject to regulations by multiple governmental agencies at the federal, state and local level relating to environmental, zoning, health, safety and transportation matters, among other matters. Failure to comply with these laws or regulations could impact our business or harm our reputation and result in higher capital or operating expenditures or the imposition of penalties or restrictions on our operations.

As with conventional construction, typically new codes and regulations are not retroactively applied. Nonetheless, new governmental regulations in these or other areas may increase our acquisition cost of new rental equipment, limit the use of or make obsolete some of our existing equipment, or increase our costs of rental operations.

Building codes are generally reviewed every three years. All aspects of a given code are subject to change including, but not limited to, such items as structural specifications for earthquake safety, energy efficiency and environmental standards, fire and life safety, transportation, lighting and noise limits. On occasion, state agencies have undertaken studies of indoor air quality and noise levels with a focus on permanent and modular classrooms. These results could impact our existing modular equipment, and affect the future construction of our modular product.

Compliance with building codes and regulations entails a certain amount of risk as state and local government authorities do not necessarily interpret building codes and regulations in a consistent manner, particularly where applicable regulations may be unclear and subject to interpretation. These regulations often provide broad discretion to governmental authorities that oversee these matters, which can result in unanticipated delays or increases in the cost of compliance in particular markets. The construction and modular industries have developed many “best practices” which are constantly evolving. Some of our peers and competitors may adopt practices that are more or less stringent than the Company’s. When, and if, regulatory standards are clarified, the effect of the clarification may be to impose rules on our business and practices retroactively, at which time, we may not be in compliance with such regulations and we may be required to incur costly remediation. If we are unable to pass these increased costs on to our customers, our profitability, operating cash flows and financial condition could be negatively impacted.

 

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Expansions of our modular operations into new markets may negatively affect our operating results.

Over the past several years, we have expanded our modular operations in North Carolina, Georgia, Maryland, Virginia and Washington, D.C. There are risks inherent in the undertaking of such expansion, including the risk of revenue from the business in any new markets not meeting our expectations, higher than expected costs in entering these new markets, risk associated with compliance with applicable state and local laws and regulations, response by competitors and unanticipated consequences of expansion. In addition, expansion in new markets may be affected by local economic and market conditions. Expansion of our operations into new markets will require a significant amount of attention from our management, a commitment of financial resources and will require us to add qualified management in these markets, which may negatively impact our operating results.

We are subject to laws and regulations governing government contracts. These laws and regulations make these government contracts more favorable to government entities than other third parties and any changes in these laws and regulations, or our failure to comply with these laws and regulations could harm our business.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts such as clauses that allow government entities not to perform on contractual obligations in the case of a lack of fiscal funding. Also, in the educational markets we serve, we are able to utilize “piggyback” contracts in marketing our products and services and ultimately to book business. The term “piggyback contract” refers to contracts for portable classrooms or other products entered into by public school districts following a formal bid process that allows for the use of the same contract terms and conditions with the successful vendor by other public school districts. As a result, “piggyback” contracts allow us to more readily book orders from our government customers, primarily public school districts, and to reduce the administrative expense associated with booking these orders. The governmental statutes and regulations that allow for use of “piggyback” contracts are subject to change or elimination in their entirety. A change in the manner of use or the elimination of “piggyback” contracts would likely negatively impact our ability to book new business from these government customers and could cause our administrative expenses related to processing these orders to increase significantly. In addition, any failure to comply with these laws and regulations might result in administrative penalties or even in the suspension of these contracts and as a result, the loss of the related revenues which would harm our business and results from operations.

Seasonality of our educational business may have adverse consequences for our business.

A significant portion of the modular sale and rental revenues is derived from the educational market. Typically, during each calendar year, our highest numbers of classrooms are shipped for rental and sale orders during the second and third quarters for delivery and installation prior to the start of the upcoming school year. The majority of classrooms shipped in the second and third quarters have rental start dates during the third quarter, thereby making the fourth quarter the first full quarter of rental revenues recognized for these transactions. Although this is the historical seasonality of our business, it is subject to change or may not meet our expectations, which may have adverse consequences for our business.

We face strong competition in our modular building markets and we may not be able to effectively compete.

The modular building leasing industry is highly competitive in our states of operation and we expect it to remain so. The competitive market in which we operate may prevent us from raising rental fees or sales prices to pass any increased costs on to our customers. We compete on the basis of a number of factors, including equipment availability, quality, price, service, reliability, appearance, functionality and delivery terms. We may experience pricing pressures in our areas of operation in the future as some of our competitors seek to obtain market share by reducing prices.

Some of our larger national competitors in the modular building leasing industry, notably Williams Scotsman International, Inc. and Modspace, have a greater range of products and services, greater financial and marketing resources, larger customer bases, and greater name recognition than we have. These larger competitors may be better able to respond to changes in the relocatable modular building market, to finance acquisitions, to fund internal growth and to compete for market share, any of which could harm our business.

 

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We may not be able to quickly redeploy modular units returning from leases, which could negatively affect our financial performance and our ability to expand, or utilize, our rental fleet.

As of June 30, 2013, 57% of our modular portfolio had equipment on rent for periods exceeding the original committed term. Generally, when a customer continues to rent the modular units beyond the contractual term, the equipment rents on a month-to-month basis. If a significant number of our rented modular units were returned during a short period of time, particularly those units that are rented on a month-to-month basis, a large supply of units would need to be remarketed. Our failure to effectively remarket a large influx of units returning from leases could negatively affect our financial performance and our ability to continue expanding our rental fleet. In addition, if returned units stay off rent for an extended period of time, we may incur additional costs to securely store and maintain them.

Significant increases in raw material and labor costs could increase our acquisition cost of new modular rental units and repair and maintenance costs of our fleet, which would increase our operating costs and harm our profitability.

We incur labor costs and purchase raw materials, including lumber, siding and roofing and other products to perform periodic repairs, modifications and refurbishments to maintain physical conditions of our modular units. The volume, timing and mix of maintenance and repair work on our rental equipment may vary quarter-to-quarter and year-to-year. Generally, increases in labor and raw material costs will also increase the acquisition cost of new modular units and increase the repair and maintenance costs of our fleet. We also maintain a fleet of service trucks and use subcontractor companies for the delivery, set-up, return delivery and dismantle of modulars for our customers. We rely on our subcontractor service companies to meet customer demands for timely shipment and return, and the loss or inadequate number of subcontractor service companies may cause prices to increase, while negatively impacting our reputation and operating performance. During periods of rising prices for labor, raw materials or fuel, and in particular, when the prices increase rapidly or to levels significantly higher than normal, we may incur significant increases in our acquisition costs for new modular units and incur higher operating costs that we may not be able to recoup from our customers, which would reduce our profitability.

Failure by third parties to manufacture our products timely or properly may harm our reputation and financial condition.

We are dependent on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. Mobile Modular purchases new modulars from various manufacturers who build to Mobile Modular’s design specifications. With the exception of Enviroplex, none of the principal suppliers are affiliated with the Company. During 2012, Mobile Modular purchased 38% of its modular product from one manufacturer. The Company believes that the loss of any of its primary manufacturers of modulars could have an adverse effect on its operations since Mobile Modular could experience higher prices and longer delivery lead times for modular product until other manufacturers were able to increase their production capacity.

Failure to properly design, manufacture, repair and maintain the modular product may result in impairment charges, potential litigation and reduction of our operating results and cash flows.

We estimate the useful life of the modular product to be 18 years with a residual value of 50%. However, proper design, manufacture, repairs and maintenance of the modular product during our ownership is required for the product to reach the estimated useful life of 18 years with a residual value of 50%. If we do not appropriately manage the design, manufacture, repair and maintenance of our modular product, or otherwise delay or defer such repair or maintenance, we may be required to incur impairment charges for equipment that is beyond economic repair costs or incur significant capital expenditures to acquire new modular product to serve demand. In addition, such failures may result in personal injury or property damage claims, including claims based on presence of mold, and termination of leases or contracts by customers. Costs of contract performance, potential litigation, and profits lost from termination could accordingly reduce our future operating results and cash flows.

Our warranty costs may increase and warranty claims could damage our reputation and negatively impact our revenues and operating income.

Sales of new relocatable modular buildings not manufactured by us are typically covered by warranties provided by the manufacturer of the products sold. We provide ninety-day warranties on certain modular sales of used rental units and one-year warranties on equipment manufactured by our Enviroplex subsidiary. Historically,

 

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our warranty costs have not been significant, and we monitor the quality of our products closely. If a defect were to arise in the installation of our equipment at the customer’s facilities or in the equipment acquired from our suppliers or by our Enviroplex subsidiary, we may experience increased warranty claims. Such claims could disrupt our sales operations, damage our reputation and require costly repairs or other remedies, negatively impacting revenues and operating income.

SPECIFIC RISKS RELATED TO OUR ELECTRONIC TEST EQUIPMENT BUSINESS SEGMENT:

Market risk and cyclical downturns in the industries using test equipment may result in periods of low demand for our product resulting in excess inventory, impairment charges and reduction of our operating results and cash flows.

TRS-RenTelco’s revenues are derived from the rental and sale of general purpose and communications test equipment to a broad range of companies, from Fortune 500 to middle and smaller market companies, in the aerospace, defense, communications, manufacturing and semiconductor industries. Electronic test equipment rental and sales revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure and maintenance. Historically, these industries have been cyclical and have experienced periodic downturns, which can have a material adverse impact on the industry’s demand for equipment, including our rental electronic test equipment. In addition, the severity and length of any downturn in an industry may also affect overall access to capital, which could adversely affect our customers and result in excess inventory and impairment charges. During periods of reduced and declining demand for test equipment, we are exposed to additional receivable risk from non-payment and may need to rapidly align our cost structure with prevailing market conditions, which may negatively impact our operating results and cash flows.

Seasonality of our electronic test equipment business may impact quarterly results.

Generally, rental activity declines in the fourth quarter month of December and the first quarter months of January and February. These months may have lower rental activity due to holiday closures, particularly by larger companies, inclement weather and its impact on various field related communications equipment rentals, and companies’ operational recovery from holiday closures which may impact the start-up of new projects coming online in the first quarter. These seasonal factors historically have impacted quarterly results in each year’s first and fourth quarter, but we are unable to predict how such factors may impact future periods.

Our rental test equipment may become obsolete, which could result in an impairment charge, or may no longer be supported by a manufacturer.

Electronic test equipment is characterized by changing technology and evolving industry standards that may render our existing equipment obsolete through new product introductions, or enhancements, before the end of its anticipated useful life, causing us to incur impairment charges. We must anticipate and keep pace with the introduction of new hardware, software and networking technologies and acquire equipment that will be marketable to our current and prospective customers.

Additionally, some manufacturers of our equipment may be acquired or cease to exist, resulting in a future lack of support for equipment purchased from those manufacturers. This could result in the remaining useful life to become shorter, causing us to incur an impairment charge. We monitor our manufacturers’ capacity to support their products and the introduction of new technologies, and we acquire equipment that will be marketable to our current and prospective customers. However, any prolonged economic downturn could result in unexpected bankruptcies or reduced support from our manufacturers. Failure to properly select, manage and respond to the technological needs of our customers and changes to our products through their technology life cycle may cause certain electronic test equipment to become obsolete, resulting in impairment charges, which may negatively impact operating results and cash flows.

If we do not effectively compete in the rental equipment market, our operating results will be materially and adversely affected.

The electronic test equipment rental business is characterized by intense competition from several competitors, including Electro Rent Corporation, Continental Resources, Microlease and TestEquity, some of which may have access to greater financial and other resources than we do. Although no single competitor holds a dominant market share, we face competition from these established entities and new entrants in the market. We

 

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believe that we anticipate and keep pace with the introduction of new products and acquire equipment that will be marketable to our current and prospective customers. We compete on the basis of a number of factors, including product availability, price, service and reliability. Some of our competitors may offer similar equipment for lease, rental or sale at lower prices and may offer more extensive servicing, or financing options. Failure to adequately forecast the adoption of, and demand for, new or existing products may cause us not to meet our customers’ equipment requirements and may materially and adversely affect our operating results.

If we are not able to obtain equipment at favorable rates, there could be a material adverse effect on our operating results and reputation.

The majority of our rental equipment portfolio is comprised of general purpose test and measurement instruments purchased from leading manufacturers such as Agilent Technologies and Tektronix, a division of Danaher Corporation. We depend on purchasing equipment from these manufacturers and suppliers for use as our rental equipment. If, in the future, we are not able to purchase necessary equipment from one or more of these suppliers on favorable terms, we may not be able to meet our customers’ demands in a timely manner or for a rental rate that generates a profit. If this should occur, we may not be able to secure necessary equipment from an alternative source on acceptable terms and our business and reputation may be materially and adversely affected.

If we are not able to anticipate and mitigate the risks associated with operating internationally, there could be a material adverse effect on our operating results.

Currently, total foreign country customers and operations account for less than 10% of the Company’s revenues and long-lived assets. In recent years some of our customers have expanded their international operations faster than domestic operations, and this trend may continue. Over time, we anticipate the amount of our international business may increase if our focus on international market opportunities continues. Operating in foreign countries subjects the Company to additional risks, any of which may adversely impact our future operating results, including:

 

   

international political, economic and legal conditions including tariffs and trade barriers;

 

   

our ability to comply with customs, anti-corruption, import/export and other trade compliance regulations, together with any unexpected changes in such regulations;

 

   

greater difficulty in our ability to recover rental equipment and obtain payment of the related trade receivables;

 

   

additional costs to establish and maintain international subsidiaries and related operations;

 

   

difficulties in attracting and retaining staff and business partners to operate internationally;

 

   

language and cultural barriers;

 

   

seasonal reductions in business activities in the countries where our international customers are located;

 

   

difficulty with the integration of foreign operations;

 

   

longer payment cycles;

 

   

currency fluctuations; and

 

   

potential adverse tax consequences.

Unfavorable currency exchange rates may negatively impact our financial results in U.S. dollar terms.

We receive revenues in Canadian dollars from our business activities in Canada. Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates. If the currency exchange rates change unfavorably, the value of net receivables we receive in foreign currencies and later convert to U.S. dollars after the unfavorable change would be diminished. This could have a negative impact on our reported operating results. We currently do not engage in hedging strategies to mitigate this risk.

SPECIFIC RISKS RELATED TO OUR LIQUID AND SOLID CONTAINMENT TANKS AND BOXES BUSINESS SEGMENT:

We may be brought into tort or environmental litigation or held responsible for cleanup of spills if the customer fails to perform, or an accident occurs in the use of our rental products, which could materially adversely affect our business, future operating results or financial position.

 

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Our rental tanks and boxes are used by our customers to store non-hazardous and certain hazardous liquids on the customer’s site. Our customers are generally responsible for proper operation of our tank and box rental equipment while on rent and returning a cleaned and undamaged container upon completion of use, but exceptions may be granted and we cannot always assure that these responsibilities are fully met in all cases. Although we require the customer to carry commercial general liability insurance in a minimum amount of $5,000,000, such policies often contain pollution exclusions and other exceptions. Furthermore, we cannot be certain our liability insurance will always be sufficient. In addition, if an accident were to occur involving our rental equipment or a spill of substances were to occur when the tank or box was in transport or on rent with our customer, a claim could be made against us as owner of the rental equipment.

In the event of a spill or accident, we may be brought into a lawsuit or enforcement action by either our customer or a third party on numerous potential grounds, including an allegation that an inherent flaw in a tank or box contributed to an accident or that the tank had suffered some undiscovered harm from a previous customer’s prior use. In the event of a spill caused by our customers, we may be held responsible for cleanup under environmental laws and regulations concerning obligations of suppliers of rental products to effect remediation. In addition, applicable environmental laws and regulations may impose liability on us for the conduct of third parties, or for actions that complied with applicable regulations when taken, regardless of negligence or fault. Substantial damage awards have also been made in certain jurisdictions against lessors of industrial equipment based upon claims of personal injury, property damage, and resource damage caused by the use of various products. While we take what we believe are reasonable precautions that our rental equipment is in good and safe condition prior to rental and carry insurance to protect against certain risks of loss or accidents, such liability could adversely impact our profitability.

The liquid and solid storage and containment rental industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in rental rates and our ability to rent, or sell, equipment at favorable prices, which could adversely affect our operating results.

The liquid and solid storage and containment rental industry is highly competitive. We compete against national, regional and local companies, including BakerCorp and Rain For Rent, both of which are significantly larger than we are and both of which have greater financial and marketing resources than we have. Some of our competitors also have longer operating histories, lower cost basis of rental equipment, lower cost structures and more established relationships with equipment manufacturers than we have. In addition, certain of our competitors are more geographically diverse than we are and have greater name recognition among customers than we do. As a result, our competitors that have these advantages may be better able to attract customers and provide their products and services at lower rental rates. Some competitors offer different approaches to liquid storage, such as large-volume modular tanks that may have better economics and compete with conventional frac tanks in certain oil and gas field applications. We may in the future encounter increased competition in the markets that we serve from existing competitors or from new market entrants.

We believe that equipment quality, service levels, rental rates and fleet size are key competitive factors in the liquid and solid containment storage rental industry. From time to time, we or our competitors may attempt to compete aggressively by lowering rental rates or prices. Competitive pressures could adversely affect our revenues and operating results by decreasing our market share or depressing the rental rates. To the extent we lower rental rates or increase our fleet in order to retain or increase market share, our operating margins would be adversely impacted. In addition, we may not be able to match a larger competitor’s price reductions or fleet investment because of its greater financial resources, all of which could adversely impact our operating results through a combination of a decrease in our market share, revenues and operating income.

Market risk, commodity price volatility, regulatory changes or interruptions and cyclical downturns in the industries using tanks and boxes may result in periods of low demand for our products resulting in excess inventory, impairment charges and reduction of our operating results and cash flows.

Adler Tanks’ revenues are derived from the rental of tanks and boxes to companies involved in oil and gas exploration, extraction and refinement, environmental remediation and wastewater/groundwater treatment, infrastructure construction and various industrial services, among others. We expect tank and box rental revenues will primarily be affected by the business activity within these industries. Historically, these industries have been cyclical and have experienced periodic downturns, which have a material adverse impact on the industry’s demand for equipment, including the tanks and boxes rented by us. Lower oil or gas prices may have an adverse effect on our liquid and solid containment tank and boxes business if the price reduction causes customers to limit or stop exploration, extraction or refinement activities, resulting in lower demand and pricing for renting Adler Tank’s products. Also, a weak U.S. economy may negatively impact infrastructure construction and industrial activity. Any of these factors may result in excess inventory or impairment charges and reduce our operating results and cash flows.

 

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Changes in regulatory, or governmental, oversight of hydraulic fracturing could materially adversely affect the demand for our rental products and reduce our operating results and cash flows.

We believe that in recent years growing demand related to hydraulic fracturing has increased the total market size and accounted for approximately one third or more of total market rental revenue in recent years. Oil and gas exploration and extraction (including use of tanks for hydraulic fracturing to obtain shale oil and shale gas) are subject to numerous local, state and federal regulations. The hydraulic fracturing method of extraction has come under scrutiny in several states and by the Federal government due to the potential adverse effects that hydraulic fracturing, and the liquids and chemicals used, may have on water quality and public health. In addition, the disposal of wastewater from the hydraulic fracturing process into injection wells may increase the rate of seismic activity near drill sites and could result in regulatory changes, delays or interruption of future activity. Changes in these regulations could limit, interrupt, or stop exploration and extraction activities, which would negatively impact the demand for our rental products. Finally, it is possible that changes in the technology utilized in hydraulic fracturing could make it less dependent on liquids and therefore lower the related requirements for the use of our rental products, which would reduce our operating results and cash flows.

Seasonality of the liquid and solid storage and containment rental industry may impact quarterly results.

Rental activity may decline in the fourth quarter month of December and the first quarter months of January and February. These months may have lower rental activity in parts of the country where inclement weather may delay, or suspend, a company’s project. The impact of these delays may be to decrease the number of tanks, or boxes, on rent until companies are able to resume their projects when weather improves. These seasonal factors historically have impacted quarterly results in each year’s first and fourth quarter, but we are unable to predict how such factors may impact future periods.

Significant increases in raw material, fuel and labor costs could increase our acquisition and operating costs of rental equipment, which would increase operating costs and decrease profitability.

Increases in raw material costs such as steel and labor to manufacture liquid and solid storage containment tanks and boxes would increase the cost of acquiring new equipment. These price increases could materially adversely impact our financial condition and results of operations if we were not able to recoup these increases through higher rental revenues. In addition, a significant amount of revenues are generated from the transport of rental equipment to and from customers. We own delivery trucks, employ drivers and utilize subcontractors to provide these services. The price of fuel can be unpredictable and beyond our control. During periods of rising fuel and labor costs, and in particular when prices increase rapidly, we may not be able recoup these costs from our customers, which would reduce our profitability.

Failure by third parties to manufacture our products timely or properly may harm our ability to meet customer demand and harm our financial condition.

We are dependent on a variety of third party companies to manufacture equipment to be used in our rental fleet. With the exception of Sabre Manufacturing, LLC, which is owned by the President of our Adler Tanks division, none of the manufacturers are affiliated with the Company. In some cases, we may not be able to procure equipment on a timely basis to the extent that manufacturers for the quantities of equipment we need are not able to produce sufficient inventory on schedules that meet our delivery requirements. If demand for new equipment increases significantly, especially during a seasonal slowdown, manufacturers may not be able to meet customer orders on a timely basis. As a result, we at times may experience long lead-times for certain types of new equipment and we cannot assure that we will be able to acquire the types or sufficient numbers of the equipment we need to grow our rental fleet as quickly as we would like and this could harm our ability to meet customer demand and harm our financial condition.

 

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We derive a significant amount of our revenue in our liquid and solid containment tank and boxes business from a limited number of customers, the loss of one or more of which could have an adverse effect on our business.

A significant portion of our revenue in our liquid and solid containment tank and boxes business is generated from a few major customers. Although we have some long-term relationships with our major customers, we cannot be assured that our customers will continue to use our products or services or that they will continue to do so at historical levels. The loss of any significant customer, the failure to collect a significant receivable from a significant customer, any material reduction in orders by a significant customer or the cancellation of a significant customer order could significantly reduce our revenues and consequently harm our financial condition and our ability to fund our operations.

We may not be able to quickly redeploy equipment returning from leases at equivalent prices.

Many of our rental transactions are short-term in nature with pricing established on a daily basis. The length of time that a customer needs equipment can often be difficult to determine and can be impacted by a number of factors such as weather, customer funding and project delays. In addition, our equipment is primarily used in the oil and gas, industrial plant services, environmental remediation and infrastructure construction industries. Changes in the economic conditions facing any of those industries could result in a significant number of units returning off rent, both for us and our competitors.

If the supply of rental equipment available on the market significantly increases due to units coming off rent, demand for and pricing of our rental products could be adversely impacted. We may experience delays in remarketing our off-rent units to new customers and incur cost to move the units to other regions where demand is stronger. Actions in these circumstances by our competitors may also depress the market price for rental units. These delays and price pressures would adversely affect equipment utilization levels and total revenues, which would reduce our profitability.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

10.7    McGrath RentCorp Change in Control Severance Plan and Summary Plan Description.
15.1    Awareness Letter From Grant Thornton LLP.
31.1    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from McGrath RentCorp’s Quarterly report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Balance Sheet, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: July 31, 2013

  MCGRATH RENTCORP
  By:  

/s/    Keith E. Pratt        

    Keith E. Pratt
    Senior Vice President and Chief Financial Officer
  By:  

/s/    David M. Whitney        

    David M. Whitney
    Vice President, Controller and Principal Accounting Officer

 

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EX-10.7

Exhibit 10.7

MCGRATH RENTCORP CHANGE IN CONTROL SEVERANCE PLAN

AND SUMMARY PLAN DESCRIPTION

1. Introduction. The purpose of this McGrath RentCorp Change in Control Severance Plan (the “Plan”) is to provide assurances of specified severance benefits to eligible employees of the Company whose employment is subject to being involuntarily terminated other than for Cause or who is voluntarily terminating his employment for Good Reason under the circumstances described in the Plan following a Change in Control of the Company. The Company recognizes that the potential of a Change in Control can be a distraction to employees and can cause such employees to consider alternative employment opportunities. The Plan is intended to (i) assure that the Company will have continued dedication and objectivity of key employees, notwithstanding the possibility, threat or occurrence of a Change in Control and (ii) provide such employees with an incentive to continue their employment and to motivate them to maximize the value of the Company prior to and following a Change in Control for the benefit of its stockholders. This Plan is an “employee welfare benefit plan,” as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended. This document constitutes both the written instrument under which the Plan is maintained and the required summary plan description for the Plan.

2. Important Terms. To help you understand how this Plan works, it is important to know the following terms:

2.1 “Administrator” means the Compensation Committee of the Board or another duly constituted committee of members of the Board, or officers of the Company as delegated by the Board, or any person to whom the Administrator has delegated any authority or responsibility pursuant to Section 11, but only to the extent of such delegation.

2.2 “Base Pay” means a Covered Employee’s regular straight-time salary as in effect during the last regularly scheduled payroll period immediately preceding the date on which an Involuntary Termination occurs. Base Pay does not include payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions or other compensation.

2.3 “Board” means the Board of Directors of the Company.

2.4 “Cause” means (i) the Covered Employee’s willful and continued failure to perform the duties and responsibilities of his or her position after there has been delivered to the Covered Employee a written demand for performance from the Company’s Chief Executive Officer (or the Board, in the case of the Chief Executive Officer) which describes the basis for the Chief Executive Officer’s belief that the Covered Employee has not substantially performed his or her duties and the Covered Employee has not corrected such failure within thirty (30) days of such written demand; (ii) any act of personal dishonesty taken by the Covered Employee in connection with his or her responsibilities as an employee of the Company with the intention or reasonable expectation that such action may result in the substantial personal enrichment of the Covered Employee; (iii) the Covered Employee’s conviction of, or plea of nolo contendere to, a


felony that the Board reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; (iv) a breach of any fiduciary duty owed to the Company by the Covered Employee that has a material detrimental effect on the Company’s reputation or business; (v) the Covered Employee being found liable in any Securities and Exchange Commission or other civil or criminal securities law action or entering any cease and desist order with respect to such action (regardless of whether or not the Covered Employee admits or denies liability); (vi) the Covered Employee (A) obstructing or impeding; (B) endeavoring to obstruct, impede or improperly influence, or (C) failing to materially cooperate with, any investigation authorized by the Board or any governmental or self-regulatory entity (an “Investigation”); however, the Covered Employee’s failure to waive attorney-client privilege relating to communications with the Covered Employee’s own attorney in connection with an Investigation will not constitute “Cause”; or (vii) the Covered Employee’s disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by his or her position or the Covered Employee’s loss of any governmental or self-regulatory license that is reasonably necessary for the Covered Employee to perform his or her responsibilities to the Company, if (A) the disqualification, bar or loss continues for more than thirty (30) days, and (B) during that period the Company uses its good faith efforts to cause the disqualification or bar to be lifted or the license replaced, it being understood that while any disqualification, bar or loss continues during the Covered Employee’s employment, the Covered Employee will serve in the capacity contemplated by his or her position to whatever extent legally permissible and, if the Covered Employee’s service in the capacity contemplated by his or her position is not permissible, the Covered Employee will be placed on leave (which will be paid to the extent legally permissible).

2.5 “Change in Control” means a “Change in Control” or a “Corporate Transaction” as those events are defined under the Company’s 2007 Stock Incentive Plan.

2.6 “Change in Control Determination Period” means the time period beginning with the Change in Control and ending twelve (12) months following the Change in Control.

2.7 “Change in Control Severance Benefits” means the compensation and other benefits the Covered Employee will be provided pursuant to Section 4.

2.8 “Company” means McGrath RentCorp, a California corporation, and any successor.

2.9 “Covered Employee” means an employee of the Company or any parent or subsidiary of the Company who has been designated by the Administrator to participate in the Plan as shown on Appendix A, attached hereto, and has executed and delivered a Participation Agreement to the Company.

2.10 “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).

2.11 “Effective Date” means April 22, 2013.

 

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2.12 “Equity Compensation Awards” means, with respect to a Covered Employee, the Covered Employee’s unvested equity compensation awards outstanding on the date of the Change in Control. For the sake of clarity, nothing herein will be deemed to extend the maximum term of a Covered Employee’s stock appreciation rights or stock options as set forth in the applicable stock appreciation rights or option agreements by and between the Covered Employee and the Company.

2.13 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.14 “Good Reason” means the Covered Employee’s termination of employment as a result of the occurrence of any of the following without his or her written consent: (i) a material diminution of the Covered Employee’s authority, duties, or responsibilities, relative to the Covered Employee’s authority, duties, or responsibilities in effect immediately prior to such reduction; provided, that a Covered Employee will be deemed to have a material diminution unless the Covered Employee retains the same position (or a similar or more senior position (and the same, similar or more significant authority, duties and responsibilities)) in the ultimate publicly listed parent company of the surviving entity following a Change in Control, (ii) a material diminution by the Company in the Base Pay of the Covered Employee as in effect immediately prior to such reduction; provided, however, that following a Change in Control, a comparable reduction of the Base Pay of substantially all other executives of the consolidated entity that includes the Company of not more than ten percent (10%) will not constitute “Good Reason”, (iii) the relocation of the Covered Employee to a facility or a location more than fifty (50) miles from his or her then present location, or (iv) the failure of the Company to obtain the assumption of the Plan by any successor in accordance with Section 20 below. For purposes of clause (i) above, the determination of “material diminution” will include for example, but not by way of limitation, an analysis of whether the Covered Employee maintains at least the same level, scope and type of authority, duties and responsibilities with respect to the management, strategy, operations and business. In order to terminate employment for “Good Reason,” a Covered Employee must provide written notice to the Board of the condition that could constitute a “Good Reason” event within ninety (90) days of the initial existence of such condition, such condition must not have been remedied by the Company within thirty (30) days (the “Cure Period”) of such written notice and the Covered Employee must terminate employment within ninety (90) days following the end of the Cure Period.

2.15 “Involuntary Termination” means a termination of employment of a Covered Employee under the circumstances described in Section 4.1.

2.16 “Participation Agreement” means the individual agreement (a form of which is shown in Appendix B) provided by the Administrator to an employee of the Company designating such employee as a Covered Employee under the Plan, which has been signed and accepted by the employee.

2.17 “Plan” means the McGrath RentCorp Change in Control Severance Plan, as set forth in this document, and as hereafter amended from time to time.

 

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2.18 “Section 409A Limit” means the lesser of two (2) times: (i) the Covered Employee’s annualized compensation based upon the annual rate of pay paid to the Covered Employee during his or her taxable year preceding the Covered Employee’s taxable year in which the Covered Employee’s separation from service occurs as determined under Treasury Regulation Section 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; or (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which the Covered Employee’s employment is terminated.

3. Eligibility for Change in Control Severance Benefits. An individual is eligible for the Change in Control Severance Benefits under the Plan in the amount set forth in Section 4 only if he or she is a Covered Employee on the date he or she experiences an Involuntary Termination.

4. Change in Control Severance Benefits.

4.1 Involuntary Termination in Connection with a Change in Control. If, at any time within the Change in Control Determination Period, (i) a Covered Employee terminates his or her employment with the Company (or any parent or subsidiary of the Company) for Good Reason, or (ii) the Company (or any parent or subsidiary of the Company) terminates such Covered Employee’s employment other than for Cause, then, subject to the Covered Employee’s compliance with Section 6, the Covered Employee shall receive the following Change in Control Severance Benefits from the Company:

4.1.1 Cash Severance Benefits. A Covered Employee shall be entitled to a lump sum payment in cash equal to (a) one (1) times the Covered Employee’s Base Pay, plus (b) an amount equal to the Covered Employee’s target cash bonus for the year of termination (or the prior year if no target has been set for the year of termination).

4.1.2 Continued Medical Benefits. If the Covered Employee, and any spouse and/or dependents of the Covered Employee (“Family Members”), has coverage on the date of the Covered Employee’s Involuntary Termination under a group health plan sponsored by the Company, the Company will pay the total applicable premium cost for continued group health plan coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. Sections 1161-1168; 26 U.S.C. Section 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”), provided that the Covered Employee is eligible for and validly elects to continue coverage under COBRA for the Covered Employee and his Family Members for a period of up to twelve (12) months.

4.1.3 Equity Award Accelerated Vesting. One hundred percent (100%) of each Covered Employee’s Equity Compensation Awards automatically shall accelerate and all restrictions or repurchase rights applicable thereto shall immediately lapse so as to become fully vested and exercisable. The period over which such Equity Compensation Awards may be exercised shall be governed by the applicable provisions of the Company’s stock plans and related award agreements. In addition, the Covered Employee shall enjoy any additional rights provided under the terms of an Equity Compensation Award, including but not limited to the terms of the Company’s 2007 Stock Incentive Plan, 1998 Stock Incentive Plan, or any other Company equity plan.

 

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4.1.4 Outplacement Assistance. The Covered Employee shall be entitled to transitional outplacement benefits in accordance with the policies and guidelines of the Company as in effect immediately prior to the Change in Control.

5. Parachute Payments. In the event that the severance and other benefits provided for in this Plan or otherwise payable or provided to the Covered Employee (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section 5, would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Employee’s severance benefits hereunder shall be either

(a) delivered in full, or

(b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to the Excise Tax,

whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Covered Employee on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Covered Employee otherwise agree in writing, any determination required under this Section 5 shall be made in writing in good faith by the Company’s independent tax accountants immediately prior to the Change in Control (the “Accountants”). In the event of a reduction in accordance with subsection (b) above, the reduction will occur, with respect to such severance and other benefits considered “parachute payments” within the meaning of Section 280G of the Code in a manner designed to maximize the intrinsic value delivered to the Covered Employee by first reducing or eliminating any cash severance benefits, then by reducing or eliminating any accelerated vesting of stock appreciation rights or stock options, then by reducing or eliminating any accelerated vesting of other Equity Compensation Awards, then by reducing or eliminating any other remaining parachute payments.

6. Conditions to Receipt of Severance.

6.1 Release Agreement. As a condition to receiving Change in Control Severance Benefits under this Plan, each Covered Employee will be required to sign a waiver and release of all claims arising out of his or her Involuntary Termination and employment with the Company and its subsidiaries and affiliates (the “Release”) in the applicable form attached on Appendix C. The Release will include specific information regarding the amount of time the Covered Employee will have to consider the terms of the Release and return the signed agreement to the Company. In no event will the period to return the Release be longer than sixty (60) days, inclusive of any revocation period set forth in the Release, following the Covered Employee’s Involuntary Termination (the “Release Period”).

6.2 Non-solicitation. As a condition to receiving Change in Control Severance Benefits under this Plan, each Covered Employee agrees that the Covered Employee will not solicit any employee of the Company for employment other than at the Company during the Covered Employee’s employment with the Company and for twelve (12) months following his or her termination.

 

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Public solicitation, such as by taking out ads in a newspaper, advertising on the web and the like, not specifically aimed at employees of the Company, will not constitute a breach of this Section 6.2.

6.3 Nondisparagement. During the Covered Employee’s employment with the Company and, for twelve (12) months following his termination, respectively, the Covered Employee and the Company will not knowingly and materially disparage, libel, slander, or otherwise make any materially derogatory statements regarding the other; provided that the Company’s obligations under this Section 6.3 shall apply only to the Company’s executive officers and members of its Board of Directors (the “Board”) who serve in such capacities during the course of the Covered Employee’s employment with the Company and only for so long as each such officer or member of the Board is an employee or director of the Company; provided further that the Company’s obligations under this Section 6.3 extend only to those communications that are made by the above-referenced officers or directors in their capacities as officers or directors of the Company. Notwithstanding the foregoing, nothing contained in the Plan will be deemed to restrict the Covered Employee, the Company or any of the Company’s current or former officers and/or directors from providing information to any governmental or regulatory agency or body (or in any way limit the content of any such information) to the extent they are requested or required to provide such information pursuant a subpoena or as otherwise required by applicable law or regulation, or in accordance with any governmental investigation or audit relating to the Company. Further, nothing contained in this Section 6.3 shall in any way limit the rights or relief that the Covered Employee or Company may have under common law or otherwise with respect to the conduct prohibited in this paragraph.

6.4 Other Requirements. A Covered Employee’s receipt of severance payments pursuant to Section 4.1 will be subject to the Covered Employee continuing to comply with the provisions of this Section 6 and the terms of any confidential information agreement, proprietary information and inventions agreement and such other appropriate agreement between the Covered Employee and the Company. Benefits under this Plan shall terminate immediately for a Covered Employee if such Covered Employee, at any time, violates any such agreement or the provisions of this Section 6.

7. Timing of Change in Control Severance Benefits. Subject to Section 9 below, the Change in Control Severance Benefits that do not constitute Deferred Compensation Separation Benefits (as defined in Section 9 below) shall commence or be paid, as applicable, as soon as administratively practicable but within ten (10) calendar days following the date of the Covered Employee’s termination of employment (or, if required by Section 9, the Covered Employee’s separation from service) or, if later, on the date the Release becomes effective. Subject to Section 9 below, the Change in Control Severance Benefits that do constitute Deferred Compensation Separation Benefits will commence or be paid as applicable, as follows:

7.1 If the Covered Employee’s Release Period ends on or before December 15 of the calendar year in which the Covered Employee’s Involuntary Termination occurs, his or her Deferred Compensation Separation Benefits will commence or be made, as applicable, on or before December 31 of that calendar year.

 

6


7.2 If the Covered Employee’s Release Period ends after December 15 of the calendar year in which the Covered Employee’s Involuntary Termination his or her Deferred Compensation Separation Benefits will commence or be paid, as applicable, on the later of (a) the first payroll date in the calendar year next following the calendar year of the Covered Employee’s Involuntary Termination or (b) the first payroll date following the date his or her Release becomes effective, subject to Section 9 below.

8. Non-Duplication of Benefits. Notwithstanding any other provision in the Plan to the contrary, the Change in Control Severance Benefits provided are intended to be and are exclusive and in lieu of any other change of control and severance benefits or payments to which the Covered Employee may otherwise be entitled, either at law, tort, or contract, in equity, or under the Plan, in the event of any termination of the Covered Employee’s employment. The Covered Employee will be entitled to no change of control or severance benefits or payments upon a termination of employment that constitute an Involuntary Termination other than those benefits expressly set forth herein and those benefits required to be provided by applicable law or as negotiated in accordance with applicable law. Notwithstanding the foregoing, if the Covered Employee is entitled to any benefits other than the benefits under the Plan by operation of applicable law or as negotiated in accordance with applicable law, his or her benefits under the Plan shall be reduced by the value of the benefits the Covered Employee receives by operation of applicable law or as negotiated in accordance with applicable law, as determined by the Administrator in its discretion. It is the intent of the Administrator that amounts owing under the terms of a non-equity performance based incentive plan will be made in addition to any Plan benefits and will not be so offset.

9. Section 409A.

9.1 Notwithstanding anything to the contrary in the Plan, no Deferred Compensation Separation Benefits (as defined below) or other severance benefits that are exempt from Section 409A (as defined below) pursuant to Treasury Regulation Section 1.409A-1(b)(9) will become payable until the Covered Employee has a “separation from service” within the meaning of Section 409A of the Code and the final regulations and any guidance promulgated thereunder (“Section 409A”). Further, if the Covered Employee is subject to Section 409A and is a “specified employee” within the meaning of Section 409A at the time of the Covered Employee’s separation from service (other than due to death), then any Deferred Compensation Separation Benefits otherwise due to the Covered Employee on or within the six (6) month period following his or her separation from service will accrue during such six (6) month period and will become payable in a lump sum payment (less applicable withholding taxes) on the date six (6) months and one (1) day following the date of the Covered Employee’s separation from service. All subsequent payments of Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if the Covered Employee dies following his or her separation from service but prior to the six (6) month anniversary of his or her date of separation, then any payments delayed in accordance with this paragraph will be payable in a lump sum (less applicable withholding taxes) to the Covered Employee’s estate as soon as

 

7


administratively practicable after the date of his or her death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. For purposes of the Plan, “Deferred Compensation Separation Benefits” will mean the severance payments or benefits payable to the Covered Employee, if any, pursuant to the Plan that, when considered together with any other severance payments or separation benefits, is considered deferred compensation under Section 409A.

9.2 Each payment and benefit payable under the Plan is intended to constitute a separate payment for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. Any severance payment that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations shall not constitute a Deferred Compensation Separation Benefit. Any severance payment that entitles the Covered Employee to taxable reimbursements or taxable in-kind benefits covered by Section 1.409A-1(b)(9)(v) shall not constitute a Deferred Compensation Separation Benefit. Any severance payment or portion thereof that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that does not exceed the Section 409A Limit shall not constitute a Deferred Compensation Separation Benefit.

9.3 It is the intent of this Plan to comply with or be exempt from the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding anything to the contrary in the Plan, including but not limited to Section 13, the Company reserves the right to amend the Plan as it deems necessary or advisable, in its sole discretion and without the consent of the Covered Employees, to comply with Section 409A of the Code or to otherwise avoid income recognition under Section 409A of the Code prior to the actual payment of Change in Control Severance Benefits or imposition of any additional tax (provided that no such amendment shall materially reduce the benefits provided hereunder).

10. Withholding. The Company will withhold from any Change in Control Severance Benefits all federal, state, local and other taxes required to be withheld therefrom and any other required payroll deductions.

11. Administration. The Plan will be administered and interpreted by the Administrator (in his or her sole discretion). The Administrator is the “named fiduciary” of the Plan for purposes of ERISA and will be subject to the fiduciary standards of ERISA when acting in such capacity. Any decision made or other action taken by the Administrator prior to a Change in Control with respect to the Plan, and any interpretation by the Administrator prior to a Change in Control of any term or condition of the Plan, or any related document, will be conclusive and binding on all persons and be given the maximum possible deference allowed by law. Following a Change in Control, any decision made or other action taken by the Administrator with respect to the Plan, and any interpretation by the Administrator of any term or condition of the Plan, or any related document that (i) does not affect the benefits payable under the Plan shall not be subject to review unless found to be arbitrary and capricious or (ii) does affect the benefits payable under the Plan shall not be subject to review unless found to be unreasonable or not to have been made in good faith. In accordance with Section 2.1, the Administrator may, in its sole discretion and on such terms and conditions as it may provide, delegate in writing to one or more

 

8


officers of the Company all or any portion of its authority or responsibility with respect to the Plan; provided, however, that any Plan amendment or termination or any other action that could reasonably be expected to increase significantly the cost of the Plan must be approved by the Board or the Compensation Committee of the Board.

12. Eligibility to Participate. To the extent that the Administrator has delegated administrative authority or responsibility to one or more officers of the Company in accordance with Sections 2.1 and 11, each such officer will not be excluded from participating in the Plan if otherwise eligible, but he or she is not entitled to act or pass upon any matters pertaining specifically to his or her own benefit or eligibility under the Plan. The Administrator will act upon any matters pertaining specifically to the benefit or eligibility of each such officer under the Plan.

13. Amendment or Termination. The Company, by action of the Administrator, reserves the right to amend or terminate the Plan at any time, without advance notice to any Covered Employee and without regard to the effect of the amendment or termination on any Covered Employee or on any other individual. Any amendment or termination of the Plan will be in writing. Notwithstanding the preceding, once the Change in Control Determination Period has begun, the Company may not, without a Covered Employee’s written consent, amend or terminate the Plan in any way, nor take any other action, that (a) prevents that Covered Employee from becoming eligible for Change in Control Severance Benefits under the Plan or (b) reduces or alters to the detriment of the Covered Employee the Change in Control Severance Benefits payable, or potentially payable, to a Covered Employee under the Plan (including, without limitation, imposing additional conditions or modifying the timing of payment). Any action of the Company in amending or terminating the Plan will be taken in a non-fiduciary capacity. Notwithstanding anything in the Plan to the contrary, the Plan shall have an initial term of two (2) years commencing on the Effective Date and shall automatically terminate on the second (2nd) anniversary of the Effective Date unless otherwise extended by the Compensation Committee of the Board, in its discretion. On or about the first (1st) anniversary and each subsequent anniversary of the Effective Date, the Compensation Committee of the Board will review the Plan in good faith and determine whether to extend the initial or subsequent term of the Plan by one year. For the avoidance of doubt, in the event a Change in Control occurs during the term of the Plan, the Plan shall not terminate until the Change in Control Determination Period has expired and any benefits payable have been paid.

14. Claims Procedure. Any employee or other person who believes he or she is entitled to any payment under the Plan may submit a claim in writing to the Administrator within ninety (90) days of the earlier of (i) the date the claimant learned the amount of their Change in Control Severance Benefits under the Plan or (ii) the date the claimant learned that he or she will not be entitled to any benefits under the Plan. If the claim is denied (in full or in part), the claimant will be provided a written notice explaining the specific reasons for the denial and referring to the provisions of the Plan on which the denial is based. The notice will also describe any additional information needed to support the claim and the Plan’s procedures for appealing the denial. The denial notice will be provided within ninety (90) days after the claim is received. If special circumstances require an extension of time (up to ninety (90) days), written notice of the extension will be given within the initial ninety (90) day period. This notice of extension will indicate the special circumstances requiring the extension of time and the date by which the

 

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Administrator expects to render its decision on the claim. The Administrator has delegated the claims review responsibility to the Company’s Vice President, Human Resources, except in the case of a claim filed by or on behalf of the Company’s Vice President, Human Resources, in which case, the claim will be reviewed by the Company’s Chief Executive Officer.

15. Appeal Procedure. If the claimant’s claim is denied, the claimant (or his or her authorized representative) may apply in writing to the Administrator for a review of the decision denying the claim. Review must be requested within sixty (60) days following the date the claimant received the written notice of their claim denial or else the claimant loses the right to review. The claimant (or representative) then has the right to review and obtain copies of all documents and other information relevant to the claim, upon request and at no charge, and to submit issues and comments in writing. The Administrator will provide written notice of its decision on review within sixty (60) days after it receives a review request. If additional time (up to sixty (60) days) is needed to review the request, the claimant (or representative) will be given written notice of the reason for the delay. This notice of extension will indicate the special circumstances requiring the extension of time and the date by which the Administrator expects to render its decision. If the claim is denied (in full or in part), the claimant will be provided a written notice explaining the specific reasons for the denial and referring to the provisions of the Plan on which the denial is based. The notice shall also include a statement that the claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents and other information relevant to the claim and a statement regarding the claimant’s right to bring an action under Section 502(a) of ERISA. The Administrator has delegated the appeals review responsibility to the Company’s Vice President, Human Resources, except in the case of an appeal filed by or on behalf of the Company’s Vice President, Human Resources, in which case, the appeal will be reviewed by the Company’s Chief Executive Officer.

16. Legal Expenses. In the event that, on or following a Change in Control that is triggered by an occurrence described in Section 2.4(iii) that is not approved by the Board or an occurrence described in Section 2.4 (iv), either party brings an action to enforce or effect its rights under this Plan, the Company will reimburse the Covered Employee for his or her costs and expenses incurred in connection with the action (including, without limitation, in connection with the Covered Employee defending himself against an action brought by the Company to enforce or effect its rights under the Plan), including the costs of mediation, arbitration, litigation, court fees, and reasonable attorneys’ fees. Notwithstanding the preceding, no reimbursement will be made to the Covered Employee for an action originally brought by the Covered Employee if an entity of competent jurisdiction issues a final order that the Covered Employee’s action was frivolous. This right to reimbursement will be subject to the following additional requirements: (i) the Covered Employee must submit documentation of the costs, expenses and fees to be reimbursed within thirty (30) days of the end of his or her taxable year in which the costs, expenses and fees were incurred; (ii) the amount of any reimbursement provided during his or her taxable year shall not affect any expenses eligible for reimbursement in any other taxable year; (iii) the reimbursement of eligible costs and expenses shall be made by the Company within thirty (30) days of the Covered Employee’s submission of documentation of the costs, expenses and fees to be reimbursed but no later than the last day of the Covered Employee’s taxable year that immediately follows the taxable year in which the costs or expenses were incurred; and (iv) the right to any such reimbursement shall not be subject to liquidation or exchange for another benefit or payment.

 

10


17. Source of Payments. All Change in Control Severance Benefits will be paid in cash from the general funds of the Company; no separate fund will be established under the Plan, and the Plan will have no assets. No right of any person to receive any payment under the Plan will be any greater than the right of any other general unsecured creditor of the Company.

18. Inalienability. In no event may any current or former employee of the Company or any of its subsidiaries or affiliates sell, transfer, anticipate, assign or otherwise dispose of any right or interest under the Plan. At no time will any such right or interest be subject to the claims of creditors nor liable to attachment, execution or other legal process.

19. No Enlargement of Employment Rights. Neither the establishment or maintenance of the Plan, any amendment of the Plan, nor the making of any benefit payment hereunder, will be construed to confer upon any individual any right to be continued as an employee of the Company. The Company expressly reserves the right to discharge any of its employees at any time, with or without cause. However, as described in the Plan, a Covered Employee may be entitled to benefits under the Plan depending upon the circumstances of his or her termination of employment.

20. Successors. Any successor to the Company of all or substantially all of the Company’s business and/or assets (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) will assume the obligations under the Plan and agree expressly to perform the obligations under the Plan in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under the Plan, the term “Company” will include any successor to the Company’s business and/or assets which become bound by the terms of the Plan by operation of law, or otherwise.

21. Applicable Law. The provisions of the Plan will be construed, administered and enforced in accordance with ERISA and, to the extent applicable, the internal substantive laws of the State of California (with the exception of its conflict of laws provisions).

22. Severability. If any provision of the Plan is held invalid or unenforceable, its invalidity or unenforceability will not affect any other provision of the Plan, and the Plan will be construed and enforced as if such provision had not been included.

23. Headings. Headings in this Plan document are for purposes of reference only and will not limit or otherwise affect the meaning hereof.

24. Indemnification. The Company hereby agrees to indemnify and hold harmless the officers and employees of the Company, and the members of its boards of directors, from all losses, claims, costs or other liabilities arising from their acts or omissions in connection with the administration, amendment or termination of the Plan, to the maximum extent permitted by applicable law. This indemnity will cover all such liabilities, including judgments, settlements and costs of defense. The Company will provide this indemnity from its own funds to the extent that insurance does not cover such liabilities. This indemnity is in addition to and not in lieu of any other indemnity provided to such person by the Company.

 

11


25. Additional Information.

 

Plan Name:

   McGrath RentCorp Change in Control Severance Plan

Plan Sponsor:

   McGrath RentCorp
   5700 Las Positas Road
   Livermore, CA 94551

Identification Numbers:

   EIN: ___________
   PLAN: _________

Plan Year:

   Company’s Fiscal Year

Plan Administrator:

   McGrath RentCorp
   Attention: Administrator of the McGrath RentCorp Change in Control Severance Plan
   5700 Las Positas Road
   Livermore, CA 94551
   (925) ___-____

Agent for Service of

   McGrath RentCorp

Legal Process:

   Attention: [Title]
   [Address]
   (925) ___-____

 

12


     Service of process may also be made upon the Administrator.

Type of Plan:

   Severance Plan/Employee Welfare Benefit Plan

Plan Costs:

   The cost of the Plan is paid by the Employer.

26. Statement of ERISA Rights.

As a Covered Employee under the Plan, you have certain rights and protections under ERISA:

(a) You may examine (without charge) all Plan documents, including any amendments and copies of all documents filed with the U.S. Department of Labor. These documents are available for your review in the Company’s Human Resources Department.

(b) You may obtain copies of all Plan documents and other Plan information upon written request to the Administrator. A reasonable charge may be made for such copies.

In addition to creating rights for Covered Employees, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate the Plan (called “fiduciaries”) have a duty to do so prudently and in the interests of you and the other Covered Employees. No one, including the Company or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit under the Plan or exercising your rights under ERISA. If your claim for a severance benefit is denied, in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the denial of your claim reviewed. (The claim review procedure is explained in Sections 14 and 15 above.)

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials and do not receive them within thirty (30) days, you may file suit in a federal court. In such a case, the court may require the Administrator to provide the materials and to pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator. If you have a claim which is denied or ignored, in whole or in part, you may file suit in a federal court. If it should happen that you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court.

In any case, the court will decide who will pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds that your claim is frivolous.

 

13


If you have any questions regarding the Plan, please contact the Administrator. If you have any questions about this statement or about your rights under ERISA, you may contact the nearest area office of the Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration), U.S. Department of Labor, listed in your telephone directory, or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W. Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

 

14


APPENDIX A

PLAN PARTICIPANTS


APPENDIX B

MCGRATH RENTCORP

CHANGE IN CONTROL SEVERANCE PLAN

PARTICIPATION AGREEMENT

This Participation Agreement (the “Agreement”) with respect to participation in the McGrath RentCorp Change in Control Severance Plan (the “Plan”) is made as of [Click and Type Date] by and between McGrath RentCorp (the “Company”) and [Click and Type Name] (“Employee”). Capitalized terms not otherwise defined herein shall have the meanings given to them in the Plan.

WHEREAS, the Company has adopted and sponsors the Plan, a copy of which is attached hereto; and

WHEREAS, Employee has been selected to participate in the Plan in accordance with and subject to the terms of the Plan and this Agreement.

NOW, THEREFORE, in consideration of the mutual promises made herein, the parties hereby agree as follows:

1. Participation. Employee has been designated as a Covered Employee in the Plan, subject to Employee executing this Agreement pursuant to which Employee has agreed to, among other things, (i) waive his or her rights to any severance benefits provided under any other agreement with the Company or arrangement or plan sponsored by the Company and (ii) amend any existing employment or other agreement by and between Employee and the Company pursuant to which Employee is entitled to receive severance benefits to remove the severance provisions from such agreement. The terms and conditions of Covered Employee’s participation in the Plan are as set forth in the Plan and herein.

2. Severance Benefits. Upon satisfaction of the conditions set forth in Section 4 of the Plan, Employee will be eligible to receive the Change in Control Severance Benefits set forth in Section 4.1 of the Plan, subject to compliance with Section 6 of the Plan.

3. Condition to Receipt of Benefits. Employee acknowledges and agrees that notwithstanding anything herein, in the Plan, or otherwise to the contrary, Employee shall not be entitled to any payments or benefits from the Company under the Plan or this Agreement in connection with an Involuntary Termination of Employee’s employment with the Company unless Employee has signed and not revoked a waiver and release of claims agreement in a form reasonably satisfactory to the Company. Employee also acknowledges and agrees that receipt of any Change in Control Severance Benefits will be subject to Employee’s compliance with the conditions during the time periods set forth in Sections 6.2 through 6.4 of the Plan.

4. Interaction with Other Severance Benefit Plans or Arrangements. The change of control and severance benefits and payments provided under the Plan are intended to be and are exclusive and in lieu of any other change of control and severance benefits and payments to which Employee may otherwise be entitled, either at law, tort, or contract, in equity, or under the Plan, in the event of any termination of Employee’s employment unless otherwise specifically


agreed to by the Employee and the Company in an agreement entered into after the Effective Date of the Plan. Employee agrees that he or she will be entitled to no change of control or severance benefits or payments upon a termination of employment that constitute an Involuntary Termination other than those benefits expressly set forth in the Plan and those benefits required to be provided by applicable law or as negotiated in accordance with applicable law. Employee further agrees to amend any existing employment or other agreement by and between Employee and the Company pursuant to which Employee is entitled to receive severance benefits to remove the severance provisions from such agreement. Notwithstanding the foregoing, if the Employee is entitled to any benefits other than the benefits under the Plan by operation of applicable law or as negotiated in accordance with applicable law, his or her benefits under the Plan shall be reduced by the value of the benefits the Employee receives by operation of applicable law or as negotiated in accordance with applicable law, as determined by the Administrator in its discretion.

5. Additional Provisions.

(a) Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

(b) Integration; No Oral Modification. This Agreement and the Plan, constitute the entire agreement of the parties with respect to the subject matter hereof and supersede all prior agreements, written or oral. This Agreement may only be amended in writing signed by the parties hereto.

(c) Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. Execution and delivery of this Agreement by exchange of facsimile copies bearing the facsimile signature of a party shall constitute a valid and binding execution and delivery of the Agreement by such party. Such facsimile copies shall constitute enforceable original documents.

(d) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.

(e) Tax Withholding. All payments made pursuant to the Plan and this Agreement will be subject to withholding of applicable taxes.

(f) Governing Law. This Agreement will be governed by the laws of the State of California (with the exception of its conflict of laws provisions).


By their signatures below, the Company and Employee agree that participation in the Plan is governed by this Agreement and by the provisions of the Plan, a copy of which is attached hereto and made a part of this document. Employee acknowledges receipt of a copy of the Plan, represents that Employee has read and is familiar with its provisions and the provisions of this Agreement, and acknowledges that decisions and determinations by the Administrator under the Plan shall be final and binding on Employee.

(The remainder of this page has been intentionally left blank)


IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date first set forth above.

 

MCGRATH RENTCORP

      EMPLOYEE

By:

           

[Click and Type Name]

     
       


APPENDIX C-1

40 and over

SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS

This Severance Agreement and Release of All Claims is entered into between                     , including its officers, directors, employees, managers, agents, and representatives (“Company”) and                      (“Employee”) pursuant to the McGrath RentCorp Change in Control Severance Plan (the “Plan”). The purpose of this Agreement is to arrange a severance of Employee’s employment with Company as contemplated under the Plan.

1. Effective [Date], Employee’s employment ended.

2. Both Employee and Company are entering into this Agreement as a way of concluding the employment relationship between them and of voluntarily settling any dispute or potential dispute that Employee has or might have with Company as of the date this Agreement is signed.

a. In return for Employee agreeing to this Agreement, Company agrees to provide to Employee benefits pursuant to the terms of the Plan.

b. Employee agrees that he/she will not seek nor accept employment with the Company in the future and that the Company is entitled to reject any application for employment made by Employee.

c. Company will not contest Employee’s claim for unemployment insurance benefits.

d. Company, upon request, will disclose only Employee’s job title and dates of employment to prospective employers, and with Employee’s agreement, his/her last wage or salary.

3. In return for these benefits, Employee, for himself/herself and his/her spouse or partner, heirs, executors, representative and assigns, forever releases Company from any and all claims, actions, and causes of action which Employee has or might have concerning his/her employment with Company or the termination of employment, up to the date of the signing of this Agreement. All such claims are forever barred by this Agreement and without regard as to whether those claims are based upon any alleged breach of contract or covenant of good faith and fair dealing; any alleged employment discrimination or other unlawful discriminatory acts, including claims under Title VII, the Fair Employment and Housing Act, the Americans with Disabilities Act, the California Labor Code, the Employee Retirement Income Security Act and the Age Discrimination in Employment Act; any alleged tortious act resulting in physical injury, emotional distress, or damage to reputation or other damages; or any other claim or cause of action as of the date of the signing of this Agreement.

 

C-1-1


4. This Agreement does not prohibit Employee from filing a charge, including a challenge to the validity of this Agreement, with the Equal Employment Opportunity Commission (EEOC) or participating in any investigation or proceeding conducted by the EEOC. This Agreement does not prohibit Employee from filing or pursuing a claim for workers’ compensation or unemployment insurance, or any other claim that cannot be legally waived under federal or state law.

5. Employee agrees that the benefits described in Paragraph 20, shall constitute the entire amount of monetary consideration provided to him/her under this Agreement and that he/she will not seek any further compensation for any other claimed damages, costs or attorneys fees in connection with the matters encompassed by this Agreement.

6. The parties acknowledge that California Civil Code Section 1542 provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

Being fully informed of this provision of the Civil Code, Employee waives any rights under that section, and acknowledges that this Agreement extends to all claims he/she has or might have against Company, whether known or unknown, except claims set forth in Paragraph 5.

7. Employee understands that:

 

  a. He/she has twenty-one days in which to consider signing this Agreement;

 

  b. He/she has carefully read and fully understands all of the terms of the Agreement;

 

  c. He/she is, through this Agreement, releasing Company from any and all claims he/she may have against it;

 

  d. He/she knowingly and voluntarily agrees to all of the terms set forth in this Agreement;

 

  e. He/she knowingly and voluntarily intends to be legally bound by this Agreement;

 

  f. He/she was advised and hereby is advised in writing to consult with an attorney of his/her choice prior to signing this Agreement;

 

  g. He/she understands that rights or claims under the Age Discrimination in Employment Act of 1967 that may arise after the date this Agreement is signed are not waived; and

 

  h. He/she has a full seven days following the signing of this Agreement to revoke it and he/she has been and hereby is advised in writing that this Agreement will not become effective or enforceable until that seven day revocation period has expired and Employee has not revoked the Agreement.

 

C-1-2


8. This Agreement is in full satisfaction of disputed claims and by entering into this Agreement, Company is in no way admitting liability of any sort. This Agreement, therefore, does not constitute an admission of liability of any kind.

9. Employee agrees that he/she will keep the fact, terms and amount of this Agreement completely confidential and that he/she will not disclose any information concerning this Agreement to anyone. However, Employee may make such disclosures as are required by law and as are necessary for legitimate law enforcement or compliance purposes. Employee may also disclose to her spouse or partner, and to her tax preparer and/or attorney. Employee agrees to notify such persons of this confidentiality agreement.

10. Employee has had access to confidential, proprietary and/or trade secret information relating to Company’s business. Such information may include, but is not limited to, business strategies, financial reports, computer programs and software, customer information, business plans and operations, sales programs, and other information and records which are owned by Company and are regularly used in the operation of its business. Employee shall not disclose any confidential, proprietary or trade secret information of Company, directly or indirectly, or use any of it in any way. Employee will not remove any files, records, documents, specifications, lists, designs or other items relating to Company business from its premises.

11. Should any provision of this Agreement be determined by any court or arbitrator to be wholly or partially illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions shall not be affected, and said illegal, unenforceable or invalid provisions shall be deemed not to be a part of this Agreement.

12. The parties agree that this document contains their complete and final agreement and that there are no representations, statements, or agreements which have not been included within this document.

13. The parties acknowledge that in signing this Agreement, they do not rely upon and have not relied upon any representation or statement made by any of the parties or their agents with respect to the subject matter, basis or effect of this Agreement, other than those specifically stated in this written Agreement.

14. The parties agree that any dispute regarding the application and interpretation or alleged violation of this Agreement shall be subject to final and binding arbitration before a neutral arbitrator referred by the Judicial Arbitration and Mediation Service (JAMS). That arbitrator shall be selected by the parties from the list of proposed arbitrators referred by JAMS. The losing party to the arbitration will be responsible for paying all costs and attorneys fees.

 

C-1-3


      EMPLOYEE
Date:                                       
       
       

 

      COMPANY
Date:                                      By:    
       
       

 

C-1-4


APPENDIX C-2

Under 40

SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS

This Severance Agreement and Release of All Claims is entered into between                     , including its officers, directors, managers, employees, agents, and representatives (“Company”) and                      (“Employee”) pursuant to the McGrath RentCorp Change in Control Severance Plan (the “Plan”). The purpose of this Agreement is to arrange a severance of Employee’s employment with Company as contemplated under the Plan.

1. Effective [Date], Employee’s employment ended.

2. Both Employee and Company are entering into this Agreement as a way of concluding the employment relationship between them and of voluntarily settling any dispute or potential dispute that Employee has or might have with Company as of the date this Agreement is signed.

a. In return for Employee agreeing to this Agreement, Company agrees to provide to Employee benefits pursuant to the terms of the Plan.

b. Employee agrees that he/she will not seek nor accept employment with the Company in the future and that Company is entitled to reject any application for employment made by Employee.

c. Company will not contest Employee’s claim for unemployment insurance benefits.

d. Company, upon request, will disclose only Employee’s job title and dates of employment to prospective employers, and with Employee’s agreement, his/her last wage or salary.

3. In return for these benefits, Employee, for himself/herself and his/her spouse, heirs, executors, representative and assigns, forever releases Company from any and all claims, actions, and causes of action which Employee has or might have concerning his/her employment with Company or the termination of employment, up to the date of the signing of this Agreement. All such claims are forever barred by this Agreement and without regard as to whether those claims are based upon any alleged breach of contract or covenant of good faith and fair dealing; any alleged employment discrimination or other unlawful discriminatory acts, including claims under Title VII, the Fair Employment and Housing Act, the Americans with Disabilities Act, the California Labor Code, and the Employee Retirement Income Security Act; any alleged tortious act resulting in physical injury, emotional distress, or damage to reputation or other damages; or any other claim or cause of action as of the date of the signing of this Agreement.

4. This Agreement does not prohibit Employee from filing a charge, including a challenge to the validity of the Agreement, with the Equal Employment Opportunity Commission (EEOC) or participating in any investigation or proceeding conducted by the EEOC. This Agreement does not prohibit Employee from filing or pursuing a claim for workers’ compensation or unemployment insurance, or any claim which cannot legally be waived under federal or state law.

5. Employee agrees that the payment in Paragraph 3 shall constitute the entire amount of monetary consideration provided to him/her under this Agreement and that he/she will not seek any further compensation for any other claimed damages, costs or attorneys fees in connection with the matters encompassed by this Agreement.


6. The parties acknowledge that California Civil Code Section 1542 provides as follows:

A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.

Being fully informed of this provision of the Civil Code, Employee waives any rights under that section, and acknowledges that this Agreement extends to all claims he/she has or might have against Company, whether known or unknown, except claims set forth in Paragraph 5.

 

  7. Employee understands that:

a. He/she has a reasonable period of time in which to consider signing this Agreement;

b. He/she has carefully read and fully understands all of the terms of the Agreement;

c. He/she is, through this Agreement, releasing Company from any and all claims he/she may have against it;

d. He/she knowingly and voluntarily agrees to all of the terms set forth in this Agreement; and

e. He/she knowingly and voluntarily intends to be legally bound by this Agreement.

8. This Agreement is in full satisfaction of disputed claims and by entering into this Agreement, Company is in no way admitting liability of any sort. This Agreement, therefore, does not constitute an admission of liability of any kind.

9. Employee agrees that he/she will keep the fact, terms and amount of this Agreement completely confidential and that he/she will not disclose any information concerning this Agreement to anyone. However, Employee may make such disclosures to his/her spouse, partner, tax preparer or attorney, or as are required by law and as are necessary for legitimate law enforcement or compliance purposes.

10. Employee has had access to confidential, proprietary and/or trade secret information relating to Company’s business. Such information may include, but is not limited to, business strategies, financial reports, computer programs and software, customer information, business plans and operations, sales programs, and other information and records which are owned by Company and are regularly used in the operation of its business. Employee shall not disclose any confidential, proprietary or trade secret information of Company, directly or indirectly, or use any of it in any way. Employee will not remove any files, records, documents, specifications, lists, designs or other items relating to Company business from its premises.

11. Should any provision of this Agreement be determined by any court to be wholly or partially illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions shall not be affected, and said illegal, unenforceable or invalid provisions shall be deemed not to be a part of this Agreement.


12. The parties agree that this document contains their complete and final agreement and that there are no representations, statements, or agreements which have not been included within this document.

13. The parties acknowledge that in signing this Agreement, they do not rely upon and have not relied upon any representation or statement made by any of the parties or their agents with respect to the subject matter, basis or effect of this Agreement, other than those specifically stated in this written Agreement.

14. The parties agree that any dispute regarding the application and interpretation or alleged breach of this Agreement shall be subject to final and binding arbitration before a neutral arbitrator referred by the Judicial Arbitration and Mediation Service (“JAMS”). That arbitrator shall be selected by the parties from the list of proposed arbitrators referred by JAMS. The losing party to the arbitration will be responsible for paying all costs and attorneys fees.

 

      EMPLOYEE
Date:                                       
       
       
      COMPANY
Date:                                      By:    
       
       
EX-15.1

Exhibit 15.1

AWARENESS LETTER FROM GRANT THORNTON LLP

McGrath RentCorp

5700 Las Positas Road

Livermore, California 94551

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited condensed consolidated interim financial information of McGrath RentCorp and subsidiaries as of June 30, 2013, and for the three and six-month periods ended June 30, 2013 and 2012, as indicated in our report dated July 31, 2013; because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, is incorporated by reference in Registration Statements on Forms S-8 (File No. 333-74089, effective March 9, 1999, File No. 333-151815, effective June 20, 2008, File No. 333-161128, effective August 6, 2009, and File No. 333-183231, effective August 10, 2012).

We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

 

/s/ Grant Thornton LLP
San Jose, California
July 31, 2013
EX-31.1

Exhibit 31.1

McGRATH RENTCORP

SECTION 302 CERTIFICATION

I, Dennis C. Kakures, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of McGrath RentCorp;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2013

 

By:  

/s/ Dennis C. Kakures

  Dennis C. Kakures
  Chief Executive Officer
EX-31.2

Exhibit 31.2

McGRATH RENTCORP

SECTION 302 CERTIFICATION

I, Keith E. Pratt, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of McGrath RentCorp;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2013

 

By:  

/s/ Keith E. Pratt

  Keith E. Pratt
  Chief Financial Officer
EX-32.1

Exhibit 32.1

McGRATH RENTCORP

SECTION 906 CERTIFICATION

In connection with the periodic report of McGrath RentCorp (the “Company”) on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission (the “Report”), I, Dennis C. Kakures, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Date: July 31, 2013

 

By:  

/s/ Dennis C. Kakures

  Dennis C. Kakures
  Chief Executive Officer
EX-32.2

Exhibit 32.2

McGRATH RENTCORP

SECTION 906 CERTIFICATION

In connection with the periodic report of McGrath RentCorp (the “Company”) on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission (the “Report”), I, Keith E. Pratt, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Date: July 31, 2013

 

By:  

/s/ Keith E. Pratt

  Keith E. Pratt
  Chief Financial Officer