UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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)
Registrants telephone number: (925) 606-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes | x No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes | x No |
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.
x Yes | ¨ 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).
x Yes | ¨ No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x Yes | ¨ 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 the definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one).
Large accelerated filer x | Accelerated filer ¨ | 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 | x No |
Aggregate market value of the registrants common stock held by non-affiliates of the registrant as of June 30, 2014 (based upon the closing sale price of the registrants common stock as reported on the NASDAQ Global Select Market on June 30, 2014): $930,419,889.
As of February 25, 2015, 26,051,251 shares of Registrants Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
McGrath RentCorps definitive proxy statement with respect to its 2015 Annual Meeting of Shareholders to be held on June 10, 2015 which will be filed with the Securities and Exchange Commission within 120 days after the end of its fiscal year ended December 31, 2014, is incorporated by reference into Part III (Items 10, 11, 12, and 13).
Exhibit index appears on page 91
FORWARD LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (this Form 10-K) 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 RentCorps 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-K. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.
Forward-looking statements are made only as of the date of this Form 10-K and are based on managements 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-K to conform such statements to actual results or to changes in our expectations.
PART I
ITEM 1. | BUSINESS. |
General Overview
McGrath RentCorp (the Company) is a California corporation organized in 1979 with corporate offices located in Livermore, California. The Companys common stock is traded on the NASDAQ Global Select Market under the symbol MGRC. References in this report to the Company, we, us, and ours refer to McGrath RentCorp and its subsidiaries, unless the context requires otherwise.
The Company is a diversified business to business rental company with three rental divisions: relocatable modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes. Although the Companys primary emphasis is on equipment rentals, sales of equipment occur in the normal course of business. The Company is comprised of four business segments: (1) our modular building and portable storage rental division (Mobile Modular); (2) our electronic test equipment rental division (TRS-RenTelco); (3) our wholly-owned subsidiary providing containment solutions for the storage of hazardous and non-hazardous liquids and solids (Adler Tanks); and (4) our wholly-owned subsidiary classroom manufacturing business selling modular buildings used primarily as classrooms in California (Enviroplex). The Mobile Modular business segment includes Mobile Modular Portable Storage, which represented approximately 5% of the Companys 2014 total revenues.
No single customer accounted for more than 10% of total revenues during 2014, 2013 and 2012. Revenue from foreign country customers accounted for 5%, 7% and 9% of the Companys revenues for the same periods, respectively.
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Business Model
The Company invests capital in rental products and generally has recovered its original investment through rents less cash operating expenses in a relatively short period of time compared to the products rental life. When the Companys rental products are sold, the proceeds generally have covered a high percentage of the original investment. With these characteristics, a significant base of rental assets on rent generate a considerable amount of operating cash flows to support continued rental asset growth. The Companys rental products have the following characteristics:
| The product required by the customer tends to be expensive compared to the Companys monthly rental charge, with the interim rental solution typically evaluated as a less costly alternative. |
| Generally, we believe the Companys customers have a short-term need for our rental products. The customers rental requirement may be driven by a number of factors including time, budget or capital constraints, future uncertainty impacting their ongoing requirements, equipment availability, specific project requirements, peak periods of demand or the customer may want to eliminate the burdens and risks of ownership. |
| All of the Companys rental products have long useful lives relative to the typical rental term. Modular buildings (modulars) have an estimated life of eighteen years compared to the typical rental term of twelve to twenty-four months, electronic test equipment has an estimated life range of one to eight years (depending on the type of product) compared to a typical rental term of one to six months, and liquid and solid containment tanks and boxes have an estimated life of twenty years compared to typical rental terms of one to six months. |
| We believe short-term rental rates typically recover the Companys original investment quickly based on the respective products annual yield, or annual rental revenues divided by the average cost of rental inventory. For modulars the original investment is recovered in approximately six years, in approximately three years for electronic test equipment and in approximately four years for liquid and solid containment tanks and boxes. |
| When a product is sold from our rental inventory, a significant portion of the original investment is usually recovered. Effective asset management is a critical element to each of the rental businesses and the residuals realized when product is sold from inventory. Modular asset management requires designing and building the product for a long life, coupled with ongoing repair and maintenance investments, to ensure its long useful rental life and generally higher residuals upon sale. Electronic test equipment asset management requires understanding, selecting and investing in equipment technologies that support market demand and, once invested, proactively managing the equipment at the model level for optimum utilization through its technology life cycle to maximize the rental revenues and residuals realized. Liquid and solid containment tanks and boxes asset management requires selecting and purchasing quality product and making ongoing repair and maintenance investments to ensure its long rental life. |
The Company believes that rental revenue growth from an increasing base of rental assets and improved gross profits on rents are the best measures of the health of each of our rental businesses. Additionally, we believe our business model and results are enhanced with operational leverage that is created from large regional sales and inventory centers for modulars, a single U.S. based sales, inventory and operations facility for electronic test equipment, as well as shared senior management and back office functions for financing, human resources, insurance, and operating and accounting systems.
Employees
As of December 31, 2014, the Company had 995 employees, of whom 83 were primarily administrative and executive personnel, with 534, 170, 143 and 65 in the operations of Mobile Modular, Adler Tanks, TRS-RenTelco and Enviroplex, respectively. None of our employees are covered by a collective bargaining agreement, and management believes its relationship with our employees is good.
Available Information
We make the Companys Securities and Exchange Commission (SEC) filings available, free of charge, at our website www.mgrc.com. These filings include our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934, which are
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available as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the SEC. Information included on our web site is not incorporated by reference to this Form 10-K. Furthermore, all reports the Company files with the SEC are available, free of charge, through the SECs web site at www.sec.gov. In addition, the public may read and copy materials filed by the Company at the SECs Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
We also have a Code of Business Conduct and Ethics which applies to all directors, officers and employees. Copies of this code can be obtained free of charge at our website www.mgrc.com.
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RELOCATABLE MODULAR BUILDINGS
Description
Modulars are designed for use as classrooms, temporary offices adjacent to existing facilities, sales offices, construction field offices, restroom buildings, health care clinics, child care facilities, office space, and for a variety of other purposes and may be moved from one location to another. Modulars vary from simple single-unit construction site offices to multi-floor modular complexes. The Companys modular rental fleet includes a full range of styles and sizes. The Company considers its modulars to be among the most attractive and well-designed available. The units are constructed with wood or metal siding, sturdily built and physically capable of a long useful life. Modulars are generally provided with installed heat, air conditioning, lighting, electrical outlets and floor covering, and may have customized interiors including partitioning, cabinetry and plumbing facilities.
Mobile Modular purchases new modulars from various manufacturers who build to Mobile Modulars design specifications. With the exception of Enviroplex, none of our principal suppliers are affiliated with the Company. During 2014, Mobile Modular purchased 35% of its modular units from one manufacturer. The Company believes that the loss of any of its primary modular manufacturers could have an adverse effect on its operations since Mobile Modular could experience higher prices and longer lead times for delivery of modular units until other manufacturers were able to increase their production capacity.
The Companys modulars are manufactured to comply with state building codes, have a low risk of obsolescence, and can be modified or reconfigured to accommodate a wide variety of customer needs. Historically, as state building codes have changed over the years, Mobile Modular has been able to continue to use existing modulars, with minimal, if any, required upgrades. The Company has no assurance that it will continue to be able to use existing modular equipment with minimal upgrades as building codes change in the future.
Mobile Modular currently operates from regional sales and inventory centers in California, Texas, and Florida, serving large geographic areas in these states, and sales offices serving North Carolina, Georgia, Maryland, Virginia and Washington, D.C. The California, Texas and Florida regional sales and inventory centers have in-house infrastructure and operational capabilities to support quick and efficient repair, modification, and refurbishment of equipment for the next rental opportunity. The Company believes operating from large regional sales and inventory centers results in better operating margins as operating costs can be spread over a large installed customer base. Mobile Modular actively maintains and repairs its rental equipment, and management believes this ensures the continued use of the modular product over its long life and, when sold, has resulted in higher sale proceeds relative to its capitalized cost. When rental equipment returns from a customer, the necessary repairs and preventative maintenance are performed prior to its next rental. By making these expenditures for repair and maintenance throughout the equipments life we believe that older equipment can generally rent for similar rates as newer equipment. Management believes the condition of the equipment is a more significant factor in determining the rental rate and sale price than its age. Over the last three years, used equipment sold each year represented less than 2% of rental equipment, and has been, on average, 14 years old with sale proceeds above its net book value.
Competitive Strengths
Market LeadershipThe Company believes Mobile Modular is the largest supplier in California, and a significant supplier in Florida and Texas, of modular educational facilities for rental to both public and private schools. Management is knowledgeable about the needs of its educational customers and the related regulatory requirements in the states where Mobile Modular operates, which enables Mobile Modular to meet its customers specific project requirements.
ExpertisThe Company believes that over the more than 30 years during which Mobile Modular has competed in the modular rental industry, it has developed expertise that differentiates it from its competitors. Mobile Modular has dedicated its attention to continuously developing and improving the quality of its modular units. Mobile Modular has expertise in the licensing and regulatory requirements that govern modulars in the states where it operates, and its management, sales and operational staffs are knowledgeable and committed to providing exemplary customer service. Mobile Modular has expertise in project management and complex applications.
Operating StructurePart of the Companys strategy for Mobile Modular is to create facilities and infrastructure capabilities that its competitors cannot easily duplicate. Mobile Modular achieves this by building regional sales and inventory centers designed to
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serve a broad geographic area and a large installed customer base under a single overhead structure, thereby reducing its cost per transaction. The Companys regional facilities and related infrastructure enable Mobile Modular to maximize its modular inventory utilization through efficient and cost effective in-house repair, maintenance and refurbishment for quick redeployment of equipment to meet its customers needs.
Asset ManagementThe Company believes Mobile Modular markets high quality, well-constructed and attractive modulars. Mobile Modular requires manufacturers to build to its specifications, which enables Mobile Modular to maintain a standardized quality fleet. In addition, through its ongoing repair, refurbishment and maintenance programs, the Company believes Mobile Modulars buildings are the best maintained in the industry. The Company depreciates its modular buildings over an 18 year estimated useful life to a 50% residual value. Older buildings continue to be productive primarily because of Mobile Modulars focus on ongoing fleet maintenance. Also, as a result of Mobile Modulars maintenance programs, when a modular unit is sold, a high percentage of the equipments capitalized cost is recovered. In addition, the fleets utilization is regionally optimized by managing inventory through estimates of market demand, fulfillment of current rental and sale order activity, modular returns and capital purchases.
Customer ServiceThe Company believes the modular rental industry to be service intensive and locally based. The Company strives to provide excellent service by meeting its commitments to its customers, being proactive in resolving project issues and seeking to continuously improve the customers experience. Mobile Modular is committed to offering quick response to requests for information, providing experienced assistance, on time delivery and preventative maintenance of its units. Mobile Modulars goal is to continuously improve its procedures, processes and computer systems to enhance internal operational efficiency. The Company believes this dedication to customer service results in high levels of customer loyalty and repeat business.
Market
Management estimates relocatable modular building rental is an industry that today has equipment on rent or available for rent in the U.S. with an aggregate original cost of over $4.0 billion. Mobile Modulars largest market segment is for temporary classroom and other educational space needs of public and private schools, colleges and universities in California and Florida, and to a lesser extent in Texas, North Carolina, Georgia, Maryland, Virginia and Washington, D.C. Management believes the demand for rental classrooms is caused by shifting and fluctuating school populations, the lack of state funds for new construction, the need for temporary classroom space during reconstruction of older schools, class size reduction and the phasing out of portable classrooms compliant with older building codes (see Classroom Rentals and Sales to Public Schools (K-12) below). Other customer applications include sales offices, construction field offices, health care facilities, church sanctuaries and child care services. Industrial, manufacturing, entertainment and utility companies, as well as governmental agencies commonly use large multi-modular complexes to serve their interim administrative and operational space needs. Modulars offer customers quick, cost-effective space solutions while conserving their capital. The Companys corporate offices, and California, Texas and Florida regional sales and inventory center offices are housed in various sizes of modular units.
Since most of Mobile Modulars customer requirements are to fill temporary space needs, Mobile Modulars marketing emphasis is on rentals rather than sales. Mobile Modular attracts customers through its website at www.mobilemodularrents.com, internet advertising and direct mail. Customers are encouraged to visit a regional sales and inventory center to view different models on display and to see a regional office, which is a working example of a modular application.
Because service is a major competitive factor in the rental of modulars, Mobile Modular offers quick response to requests for information, assistance in the choice of a suitable size and floor plan, in-house customization services, rapid delivery, timely installation and field service of its units. On Mobile Modulars website, customers are able to view and select inventory for quotation and request in-field service.
Rentals
Rental periods range from one month to several years with a typical initial contract term between twelve and twenty-four months. In general, monthly rental rates are determined by a number of factors including length of term, market demand, product availability and product type. Upon expiration of the initial term, or any extensions, rental rates are reviewed, and when appropriate, are adjusted
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based on current market conditions. Most rental agreements are operating leases that provide no purchase options, and when a rental agreement does provide the customer with a purchase option, it is generally on terms management believes to be attractive to Mobile Modular.
The customer is responsible for obtaining the necessary use permits and for the costs of insuring the unit, and is financially responsible for transporting the unit to the site, preparation of the site, installation of the unit, dismantle and return delivery of the unit to Mobile Modular, and certain costs for customization. Mobile Modular maintains the units in good working condition while on rent. Upon return, the units are inspected for damage and customers are billed for items considered beyond normal wear and tear. Generally, the units are then repaired for subsequent use. Repair and maintenance costs are expensed as incurred and can include floor repairs, roof maintenance, cleaning, painting and other cosmetic repairs. The costs of major refurbishment of equipment are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment.
At December 31, 2014, Mobile Modular owned 43,792 new or previously rented modulars and portable storage containers with an aggregate cost of $664.3 million including accessories, or an average cost per unit of $15,170. Utilization is calculated at the end of each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. At December 31, 2014, fleet utilization was 75.0% and average fleet utilization during 2014 was 72.3%. The Mobile Modular segment includes the results of operations of Mobile Modular Portable Storage, which represented approximately 5% of the Companys 2014 total revenues.
Sales
In addition to operating its rental fleet, Mobile Modular sells modulars to customers. These sales typically arise out of its marketing efforts for the rental fleet and from existing equipment already on rent. Such sales can be of either new or used units from the rental fleet, which permits some turnover of older units. During 2014 Mobile Modulars largest sale represented approximately 8% of Mobile Modulars sales, 3% of the Companys consolidated sales and less than 1% of the Companys consolidated revenues.
Mobile Modular typically provides limited 90-day warranties on used modulars and passes through the manufacturers one-year warranty on new units to its customers. Warranty costs have not been significant to Mobile Modulars operations to date, and the Company attributes this to its commitment to high quality standards and regular maintenance programs. However, there can be no assurance that warranty costs will continue to be insignificant to Mobile Modulars operations in the future.
Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect (DSA) and sells directly to California public school districts and other educational institutions.
Seasonality
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.
Competition
Competition in the rental and sale of relocatable modular buildings is intense. Two major national firms, Williams Scotsman International, Inc. and Modspace, Inc., are engaged in the rental of modulars, have many offices throughout the country and we believe may have greater financial and other resources than Mobile Modular. In addition, a number of other smaller companies operate regionally throughout the country. Mobile Modular operates primarily in California, Texas, Florida, North Carolina, Georgia, Virginia, Maryland and Washington, D.C. Significant competitive factors in the rental business include availability, price, service, reliability, appearance and functionality of the product. Mobile Modular markets high quality, well-constructed and attractive modulars. Part of the Companys strategy for modulars is to create facilities and infrastructure capabilities that its competitors cannot easily duplicate. The Companys facilities and related infrastructure enable it to modify modulars efficiently and cost effectively to meet its customers needs. Managements goal is to be more responsive at less expense. Management believes this strategy, together
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with its emphasis on prompt and efficient customer service, gives Mobile Modular a competitive advantage. Mobile Modular is determined to respond quickly to requests for information, and provide experienced assistance for the first-time user, rapid delivery and timely repair of its modular units. Mobile Modulars already high level of efficiency and responsiveness continues to improve as the Company upgrades procedures, processes and computer systems that control its internal operations. The Company anticipates intense competition to continue and believes it must continue to improve its products and services to remain competitive in the market for modulars.
Classroom Rentals and Sales to Public Schools (K-12)
Mobile Modular and Enviroplex provide classroom and specialty space needs serving public and private schools, colleges and universities. Within the educational market, the rental (by Mobile Modular) and sale (by Enviroplex and Mobile Modular) of modulars to public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten through grade twelve (K-12) are a significant portion of the Companys revenues. Mobile Modular rents and sells classrooms in California, Florida, Texas, North Carolina, Georgia, Maryland, Virginia and Washington, D.C. Enviroplex sells classrooms in the California market. California is Mobile Modulars largest educational market. Historically, demand in this market has been fueled by shifting and fluctuating student populations, insufficient funding for new school construction, class size reduction programs, modernization of aging school facilities and the phasing out of portable classrooms no longer compliant with current building codes. The following table shows the approximate percentages of the Companys modular rental and sales revenues, and of its consolidated rental and sales revenues for the past five years, that rentals and sales to these schools constitute:
Rentals and Sales to Public Schools (K-12) as a Percentage of Total Rental and Sales Revenues | ||||||||||||||||||||
Percentage of: |
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Modular Rental Revenues (Mobile Modular) |
32 | % | 37 | % | 40 | % | 44 | % | 48 | % | ||||||||||
Modular Sales Revenues (Mobile Modular & Enviroplex) |
49 | % | 36 | % | 52 | % | 33 | % | 54 | % | ||||||||||
Modular Rental and Sales Revenues (Mobile Modular & Enviroplex) |
37 | % | 36 | % | 44 | % | 40 | % | 49 | % | ||||||||||
Consolidated Rental and Sales Revenues1 |
16 | % | 14 | % | 16 | % | 16 | % | 22 | % | ||||||||||
1. Consolidated Rental and Sales Revenue percentage is calculated by dividing Modular rental and sales revenues to public schools (K-12) by the Companys consolidated rental and sales revenues. |
School Facility Funding
Funding for public school facilities is derived from a variety of sources including the passage of both statewide and local facility bond measures, operating budgets, developer fees, various taxes including parcel and sales taxes levied to support school operating budgets, and lottery funds. Since 2008, the Company has experienced interruption in the passage of facility bonds, contraction or elimination of class size reduction programs, a lack of fiscal funding, and a significant reduction of funding from other sources to public schools that has had a material adverse effect on both rental and sales revenues of the Company.
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ELECTRONIC TEST EQUIPMENT
Description
TRS-RenTelco rents and sells electronic test equipment nationally and internationally from three facilities located in Grapevine, Texas (the Dallas facility), Dollard-des-Ormeaux, Canada (the Montreal facility) and Bangalore, Karnataka, India (the Bangalore facility). TRS-RenTelcos 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 revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance. The Dallas facility, TRS-RenTelcos primary operating location, houses the electronic test equipment inventory, sales engineers, calibration laboratories, and operations staff for U.S. and international business. The Montreal facility houses sales engineers and operations staff to serve the Canadian market. The Bangalore facility houses sales engineers and operations staff to serve the Indian market. As of December 31, 2014, the original cost of electronic test equipment inventory was comprised of 59% general purpose electronic test equipment and 41% communications electronic test equipment.
Engineers, technicians and scientists utilize general purpose electronic test equipment in developing products, controlling manufacturing processes, completing field service applications and evaluating the performance of their own electrical and electronic equipment. These instruments are rented primarily to aerospace, defense, electronics, industrial, research and semiconductor industries. To date, Keysight Technologies (formerly Agilent Technologies) and Tektronix, a division of Danaher Corporation, have manufactured the majority of TRS-RenTelcos general purpose electronic test equipment.
Communications test equipment, including fiber optic test equipment, is utilized by technicians, engineers and installation contractors to evaluate voice, data and multimedia communications networks, to install fiber optic cabling, and in the development and manufacturing of transmission, network and wireless products. These instruments are rented primarily to manufacturers of communications equipment and products, electrical and communications installation contractors, field technicians, and service providers. To date, JDS Uniphase Corporation has manufactured a significant portion of TRS-RenTelcos communications test equipment, with the remainder acquired from over 40 other manufacturers.
TRS-RenTelcos general purpose test equipment rental inventory includes oscilloscopes, amplifiers, analyzers (spectrum, network and logic), signal source and power source test equipment. The communications test equipment rental inventory includes network and transmission test equipment for various fiber, copper and wireless networks. Keysight Technologies (formerly Agilent Technologies) and Tektronix manufacture the majority of TRS-RenTelcos general purpose test equipment with the remainder acquired from over 60 other manufacturers. TRS-RenTelco also occasionally rents electronic test equipment from other rental companies and re-rents the equipment to customers.
Competitive Strengths
Market LeadershipThe Company believes that TRS-RenTelco is one of the largest electronic test equipment rental and leasing companies offering a broad and deep selection of general purpose and communications test equipment for rent in North America.
ExpertiseThe Company believes that its knowledge of products, technology and applications expertise provides it with a competitive advantage over others in the industry. Customer requirements are supported by application engineers and technicians that are knowledgeable about the equipments uses to ensure the right equipment is selected to meet the customers needs. This knowledge can be attributed to the experience of TRS-RenTelcos management, sales and operational teams.
Operating StructureTRS-RenTelco is supported by a centralized distribution and inventory center on the grounds of the Dallas-Fort Worth Airport in Texas. The Company believes that the centralization of servicing all customers in North America and internationally by TRS-RenTelcos experienced logistics teams provides a competitive advantage by minimizing transaction costs and enabling TRS-RenTelco to ensure customer requirements are met.
Asset ManagementTRS-RenTelcos rental equipment inventory is serviced by an ISO 9001-2008 registered and compliant calibration laboratory that repairs and calibrates equipment ensuring that off rent equipment is ready to ship immediately to meet
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customers needs. TRS-RenTelcos team of technicians, product managers and sales personnel are continuously monitoring and analyzing the utilization of existing products, new technologies, general economic conditions and estimates of customer demand to ensure the right equipment is purchased and sold, at the right point in the equipments technology life cycle. The Company believes this enables it to maximize utilization of equipment and the cash flow generated by the rental and sales revenue of each model of equipment. TRS-RenTelco strives to maintain strong relationships with equipment manufacturers, which enables it to leverage those relationships to gain rental opportunities.
Customer ServiceThe Company believes that its focus on providing excellent service to its customers provides a competitive advantage. TRS-RenTelco strives to provide exemplary service to fulfill its commitments to its customers. TRS-RenTelco prides itself in providing solutions to meet customers needs by having equipment available and responding quickly and thoroughly to their requests. TRS-RenTelcos sophisticated in-house laboratory ensures the equipment is fully functional and meets its customers delivery requirements. Service needs of TRS-RenTelcos customers are supported 24 hours a day, 7 days a week by its customer care specialists. TRS-RenTelcos goal is to provide service beyond its customers expectations, which, the Company believes, results in customer loyalty and repeat business.
Market
Electronic test equipment rental is a market which we estimate has equipment on rent worldwide or available for rent with an aggregate original cost in excess of $1 billion. There is a broad customer base for the rental of such instruments, including aerospace, communications, defense, electrical contractor, electronics, industrial, installer contractor, network systems and research companies.
TRS-RenTelco markets its electronic test equipment throughout the United States, Canada, India, and, to a limited extent, other countries. TRS-RenTelco attracts customers through its outside sales force, website at www.TRS-RenTelco.com, telemarketing program, trade show participation, paid Internet search and electronic mail campaigns. A key part of the sales process is TRS-RenTelcos knowledgeable inside sales engineering team that effectively matches test equipment solutions to meet specific customers requirements.
The Company believes that customers rent electronic test equipment for many reasons. Customers frequently need equipment for short-term projects, to evaluate new products, and for backup to avoid costly downtime. Delivery times for the purchase of such equipment can be lengthy; thus, renting allows the customer to obtain the equipment expeditiously. The Company also believes that the relative certainty of rental costs can facilitate cost control and be useful in the bidding of and pass-through of contract costs. Finally, renting rather than purchasing may better satisfy the customers budgetary constraints.
Rentals
TRS-RenTelco rents electronic test equipment typically for rental periods of one to six months, although in some instances, rental terms can be up to a year or longer. Monthly rental rates typically are between 2% and 10% of the current manufacturers list price. TRS-RenTelco depreciates its equipment over 1 to 8 years with no residual value.
At December 31, 2014, TRS-RenTelco had an electronic test equipment rental inventory including accessories with an aggregate cost of $262.0 million. Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. Utilization was 59.8% as of December 31, 2014 and averaged 60.4% during the year.
Sales
Profit from equipment sales is a material component of TRS-RenTelcos overall annual earnings. Gross profit from sales of both used and new equipment over the last five years generally has ranged from approximately 17% to 20% of total annual gross profit for our electronics division. For 2014, gross profit on equipment sales was approximately 20% of total division gross profit. Equipment sales are driven by the turnover of older technology rental equipment, to maintain target utilization at a model number level, and new equipment sales opportunities. In 2014, approximately 19% of the electronic test equipment revenues were derived from sales. The largest electronic test equipment sale during 2014 represented approximately 8% of electronic test equipment sales, 3% of the
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Companys consolidated sales and less than 1% of consolidated revenues. There is intense competition in the sales of electronic test equipment from a world-wide network of test equipment brokers and resellers, legacy rental companies, and equipment manufacturers. We believe the annual world-wide sale of electronic test equipment is in excess of $8.0 billion per year.
Seasonality
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 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 factors may impact the quarterly results of each years first and fourth quarter.
Competition
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. TRS-RenTelco competes with these and other test equipment rental companies on the basis of product availability, price, service and reliability. Although no single competitor holds a dominant market share, we face intense competition from these established entities and new entrants in the market. Some of our competitors may offer similar equipment for lease, rental or sales at lower prices and may offer more extensive servicing, or financing options.
-10-
LIQUID AND SOLID CONTAINMENT TANKS AND BOXES
Description
Adler Tanks rental inventory is comprised of tanks and boxes used for various containment solutions to store hazardous and non-hazardous liquids and solids in applications such as: oil and gas exploration and field services, refinery, chemical and industrial plant maintenance, environmental remediation and field services, infrastructure building construction, marine services, pipeline construction and maintenance, tank terminals services, wastewater treatment, and waste management and landfill services. The tanks and boxes are comprised of the following products:
| fixed axle steel tanks (tanks) for the storage of groundwater, wastewater, volatile organic liquids, sewage, slurry and bio sludge, oil and water mixtures and chemicals, which are available in a variety of sizes including 21,000 gallon, 16,000 gallon and 8,000 gallon sizes; |
| vacuum containers (boxes), which provide secure containment of sludge and solid materials and may be used for additional on-site storage or for transporting materials off-site enabling vacuum trucks to remain in operation; |
| dewatering boxes for the separation of water contained in sludge and slurry; and |
| roll-off and trash boxes for the temporary storage and transport of solid waste. |
Adler Tanks purchases tanks and boxes from various manufacturers located throughout the country.
Competitive Strengths
Market LeadershipThe Company believes that Adler Tanks is one of the largest participants in the liquid and solid containment tanks and boxes rental business in North America. Adler Tanks has national reach from branches serving the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West.
Expertise and Customer ServiceThe Company believes that Adler Tanks has highly experienced operating management and branch employees. Adler Tanks employees are knowledgeable about the operation of its rental equipment and customer applications. Adler Tanks believes that it provides a superior level of customer service due to its strong relationship building skills and the quality of its responsiveness.
Asset ManagementThe Company believes that Adler Tanks markets a high quality, well-constructed and well-maintained rental product. The Company depreciates its tanks and boxes over a 20 year estimated useful life to 0% residual value. We believe that if maintained, older tanks and boxes will continue to produce similar rental rates as newer equipment. The fleets utilization is regionally optimized by understanding key vertical market customer demand, seasonality factors, competitors product availability, expected equipment returns and manufacturers production capacity.
Market
Liquid and solid containment equipment rental is a market in the U.S with a large and diverse number of market segments including oil and gas exploration and field services, refinery, chemical and industrial plant maintenance, environmental remediation and field services, infrastructure building construction, marine services, pipeline construction and maintenance, electrical grid transformer maintenance, tank terminals services, wastewater treatment, and waste management and landfill services.
The tank and box rental products that Adler Tanks builds may be utilized throughout the U.S. and are not subject to any local or regional construction code or approval standards.
Rentals
Adler Tanks rents tanks and boxes typically for rental periods of one to six months, although in some instances, rental terms can be up to a year or longer. Monthly rental rates typically are between 2% and 10% of the equipments original acquisition cost. Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. Utilization was 63.9% at December 31, 2014 and averaged 62.9% during the year.
-11-
Seasonality
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 due to inclement weather in certain regions of the country impacting the industries that we serve.
Competition
The liquid and solid containment rental industry is highly competitive including national, regional and local companies. Some of our national competitors, notably BakerCorp and Rain For Rent, are larger than we are and may have greater financial and other 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 and retain customers and provide their products and services at lower rental rates. Adler Tanks competes with these companies based upon product availability, product quality, price, service and reliability. We may encounter increased competition in the markets that we serve from existing competitors or from new market entrants in the future.
OPERATING SEGMENTS
For segment information regarding the Companys four operating segments: Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex, see Note 10. Segment Reporting to the audited consolidated financial statements of the Company included in Item 8. Financial Statements and Supplementary Data.
-12-
PRODUCT HIGHLIGHTS
The following table shows the revenue components, percentage of rental and total revenues, rental equipment (at cost), rental equipment (net book value), number of relocatable modular units, year-end and average utilization, average rental equipment (at cost), annual yield on average rental equipment (at cost) and gross margin on rental revenues and sales by product line for the past five years.
Product Highlights | ||||||||||||||||||||
(dollar amounts in thousands) | Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Relocatable Modular Buildings (operating under Mobile Modular and Enviroplex) |
| |||||||||||||||||||
Revenues |
||||||||||||||||||||
Rental |
$ | 96,457 | $ | 82,503 | $ | 79,518 | $ | 79,969 | $ | 82,648 | ||||||||||
Rental related services |
35,263 | 28,891 | 25,775 | 24,063 | 22,947 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Modular rental operations |
131,720 | 111,394 | 105,293 | 104,032 | 105,595 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
SalesMobile Modular |
29,394 | 20,831 | 14,026 | 20,152 | 20,685 | |||||||||||||||
SalesEnviroplex |
17,457 | 17,855 | 23,823 | 20,788 | 11,695 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Modular sales |
46,851 | 38,686 | 37,849 | 40,940 | 32,380 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
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Other |
461 | 436 | 448 | 425 | 432 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Modular revenues |
$ | 179,032 | $ | 150,516 | $ | 143,590 | $ | 145,397 | $ | 138,407 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of rental revenues |
35.8 | % | 32.2 | % | 32.0 | % | 34.0 | % | 41.2 | % | ||||||||||
Percentage of total revenues |
43.9 | % | 39.7 | % | 39.4 | % | 42.4 | % | 47.5 | % | ||||||||||
Rental equipment, at cost (year-end) |
$ | 664,340 | $ | 592,391 | $ | 551,101 | $ | 539,147 | $ | 514,548 | ||||||||||
Rental equipment, net book value (year-end) |
$ | 473,960 | $ | 415,366 | $ | 384,813 | $ | 383,621 | $ | 369,195 | ||||||||||
Number of units (year-end) |
43,792 | 39,577 | 36,961 | 35,639 | 32,644 | |||||||||||||||
Utilization (year-end)1 |
75.0 | % | 70.7 | % | 66.7 | % | 67.3 | % | 67.2 | % | ||||||||||
Average utilization1 |
72.3 | % | 68.3 | % | 66.4 | % | 67.1 | % | 67.7 | % | ||||||||||
Average rental equipment, at cost2 |
$ | 597,904 | $ | 546,540 | $ | 524,084 | $ | 504,276 | $ | 491,364 | ||||||||||
Annual yield on average rental equipment, at cost |
16.1 | % | 15.1 | % | 15.2 | % | 15.9 | % | 16.8 | % | ||||||||||
Gross margin on rental revenues |
47.2 | % | 44.7 | % | 52.6 | % | 55.3 | % | 55.4 | % | ||||||||||
Gross margin on sales |
27.1 | % | 23.8 | % | 17.1 | % | 19.9 | % | 18.3 | % | ||||||||||
Electronic Test Equipment (operating under TRS-RenTelco) |
| |||||||||||||||||||
Revenues |
||||||||||||||||||||
Rental |
$ | 99,020 | $ | 102,101 | $ | 101,645 | $ | 95,694 | $ | 82,540 | ||||||||||
Rental related services |
3,331 | 3,095 | 3,673 | 3,133 | 2,240 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Electronics rental operations |
102,351 | 105,196 | 105,318 | 98,827 | 84,780 | |||||||||||||||
Sales |
24,323 | 28,277 | 26,192 | 25,164 | 21,443 | |||||||||||||||
Other |
1,628 | 1,580 | 1,628 | 1,387 | 1,512 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Electronics revenues |
$ | 128,302 | $ | 135,053 | $ | 133,138 | $ | 125,378 | $ | 107,735 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of rental revenues |
36.7 | % | 40.0 | % | 40.9 | % | 40.7 | % | 41.1 | % | ||||||||||
Percentage of total revenues |
31.4 | % | 35.6 | % | 36.6 | % | 36.6 | % | 37.0 | % | ||||||||||
Rental equipment, at cost (year-end) |
$ | 261,995 | $ | 267,772 | $ | 266,934 | $ | 258,586 | $ | 250,125 | ||||||||||
Rental equipment, net book value (year-end) |
$ | 105,729 | $ | 109,988 | $ | 107,999 | $ | 105,565 | $ | 98,444 | ||||||||||
Utilization (year-end)1 |
59.8 | % | 58.2 | % | 64.1 | % | 67.1 | % | 64.3 | % | ||||||||||
Average utilization1 |
60.4 | % | 62.7 | % | 65.8 | % | 66.0 | % | 66.0 | % | ||||||||||
Average rental equipment, at cost3 |
$ | 262,968 | $ | 266,444 | $ | 266,912 | $ | 258,995 | $ | 244,425 | ||||||||||
Annual yield on average rental equipment, at cost |
37.7 | % | 38.3 | % | 38.1 | % | 36.9 | % | 33.8 | % | ||||||||||
Gross margin on rental revenues |
46.4 | % | 48.2 | % | 48.9 | % | 46.4 | % | 39.9 | % | ||||||||||
Gross margin on sales |
49.7 | % | 43.6 | % | 40.3 | % | 44.0 | % | 40.9 | % |
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Product Highlights (Continued) | ||||||||||||||||||||
(dollar amounts in thousands) | Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Liquid and Solid Containment Tanks and Boxes (operating under Adler Tanks) |
| |||||||||||||||||||
Revenues |
||||||||||||||||||||
Rental |
$ | 74,098 | $ | 71,162 | $ | 67,281 | $ | 59,243 | $ | 35,427 | ||||||||||
Rental related services |
25,538 | 21,162 | 17,472 | 12,290 | 9,515 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Tanks and Boxes rental operations |
99,636 | 92,324 | 84,753 | 71,533 | 44,942 | |||||||||||||||
Sales |
1,074 | 1,480 | 2,403 | 278 | 232 | |||||||||||||||
Other |
78 | 136 | 155 | 147 | 57 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Tanks and Boxes revenues |
$ | 100,788 | $ | 93,940 | $ | 87,311 | $ | 71,958 | $ | 45,231 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of rental revenues |
27.5 | % | 27.8 | % | 27.1 | % | 25.2 | % | 17.7 | % | ||||||||||
Percentage of total revenues |
24.7 | % | 24.7 | % | 24.0 | % | 21.0 | % | 15.5 | % | ||||||||||
Rental equipment, at cost (year-end) |
$ | 303,303 | $ | 284,005 | $ | 254,810 | $ | 201,456 | $ | 133,095 | ||||||||||
Rental equipment, net book value (year-end) |
$ | 246,061 | $ | 241,656 | $ | 226,041 | $ | 183,960 | $ | 123,941 | ||||||||||
Utilization (year-end)1 |
63.9 | % | 57.7 | % | 67.5 | % | 79.8 | % | 84.9 | % | ||||||||||
Average utilization1 |
62.9 | % | 64.2 | % | 71.5 | % | 86.2 | % | 76.0 | % | ||||||||||
Average rental equipment, at cost2 |
$ | 289,928 | $ | 264,189 | $ | 223,673 | $ | 157,917 | $ | 101,263 | ||||||||||
Annual yield on average rental equipment, at cost |
25.6 | % | 26.9 | % | 30.1 | % | 37.5 | % | 35.0 | % | ||||||||||
Gross margin on rental revenues |
65.4 | % | 65.3 | % | 70.7 | % | 78.0 | % | 71.8 | % | ||||||||||
Gross margin on sales |
2.0 | % | -11.7 | % | 10.2 | % | -13.4 | % | 22.2 | % | ||||||||||
Total revenues |
$ | 408,122 | $ | 379,509 | $ | 364,039 | $ | 342,733 | $291,373 |
1 | Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment. Average utilization is calculated using the average cost of equipment for the year. |
2 | Average rental equipment, at cost for modulars and tanks and boxes excludes new equipment inventory and accessory equipment. |
3 | Average rental equipment, at cost, for electronics excludes accessory equipment. |
-14-
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.
Instability in the global financial system may also have an impact on our business and our financial condition. In recent years, 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 Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital ResourcesUnsecured 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. |
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
-15-
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.
-16-
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 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 transact business, 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 could disrupt our business, distract managements 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 managements 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; |
-17-
| 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; |
| incurring amortization expenses related to certain intangible assets; and |
| becoming subject to litigation. |
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 December 31, 2014, we had $38.1 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.
Our rental equipment is subject to residual value risk upon disposition, and may not sell at the prices or in the quantities we expect.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
| the market price for new equipment of a like kind; |
| the age of the equipment at the time it is sold, as well as wear and tear on the equipment relative to its age; |
| the supply of used equipment on the market; |
| technological advances relating to the equipment; |
| worldwide and domestic demand for used equipment; and |
| general economic conditions. |
We include in income from operations the difference between the sales price and the depreciated value of an item of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gain or loss realized upon disposal of equipment. Sales of our used rental equipment at prices that fall significantly below our projections or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows.
-18-
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.
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.
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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, 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 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 of 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.
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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 have 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 Series A Senior Notes and Series B Senior Notes (both as defined and more fully described under the heading Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital Resources) 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 operations 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 $2.0 million per year for each 1% increase in the average interest rate we pay, based on the $202.5 million balance of variable rate debt outstanding at December 31, 2014. 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.
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., expansion into the portable storage business and our expansion in 2008 into the liquid and solid containment business. Since the Companys 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 Companys 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.
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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 December 31, 2014 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 Modulars 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 statewide and local 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 Companys 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 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 Companys 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
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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 not 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, labor 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 Companys. 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.
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 Texas, 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 into 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
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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.
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 December 31, 2014, 56% 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
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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 Modulars design specifications. With the exception of Enviroplex, none of the principal suppliers are affiliated with the Company. During 2014, Mobile Modular purchased 35% 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, 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 customers 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-RenTelcos 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 installation and maintenance. Historically, these industries have been cyclical and have experienced periodic downturns, which can have a material adverse impact on the industrys demand for equipment, including our rental electronic test equipment. In addition,
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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 years first and fourth quarter, but we are unable to predict how such factors may impact future periods.
Our rental test equipment may become obsolete or may no longer be supported by a manufacturer, which could result in an impairment charge.
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 becoming 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, Microlease, Continental Resources 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 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 Keysight Technologies (formerly 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.
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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 Companys 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 and Indian Rupees from our business activities in India. 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.
Our rental tanks and boxes are used by our customers to store non-hazardous and certain hazardous liquids and solids on the customers 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 customers 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
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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 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 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 may 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 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 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 competitors 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 and building construction and various industrial services, among others. In 2014, oil and gas exploration and production accounted for approximately 20% of Adler Tanks revenues, and approximately 5% of the total Companys revenues. 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 industrys 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 tanks and boxes business. The recent steep decline in both domestic and international oil prices driven by materially higher supply level and weak demand could have a significant negative impact on the industrys demand for equipment, especially if such market conditions continue for an extended period of time. If the price reduction causes customers to limit or stop exploration, extraction or refinement activities, resulting in lower demand and pricing for renting Adler Tanks products, our financial results could be adversely impacted. 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.
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 demand related to hydraulic fracturing has increased the total rental revenues and market size 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
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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 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 companys 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 years 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 containment tanks and boxes would increase the cost of acquiring new equipment. These price increases could materially and adversely impact our financial condition and results of operations if we are 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. 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 manufacturing 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.
We derive a meaningful 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.
Periodically, a meaningful portion of our revenue in our liquid and solid containment tank and boxes business may be 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 meaningful customer, the failure to collect a material receivable from a meaningful customer, any material reduction in orders by a meaningful customer or the cancellation of a meaningful 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
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funding and project delays. In addition, our equipment is primarily used in the oil and gas, industrial plant services, environmental remediation and infrastructure and building 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 1B. | UNRESOLVED STAFF COMMENTS |
None.
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ITEM 2. | PROPERTIES. |
The Companys four business segments currently conduct operations from the following locations:
Mobile ModularFour inventory centers, at which relocatable modular buildings are displayed, refurbished and stored are located in Livermore, California (San Francisco Bay Area), Mira Loma, California (Los Angeles Area), Pasadena, Texas (Houston Area) and in Auburndale, Florida (Orlando Area). The inventory centers conduct rental and sales operations from modular buildings, serving as working models of the Companys modular product. The Company also has a modular sales office in Charlotte, North Carolina from which the states of North Carolina, Georgia, Virginia and Maryland are served.
TRS-RenTelcoElectronic test equipment rental and sales operations are conducted from a facility in Grapevine, Texas (Dallas Area), a sales office in Dollard-des-Ormeaux, Quebec (Montreal, Canada Area) and a rental and sales office in Bangalore, Karnataka, India.
Adler TanksAdler Tanks is headquartered in South Plainfield, New Jersey and operates from branch offices serving the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. A number of our branch offices are leased and have remaining lease terms of one to three years, or are leased on a month to month basis. We believe satisfactory alternative properties can be found in all of our markets if we do not renew our existing leased properties.
EnviroplexThe Companys wholly owned subsidiary, Enviroplex, manufactures modular buildings used primarily as classrooms in California from its facility in Stockton, California (San Francisco Bay Area).
The following table sets forth the total acres, square footage of office space, square footage of warehouse space and total square footage of our significant properties at December 31, 2014.
Square Footage | ||||||||||||||||
Total Acres | Office | Warehouse | Total | |||||||||||||
Corporate Offices |
||||||||||||||||
Livermore, California1 |
| 26,160 | | 26,160 | ||||||||||||
Mobile Modular |
||||||||||||||||
Livermore, California1, 2, 5 |
137.2 | 7,680 | 53,440 | 61,120 | ||||||||||||
Mira Loma, California5 |
78.5 | 7,920 | 45,440 | 53,360 | ||||||||||||
Pasadena, Texas |
50.0 | 3,868 | 24,000 | 27,868 | ||||||||||||
Auburndale, Florida5 |
122.5 | 8,400 | 95,902 | 104,302 | ||||||||||||
Charlotte, North Carolina6 |
| 2,640 | | 2,640 | ||||||||||||
Lexington, North Carolina7 |
5.0 | | | | ||||||||||||
Perris, California3 |
6.0 | | | | ||||||||||||
San Diego, California4 |
2.5 | | | | ||||||||||||
Grand Prairie, Texas5 |
29.0 | | | | ||||||||||||
San Antonio, Texas5 |
35.0 | | | | ||||||||||||
Round Rock, Texas |
5.0 | 3,600 | | 3,600 | ||||||||||||
TRS-RenTelco |
||||||||||||||||
Grapevine, Texas8 |
| 45,000 | 71,895 | 116,895 | ||||||||||||
Dollard-des-Ormeaux, Quebec7 |
| 12,500 | | 12,500 | ||||||||||||
Bangalore, India9 |
| 3,895 | | 3,895 | ||||||||||||
Adler Tanks |
||||||||||||||||
South Plainfield, New Jersey |
3.5 | 1,685 | 11,832 | 13,517 | ||||||||||||
Deer Park, Texas |
10.2 | 3,448 | 5,353 | 8,801 | ||||||||||||
Beaumont, Texas |
5.4 | 850 | | 850 | ||||||||||||
Mokena, Illinois |
21.3 | 13,800 | | 13,800 | ||||||||||||
Wayland, Michigan |
10.0 | 3,000 | 12,912 | 15,912 | ||||||||||||
Ellsworth, Wisconsin |
11.3 | | 11,230 | 11,230 | ||||||||||||
Enviroplex |
||||||||||||||||
Stockton, California |
8.9 | 2,091 | 105,985 | 108,076 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
541.3 | 146,537 | 437,989 | 584,526 |
-31-
1 | The modular building complex in Livermore, California is 33,840 square feet and includes the corporate offices, modulars and Adler Tanks branch operations. |
2 | Of the 137.2 acres, 2.2 acres with an 8,000 square foot warehouse facility is leased to a third party through June 2016. |
3 | This facility is leased on a month to month basis. |
4 | This facility is leased through August 2015. |
5 | Adler Tanks also operates out of this facility. |
6 | This facility is leased through November 2015. |
7 | This facility is leased through December 2015. |
8 | This facility is leased through November 2018. |
9 | This facility is leased through May 15, 2018, with lock-in period expiring on May 15, 2016. |
ITEM 3. | LEGAL PROCEEDINGS. |
The Company is involved in various lawsuits and routine claims arising out of the normal course of its business. The Company maintains insurance coverage for its operations and employees with appropriate aggregate, per occurrence and deductible limits as the Company reasonably determines necessary or prudent with current operations and historical experience. The major policies include coverage for property, general liability, auto, directors and officers, health, and workers compensation insurances. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under any pending litigation and claims, individually or in the aggregate, will not have a material adverse effect on the financial position or operating results of the Company.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not Applicable
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
The Companys common stock is traded in the NASDAQ Global Select Market under the symbol MGRC.
The market prices (as quoted by NASDAQ) and cash dividends declared, per share of the Companys common stock, by calendar quarter for the past two years were as follows:
Stock Activity |
||||||||||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||||||||||
4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | |||||||||||||||||||||||||
High |
$ | 38.79 | $ | 38.40 | $ | 37.32 | $ | 39.96 | $ | 40.10 | $ | 37.79 | $ | 34.67 | $ | 31.98 | ||||||||||||||||
Low |
$ | 33.33 | $ | 33.72 | $ | 29.02 | $ | 30.63 | $ | 33.30 | $ | 32.31 | $ | 28.18 | $ | 28.58 | ||||||||||||||||
Close |
$ | 35.86 | $ | 34.20 | $ | 36.75 | $ | 34.96 | $ | 39.80 | $ | 35.70 | $ | 34.16 | $ | 31.10 | ||||||||||||||||
Dividends Declared |
$0.245 | $0.245 | $0.245 | $0.245 | $0.240 | $0.240 | $0.240 | $0.240 |
As of February 26, 2015, the Companys common stock was held by approximately 50 shareholders of record, which does not include shareholders whose shares are held in street or nominee name. The Company believes that when holders in street or nominee name are added, the number of holders of the Companys common stock exceeds 500.
The Company has declared a quarterly dividend on its common stock every quarter since 1990. The total amount of cash dividends paid by the Company in 2014 and 2013 is discussed under Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends.
The Company has in the past made purchases of shares of its common stock from time to time in the over-the-counter market (NASDAQ) and/or through privately negotiated, block transactions as authorized by the Companys 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 Companys Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the Companys outstanding common stock. There were no repurchases of common stock in 2014 or 2013. As of February 26, 2015, 2,000,000 shares remain authorized for repurchase under this authorization.
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ITEM 6. | SELECTED FINANCIAL DATA. |
The following table summarizes the Companys selected financial data for the five years ended December 31, 2014 and should be read in conjunction with the detailed audited consolidated financial statements and related notes included in Item 8. Financial Statements and Supplementary Data and Item 7. Managements Discussion and Analysis of Financial Condition and Result of Operation.
Selected Consolidated Financial Data |
||||||||||||||||||||
(in thousands, except per share data) | Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Operations Data |
||||||||||||||||||||
Revenues |
||||||||||||||||||||
Rental |
$ | 269,575 | $ | 255,766 | $ | 248,444 | $ | 234,906 | $ | 200,615 | ||||||||||
Rental related services |
64,132 | 53,148 | 46,920 | 39,486 | 34,702 | |||||||||||||||
|
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|
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|
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Rental operations |
333,707 | 308,914 | 295,364 | 274,392 | 235,317 | |||||||||||||||
Sales |
72,248 | 68,443 | 66,444 | 66,382 | 54,055 | |||||||||||||||
Other |
2,167 | 2,152 | 2,231 | 1,959 | 2,002 | |||||||||||||||
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|
|
|
|||||||||||
Total revenues |
408,122 | 379,509 | 364,039 | 342,733 | 291,374 | |||||||||||||||
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|
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|
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Costs and expenses |
||||||||||||||||||||
Direct costs of rental operations |
||||||||||||||||||||
Depreciation of rental equipment |
72,678 | 68,208 | 63,819 | 60,187 | 56,399 | |||||||||||||||
Rental related services |
48,849 | 40,189 | 37,207 | 30,692 | 26,542 | |||||||||||||||
Other |
56,946 | 55,017 | 45,581 | 39,859 | 40,007 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Total direct costs of rental operations |
178,473 | 163,414 | 146,607 | 130,738 | 122,948 | |||||||||||||||
Costs of sales |
47,430 | 47,080 | 49,173 | 45,141 | 37,637 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Total costs of revenues |
225,903 | 210,494 | 195,780 | 175,879 | 160,585 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
182,219 | 169,015 | 168,259 | 166,854 | 130,789 | |||||||||||||||
Selling and administrative expenses |
96,859 | 88,765 | 86,278 | 78,127 | 65,579 | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Income from operations |
85,360 | 80,250 | 81,981 | 88,727 | 65,210 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest expense |
(9,280 | ) | (8,687 | ) | (9,149 | ) | (7,606 | ) | (6,186 | ) | ||||||||||
Gain on sale of property, plant and equipment |
812 | | | | | |||||||||||||||
Foreign currency exchange gain (loss) |
(331 | ) | (189 | ) | 35 | (63 | ) | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before provision for income taxes |
76,561 | 71,374 | 72,867 | 81,058 | 59,050 | |||||||||||||||
Provision for income taxes |
30,852 | 27,977 | 28,090 | 31,456 | 22,571 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 45,709 | $ | 43,397 | $ | 44,777 | $ | 49,602 | $ | 36,479 | ||||||||||
|
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|
|
|
|
|
|
|
|
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Earnings per share: |
||||||||||||||||||||
Basic |
$ | 1.77 | $ | 1.71 | $ | 1.80 | $ | 2.04 | $ | 1.52 | ||||||||||
Diluted |
$ | 1.75 | $ | 1.67 | $ | 1.78 | $ | 2.00 | $ | 1.50 | ||||||||||
Shares used in per share calculations: |
||||||||||||||||||||
Basic |
25,914 | 25,433 | 24,759 | 24,349 | 23,944 | |||||||||||||||
Diluted |
26,175 | 25,926 | 25,156 | 24,760 | 24,289 | |||||||||||||||
Balance Sheet Data (at period end) |
||||||||||||||||||||
Rental equipment, at cost |
$ | 1,229,638 | $ | 1,144,168 | $ | 1,072,845 | $ | 999,189 | $ | 897,768 | ||||||||||
Rental equipment, net |
$ | 825,750 | $ | 767,010 | $ | 718,853 | $ | 673,146 | $ | 591,580 | ||||||||||
Total assets |
$ | 1,116,407 | $ | 1,027,611 | $ | 972,446 | $ | 918,929 | $ | 813,562 | ||||||||||
Notes payable |
$ | 322,478 | $ | 290,003 | $ | 302,000 | $ | 296,500 | $ | 265,640 | ||||||||||
Shareholders equity |
$ | 424,531 | $ | 401,030 | $ | 364,738 | $ | 333,142 | $ | 294,977 | ||||||||||
Shares issued and outstanding |
26,051 | 25,757 | 24,931 | 24,576 | 24,235 | |||||||||||||||
Book value per share |
$ | 16.30 | $ | 15.57 | $ | 14.63 | $ | 13.56 | $ | 12.17 | ||||||||||
Total liabilities to equity |
1.63 | 1.56 | 1.67 | 1.76 | 1.76 | |||||||||||||||
Debt (notes payable) to equity |
0.76 | 0.72 | 0.83 | 0.89 | 0.90 | |||||||||||||||
Return on average equity |
11.1 | % | 11.3 | % | 12.7 | % | 16.0 | % | 13.0 | % | ||||||||||
Cash dividends declared per common share |
$ | 0.98 | $ | 0.96 | $ | 0.94 | $ | 0.92 | $ | 0.90 |
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Adjusted EBITDA
To supplement the Companys 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 share-based compensation. The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Companys liquidity and financial condition and because management, as well as the Companys 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 Companys revolving lines of credit and Series A and Series B Senior Notes and the Companys ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including share-based compensation, is useful in measuring the Companys 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 Companys 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 Companys 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 share-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 Companys 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 Companys 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 Companys 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 Companys 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) | Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Net income |
$ | 45,709 | $ | 43,397 | $ | 44,777 | $ | 49,602 | $ | 36,479 | ||||||||||
Provision for income taxes |
30,852 | 27,977 | 28,090 | 31,456 | 22,571 | |||||||||||||||
Interest expense |
9,280 | 8,687 | 9,149 | 7,606 | 6,186 | |||||||||||||||
Depreciation and amortization |
81,125 | 76,849 | 72,476 | 67,395 | 62,577 | |||||||||||||||
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EBITDA |
166,966 | 156,910 | 154,492 | 156,059 | 127,813 | |||||||||||||||
Share-based compensation |
3,854 | 3,680 | 3,840 | 5,221 | 4,227 | |||||||||||||||
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Adjusted EBITDA1 |
$ | 170,820 | $ | 160,590 | $ | 158,332 | $ | 161,280 | $ | 132,040 | ||||||||||
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|
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Adjusted EBITDA margin2 |
42 | % | 42 | % | 43 | % | 47 | % | 45 | % |
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Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities |
| |||||||||||||||||||
(dollar amounts in thousands) | Year Ended December 31, | |||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Adjusted EBITDA1 |
$ | 170,820 | $ | 160,590 | $ | 158,332 | $ | 161,280 | $ | 132,040 | ||||||||||
Interest paid |
(9,074 | ) | (8,813 | ) | (9,107 | ) | (6,877 | ) | (6,306 | ) | ||||||||||
Net income taxes (paid) refunds received |
(22,275 | ) | (11,074 | ) | (5,842 | ) | 1,480 | (9,342 | ) | |||||||||||
Gain on sale of used rental equipment |
(15,368 | ) | (13,091 | ) | (12,389 | ) | (12,444 | ) | (11,728 | ) | ||||||||||
Gain on sale of property, plant and equipment |
(812 | ) | | | | | ||||||||||||||
Foreign currency exchange (gain) loss |
331 | 189 | (35 | ) | 63 | (26 | ) | |||||||||||||
Change in certain assets and liabilities: |
||||||||||||||||||||
Accounts receivable, net |
(13,644 | ) | 4,606 | (415 | ) | (16,183 | ) | (5,891 | ) | |||||||||||
Prepaid expenses and other assets |
(13,652 | ) | (8,265 | ) | (2,337 | ) | (3,226 | ) | 296 | |||||||||||
Accounts payable and other liabilities |
21,524 | 12,422 | (3,683 | ) | 3,941 | 2,509 | ||||||||||||||
Deferred income |
5,136 | (2,921 | ) | 1,857 | 1,277 | (954 | ) | |||||||||||||
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|
|||||||||||
Net cash provided by operating activities |
$ | 122,986 | $ | 133,643 | $ | 126,381 | $ | 129,311 | $ | 100,598 | ||||||||||
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|
|
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|
|||||||||||
1 | Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation, amortization, and share-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 Companys unsecured Amended Credit Facility, and Series A Senior Notes and Series B Senior Notes (both as defined and more fully described under the heading Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital Resources). 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 Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationLiquidity and Capital Resources)) 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 December 31, 2014, the actual ratio was 4.02 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 December 31, 2014, the actual ratio was 1.89 to 1. |
At December 31, 2014, the Company was in compliance with each of these 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 Companys ability to comply with these covenants.
-36-
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section as well as those discussed under Part I, Item 1A. Risk Factors and elsewhere in this document. This discussion should be read together with the financial statements and the related notes thereto set forth in Item 8. Financial Statements and Supplementary Data.
Results of Operations
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 Companys 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 business selling modular buildings used primarily as classrooms in California (Enviroplex). In 2014, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 22%, 45%, 31% and 2%, respectively, of the Companys income before provision for taxes (the equivalent of pretax income), compared to 13%, 51%, 34% and 2%, respectively, for 2013. Although managed as a separate business unit, Enviroplexs revenues, pretax income contribution and total assets are not significant relative to the Companys consolidated financial position.
The Company generates its revenues primarily from the rental of its equipment on operating leases with 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 revenue and certain other service revenues negotiated as part of the lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the lease. Sales revenue and related costs are recognized upon delivery and installation of the equipment to the customers. Sales revenues are less predictable and can fluctuate from period to period depending on customer demands and requirements. Generally, rental revenues less cash operating costs recover the equipments capitalized cost in a short period of time relative to the equipments potential rental life and when sold, sale proceeds are usually above its net book value.
The Companys rental operations include rental and rental related services revenues which comprised approximately 82% of the Companys total revenues in 2014 and 81% for the three years ended December 31, 2014. Over the past three years, modulars, electronic test equipment and tanks and boxes comprised approximately 37%, 33% and 30%, respectively, of the cumulative rental operations revenues. The Companys direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment, and other direct costs of rental operations (which include direct labor, supplies, repairs, insurance, property taxes, license fees and amortization of certain lease costs).
The Company sells modular, electronic test equipment and liquid and solid containment tanks and boxes that are new, or previously rented. The Companys Enviroplex subsidiary manufactures and sells modular classrooms. The renting and selling of some modular equipment requires a dealers license, which the Company has obtained from the appropriate governmental agencies. Sales and other revenues of modulars, electronic test equipment and tanks and boxes have comprised approximately 18% of the Companys consolidated revenues in 2014 and 19% for the three years ended December 31, 2014. Over the past three years, modulars, electronic test equipment and tanks and boxes comprised approximately 58%, 39% and 3% of sales and other revenues, respectively. The Companys 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.
The rental and sale of modulars to public school districts comprised 16%, 14% and 16% of the Companys consolidated rental and sales revenues for 2014, 2013 and 2012, respectively. (For more information, see Item 1. BusinessRelocatable Modular BuildingsClassroom Rentals and Sales to Public Schools (K-12) above.)
-37-
Selling and administrative expenses primarily include personnel and benefit costs, which includes share-based compensation, depreciation and amortization of property, plant and equipment and intangible assets, 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 Companys operations, results in an efficient use of overhead. Historically, the Companys 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 Companys ability to maintain a large installed customer base or ability to sustain its historical operating margins.
Related Party Transactions
The Company acquired liquid and solid containment tanks totaling $13.6 million and $38.3 million, during the years ended December 31, 2013 and 2012, respectively, from Sabre Manufacturing, LLC (Sabre), which was controlled by the President of Adler Tanks until August 16, 2013 when Sabre was sold to an unrelated party. Amounts due to Sabre at December 31, 2013 were zero.
Recent Developments
In February 2015, the Company announced that its board of directors declared a cash dividend of $0.250 per common share for the quarter ending March 31, 2015, an increase of 2% over the prior years comparable quarter.
Percentage of Revenue Table
The following table sets forth for the periods indicated the results of operations as a percentage of the Companys total revenues and the percentage of changes in the amount of such of items as compared to the amount in the indicated prior period:
Percent of Total Revenues | Percent Change | |||||||||||||||||||||||
Three Years 20142012 |
Year Ended December 31, | 2014 over 2013 |
2013 over 2012 |
|||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Rental |
67 | % | 66 | % | 67 | % | 68 | % | 5 | % | 3 | % | ||||||||||||
Rental related services |
14 | 16 | 14 | 13 | 21 | 13 | ||||||||||||||||||
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|
|||||||||||||||||
Rental operations |
81 | 82 | 81 | 81 | 8 | 5 | ||||||||||||||||||
Sales |
18 | 18 | 18 | 18 | 6 | 3 | ||||||||||||||||||
Other |
1 | | 1 | 1 | 1 | -5 | ||||||||||||||||||
|
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|
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|
|||||||||||||||||
Total revenues |
100 | 100 | 100 | 100 | 8 | 4 | ||||||||||||||||||
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|
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Costs and expenses |
||||||||||||||||||||||||
Direct costs of rental operations |
||||||||||||||||||||||||
Depreciation of rental equipment |
18 | 18 | 18 | 18 | 7 | 7 | ||||||||||||||||||
Rental related services |
11 | 12 | 11 | 10 | 22 | 8 | ||||||||||||||||||
Other |
13 | 14 | 14 | 12 | 4 | 21 | ||||||||||||||||||
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|
|||||||||||||||||
Total direct costs of rental operations |
42 | 44 | 43 | 40 | 9 | 11 | ||||||||||||||||||
Cost of sales |
13 | 11 | 12 | 14 | 1 | -4 | ||||||||||||||||||
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|||||||||||||||||
Total costs |
55 | 55 | 55 | 54 | 7 | 8 | ||||||||||||||||||
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|
|||||||||||||||||
Gross profit |
45 | 45 | 45 | 46 | 8 | | ||||||||||||||||||
Selling and administrative expenses |
23 | 24 | 24 | 23 | 9 | 3 | ||||||||||||||||||
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Income from operations |
22 | 21 | 21 | 23 | 6 | -2 | ||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(3 | ) | (2 | ) | (2 | ) | (3 | ) | 7 | -5 | ||||||||||||||
Gain on sale of property, plant and Equipment |
| | | | nm | nm | ||||||||||||||||||
Foreign currency exchange gain (loss) |
| | | | nm | nm | ||||||||||||||||||
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Income before provision for income taxes |
19 | 19 | 19 | 20 | 7 | -2 | ||||||||||||||||||
Provision for income taxes |
7 | 8 | 8 | 8 | | | ||||||||||||||||||
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Net income |
12 | % | 11 | % | 11 | % | 12 | % | 7 | % | -3 | % | ||||||||||||
nm = not meaningful
-38-
Twelve Months Ended December 31, 2014 Compared to
Twelve Months Ended December 31, 2013
Overview
Consolidated revenues in 2014 increased 8%, to $408.1 million from $379.5 million in 2013. Consolidated net income in 2014 increased 7%, to $46.5 million, or $1.75 per diluted share, from $43.4 million, or $1.67 per diluted share, in 2013. The Companys year over year total revenue increase was primarily due to higher rental, rental related services and sales revenues as more fully described below.
For 2014 compared to 2013, on a consolidated basis,
| Gross profit increased $13.2 million, or 8%, to $182.2 million. Mobile Modulars gross profit increased $13.0 million, or 26%, due to higher gross profit on rental revenues, sales and rental related services revenues. Adler Tanks gross profit increased $2.4 million, or 5%, due to higher gross profit on rental, rental related services and sales revenues. Enviroplexs gross profit increased $1.1 million primarily due to higher sales revenues. TRS-RenTelcos gross profit decreased $3.3 million, or 5%, due to lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental related services revenues. |
| Selling and administrative expenses increased $8.1 million, or 9%, to $96.9 million, primarily due to increased employee headcount, salaries and employee benefit costs. |
| Interest expense increased $0.6 million, or 7%, to $9.3 million, primarily due to 7% higher average debt levels of the Company. |
| In 2014, other non-operating income included the Companys sale of an excess property in June 2014 for net proceeds of $2.5 million resulting in a gain on sale of $0.8 million, which was allocated to Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of direct revenues. This property was previously used as one of the Companys branch sales and inventory centers prior to the TRS acquisition in 2004. Since 2004, the property has not been used in support of rental operations. |
| Pretax income contribution was 45%, 31% and 22% by TRS-RenTelco, Adler Tanks and Mobile Modular, respectively, in 2014, compared to 51%, 34% and 13%, respectively, in 2013. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex was 2% in 2014 and 2013. |
| Provision for income taxes resulted in an effective tax rate of 40.3% in 2014, compared with 39.2% in 2013. The increased effective tax rate in 2014 was primarily as a result of higher business levels in states with higher tax rates, and the resulting re-pricing of deferred tax liabilities. |
| Adjusted EBITDA increased $10.2 million, or 6%, to $170.8 million compared to $160.6 million in 2013. Adjusted EBITDA is a non-GAAP financial measure and is defined as net income before interest expense, provision for income taxes, depreciation, amortization and share-based compensation. A reconciliation of Adjusted EBITDA to net cash provided by operating activities and net income to Adjusted EBITDA can be found in Item 6. Selected Financial Data. on page 35. |
-39-
Mobile Modular
For 2014, Mobile Modulars total revenues increased $28.9 million, or 22%, to $161.6 million compared to 2013, primarily due to higher rental, sales and rental related services revenues. The revenue increase together with higher gross margin on rental revenues, partly offset by higher selling and administrative expenses and higher interest expense, resulted in an increase in pre-tax income of $7.4 million, or 76%, to $17.0 million in 2014.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax income, and other selected data.
Mobile Modular2014 compared to 2013 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Rental |
$ | 96,457 | $ | 82,503 | $ | 13,954 | 17 | % | ||||||||
Rental related services |
35,263 | 28,891 | 6,372 | 22 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
131,720 | 111,394 | 20,326 | 18 | % | |||||||||||
Sales |
29,394 | 20,831 | 8,563 | 41 | % | |||||||||||
Other |
461 | 436 | 25 | 6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
161,575 | 132,661 | 28,914 | 22 | % | |||||||||||
|
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|
|
|
|
|||||||||||
Costs and Expenses |
||||||||||||||||
Direct costs of rental operations: |
||||||||||||||||
Depreciation of rental equipment |
16,536 | 14,459 | 2,077 | 14 | % | |||||||||||
Rental related services |
25,486 | 20,980 | 4,506 | 21 | % | |||||||||||
Other |
34,352 | 31,167 | 3,185 | 10 | % | |||||||||||
|
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|
|
|
|
|||||||||||
Total direct costs of rental operations |
76,374 | 66,606 | 9,768 | 15 | % | |||||||||||
Costs of sales |
21,746 | 15,632 | 6,114 | 39 | % | |||||||||||
|
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|
|
|
|||||||||||
Total costs of revenues |
98,120 | 82,238 | 15,882 | 19 | % | |||||||||||
|
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|
|
|||||||||||
Gross Profit |
||||||||||||||||
Rental |
45,569 | 36,877 | 8,692 | 24 | % | |||||||||||
Rental related services |
9,777 | 7,911 | 1,866 | 24 | % | |||||||||||
|
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|
|
|
|
|||||||||||
Rental operations |
55,346 | 44,788 | 10,558 | 24 | % | |||||||||||
Sales |
7,648 | 5,199 | 2,449 | 47 | % | |||||||||||
Other |
461 | 436 | 25 | 6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
63,455 | 50,423 | 13,032 | 26 | % | |||||||||||
Selling and administrative expenses |
42,069 | 36,488 | 5,581 | 15 | % | |||||||||||
|
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|
|
|
|
|||||||||||
Income from operations |
21,386 | 13,935 | 7,451 | 53 | % | |||||||||||
Interest expense allocation |
(4,768 | ) | (4,318 | ) | 450 | 10 | % | |||||||||
Gain on sale of property, plant and equipment |
341 | | 341 | nm | ||||||||||||
|
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|
|||||||||||
Pre-tax income |
$ | 16,959 | $ | 9,617 | $ | 7,342 | 76 | % | ||||||||
|
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|
|||||||||||
Other Information |
||||||||||||||||
Average rental equipment1 |
$ | 597,904 | $ | 546,540 | $ | 51,364 | 9 | % | ||||||||
Average rental equipment on rent1 |
$ | 432,021 | $ | 373,116 | $ | 58,905 | 16 | % | ||||||||
Average monthly total yield2 |
1.34 | % | 1.26 | % | 6 | % | ||||||||||
Average utilization3 |
72.3 | % | 68.3 | % | 6 | % | ||||||||||
Average monthly rental rate4 |
1.86 | % | 1.84 | % | 1 | % | ||||||||||
Period end rental equipment1 |
$ | 635,420 | $ | 564,909 | $ | 70,511 | 12 | % | ||||||||
Period end utilization3 |
75.0 | % | 70.7 | % | 6 | % |
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. |
nm = not meaningful
-40-
Mobile Modulars gross profit for 2014 increased 26% to $63.5 million from $50.4 million in 2013. For the year ended December 31, 2014 compared to the year ended December 31, 2013:
| Gross Profit on Rental RevenuesRental revenues increased $14.0 million, or 17%, compared to 2013, due to 16% higher average rental equipment on rent and 1% higher average monthly rental rates. As a percentage of rental revenues, depreciation was 17% in 2014 and 2013 and other direct costs were 36% in 2014 and 38% in 2013, which resulted in gross margin percentage of 47% in 2014 compared to 45% in 2013. The higher rental revenues, together with higher rental margins, resulted in gross profit on rental revenues increasing 24%, to $45.6 million from $36.9 million in 2013. |
| Gross Profit on Rental Related ServicesRental related services revenues increased $6.4 million, or 22%, compared to 2013. 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 amortization of delivery and return delivery and dismantle revenues, and higher delivery and return delivery at Mobile Modular Portable Storage. The higher revenues and higher gross margin percentage of 28% in 2014 compared to 27% in 2013 resulted in rental related services gross profit increasing 24%, to $9.8 million from $7.9 million in 2013. |
| Gross Profit on SalesSales revenues increased $8.6 million, or 41%, compared to 2013. Gross profit on sales increased $2.5 million, or 47%, primarily due to higher new and used equipment sales revenues and higher gross margins on sales of used equipment in 2014. Sales occur routinely as a normal part of Mobile Modulars rental business; however, these sales can fluctuate from period to period depending on customer requirements, equipment availability and funding. |
For 2014, Mobile Modulars selling and administrative expenses increased $5.6 million, or 15%, to $42.1 million from $36.5 million in 2013, primarily due increased employee headcount, salaries and benefit costs.
-41-
TRS-RenTelco
For 2014, TRS-RenTelcos total revenues decreased $6.8 million, or 5%, to $128.3 million compared to 2013, primarily due to lower sales and rental revenues. Pre-tax income decreased $2.3 million, or 6%, to $34.4 million for 2014, primarily due to lower gross profit on rental and sales revenues, partly offset by lower selling and administrative expenses.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax income, and other selected data.
TRS-RenTelco2014 compared to 2013 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Rental |
$ | 99,020 | $ | 102,101 | $ | (3,081 | ) | -3 | % | |||||||
Rental related services |
3,331 | 3,095 | 236 | 8 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
102,351 | 105,196 | (2,845 | ) | -3 | % | ||||||||||
Sales |
24,323 | 28,277 | (3,954 | ) | -14 | % | ||||||||||
Other |
1,628 | 1,580 | 48 | 3 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
128,302 | 135,053 | (6,751 | ) | -5 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Costs and Expenses |
||||||||||||||||
Direct costs of rental operations: |
||||||||||||||||
Depreciation of rental equipment |
40,935 | 39,953 | 982 | 2 | % | |||||||||||
Rental related services |
2,742 | 2,681 | 61 | 2 | % | |||||||||||
Other |
12,139 | 12,963 | (824 | ) | -6 | % | ||||||||||
|
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|
|
|
|
|||||||||||
Total direct costs of rental operations |
55,816 | 55,597 | 219 | 0 | % | |||||||||||
Costs of sales |
12,237 | 15,936 | (3,699 | ) | -23 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total costs of revenues |
68,053 | 71,533 | (3,480 | ) | -5 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Gross Profit |
||||||||||||||||
Rental |
45,946 | 49,185 | (3,239 | ) | -7 | % | ||||||||||
Rental related services |
589 | 414 | 175 | 42 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
46,535 | 49,599 | (3,064 | ) | -6 | % | ||||||||||
Sales |
12,086 | 12,341 | (255 | ) | -2 | % | ||||||||||
Other |
1,628 | 1,580 | 48 | 3 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
60,249 | 63,520 | (3,271 | ) | -5 | % | ||||||||||
Selling and administrative expenses |
23,736 | 24,542 | (806 | ) | -3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Income from operations |
36,513 | 38,978 | (2,465 | ) | -6 | % | ||||||||||
Interest expense allocation |
(2,075 | ) | (2,156 | ) | (81 | ) | -4 | % | ||||||||
Gain on sales of property, plant and equipment |
276 | | 276 | nm | ||||||||||||
Foreign currency exchange loss |
(331 | ) | (189 | ) | 142 | 75 | % | |||||||||
|
|
|
|
|
|
|||||||||||
Pre-tax income |
$ | 34,383 | $ | 36,633 | $ | (2,250 | ) | -6 | % | |||||||
|
|
|
|
|
|
|||||||||||
Other Information |
||||||||||||||||
Average rental equipment1 |
$ | 262,968 | $ | 266,444 | $ | (3,476 | ) | -1 | % | |||||||
Average rental equipment on rent1 |
$ | 158,800 | $ | 167,035 | $ | (8,235 | ) | -5 | % | |||||||
Average monthly total yield2 |
3.14 | % | 3.19 | % | -2 | % | ||||||||||
Average utilization3 |
60.4 | % | 62.7 | % | -4 | % | ||||||||||
Average monthly rental rate4 |
5.20 | % | 5.09 | % | 2 | % | ||||||||||
Period end rental equipment1 |
$ | 260,715 | $ | 267,206 | $ | (6,491 | ) | -2 | % | |||||||
Period end utilization3 |
59.8 | % | 58.2 | % | 3 | % |
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. |
nm | = not meaningful |
-42-
TRS-RenTelcos gross profit for 2014 decreased 5% to $60.2 million from $63.5 million in 2013. For the year ended December 31, 2014 compared to the year ended December 31, 2013:
| Gross Profit on Rental RevenuesRental revenues decreased $3.1 million, or 3%, to $99.0 million with depreciation expense increasing $1.0 million, or 2%, and other direct costs decreasing $0.8 million, or 6%, resulting in a decrease in gross profit on rental revenues of $3.2 million, or 7%, to $45.9 million in 2014. As a percentage of rental revenues, depreciation was 41% in 2014 compared to 39% in 2013 and other direct costs was 12% in 2014 compared to 13% in 2013, which resulted in gross margin percentage of 46% in 2014 compared to 48% in 2013. The rental revenues decrease was due to 5% lower average rental equipment on rent, partly offset by 2% higher average monthly rental rates. |
| Gross Profit on SalesSales revenues decreased $4.0 million, or 14%, compared to 2013. The sales revenue decrease was partly offset by higher gross margins percentage of 50% in 2014, compared to 44% in 2013, primarily due to higher gross margin on used equipment sales, which resulted in gross profit on sales decreasing 2%, to $12.1 million from $12.3 million in 2013. Sales occur routinely as a normal part of TRS-RenTelcos rental business; however, these sales and related gross margins can fluctuate from period to period depending on customer requirements, equipment availability and funding. |
For 2014, TRS-RenTelcos selling and administrative expenses decreased $0.8 million, or 3%, to $23.7 million from $24.5 million in 2013, primarily due to decreased marketing and administrative costs.
-43-
Adler Tanks
For 2014, Adler Tanks total revenues increased $6.8 million, or 7%, to $100.8 million compared to 2013, primarily due to higher rental and rental related services revenues during 2014. The revenue increase and higher gross margin on sales revenues, offset by higher selling and administrative expenses, higher interest expense and lower gross margin on rental related services revenues resulted in a pre-tax income decrease of $0.4 million, or 2%, to $23.6 million for the year ended December 31, 2014.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.
Adler Tanks2014 compared to 2013 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2014 | 2013 | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Rental |
$ | 74,098 | $ | 71,162 | $ | 2,936 | 4 | % | ||||||||
Rental related services |
25,538 | 21,162 | 4,376 | 21 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
99,636 | 92,324 | 7,312 | 8 | % | |||||||||||
Sales |
1,074 | 1,480 | (406 | ) | -27 | % | ||||||||||
Other |
78 | 136 | (58 | ) | -43 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
100,788 | 93,940 | 6,848 | 7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Costs and Expenses |
||||||||||||||||
Direct costs of rental operations: |
||||||||||||||||
Depreciation of rental equipment |
15,207 | 13,796 | 1,411 | 10 | % | |||||||||||
Rental related services |
20,621 | 16,528 | 4,093 | 25 | % | |||||||||||
Other |
10,455 | 10,887 | (432 | ) | -4 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total direct costs of rental operations |
46,283 | 41,211 | 5,072 | 12 | % | |||||||||||
Costs of sales |
1,053 | 1,653 | (600 | ) | -36 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total costs of revenues |
47,336 | 42,864 | 4,472 | 10 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Gross Profit (Loss) |
||||||||||||||||
Rental |
48,436 | 46,479 | 1,957 | 4 | % | |||||||||||
Rental related services |
4,917 | 4,634 | 283 | 6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
53,353 | 51,113 | 2,240 | 4 | % | |||||||||||
Sales |
21 | (173 | ) | 194 | 112 | % | ||||||||||
Other |
78 | 136 | (58 | ) | -43 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
53,452 | 51,076 | 2,376 | 5 | % | |||||||||||
Selling and administrative expenses |
27,424 | 24,644 | 2,780 | 11 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Income from operations |
26,028 | 26,432 | (404 | ) | -2 | % | ||||||||||
Interest expense allocation |
(2,618 | ) | (2,419 | ) | 199 | 8 | % | |||||||||
Gain on sale of property, plant and equipment |
195 | | 195 | nm | ||||||||||||
|
|
|
|
|
|
|||||||||||
Pre-tax income |
$ | 23,605 | $ | 24,013 | $ | (408 | ) | -2 | % | |||||||
|
|
|
|
|
|
|||||||||||
Other Information |
||||||||||||||||
Average rental equipment1 |
$ | 289,928 | $ | 264,189 | $ | 25,739 | 10 | % | ||||||||
Average rental equipment on rent1 |
$ | 182,242 | $ | 169,661 | $ | 12,581 | 7 | % | ||||||||
Average monthly total yield2 |
2.13 | % | 2.24 | % | -5 | % | ||||||||||
Average utilization3 |
62.9 | % | 64.2 | % | -2 | % | ||||||||||
Average monthly rental rate4 |
3.39 | % | 3.50 | % | -3 | % | ||||||||||
Period end rental equipment1 |
$ | 299,485 | $ | 278,618 | $ | 20,867 | 7 | % | ||||||||
Period end utilization3 |
63.9 | % | 57.7 | % | 11 | % |
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. |
nm | = not meaningful |
-44-
Adler Tanks gross profit for 2014 increased $2.4 million to $53.5 million from $51.1 million for the same period in 2013. For the year ended December 31, 2014 compared to year ended December 31, 2013:
| Gross Profit on Rental RevenuesRental revenues increased $2.9 million, or 4%, due to 7% higher average rental equipment on rent, partly offset by 3% lower average rental rates in 2014 as compared to 2013. As a percentage of rental revenues, depreciation was 21% and 20% in 2014 and 2013, respectively, and other direct costs were 14% in 2014 and 15% in 2013, which resulted in gross margin percentages of 65% in 2014 and 2013. The higher rental revenues, together with flat rental margins resulted in gross profit on rental revenues increasing $2.0 million, or 4%, to $48.4 million in 2014. |
| Gross Profit on Rental Related ServicesRental related services revenues increased $4.4 million, or 21%, compared to 2013. The higher revenues, partly offset by lower gross margin percentage of 19% in 2014 compared to 22% in 2013 resulted in rental related services gross profit increasing $0.3 million, or 6%, to $4.9 million from $4.6 million in 2013. |
For 2014, Adler Tanks selling and administrative expenses increased $2.8 million, or 11%, to $27.4 million from $24.6 million in the same period in 2013, primarily due to increased employee headcount, salaries and benefit costs.
-45-
Twelve Months Ended December 31, 2013 Compared to
Twelve Months Ended December 31, 2012
Overview
Consolidated revenues in 2013 increased 4%, to $379.5 million from $364.0 million in 2012. Consolidated net income in 2013 decreased 3%, to $43.4 million, or $1.67 per diluted share, from $44.8 million, or $1.78 per diluted share, in 2012. The Companys year over year total revenue increase was primarily due to higher rental and rental related services revenues as more fully described below.
For 2013 compared to 2012, on a consolidated basis,
| Gross profit increased $0.7 million to $169.0 million. TRS-RenTelcos gross profit increased $1.5 million, or 2%, due to higher gross profit on sales and rental related services revenues, partly offset by lower gross profit on rental revenues. Enviroplexs gross profit increased $1.0 million primarily due to higher sales revenues. Adler Tanks gross profit decreased $0.1 million due to lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental related services revenues. Mobile Modulars gross profit decreased $1.6 million, or 3%, due to lower gross profit on rental revenues, partly offset by higher gross profit on rental related services and sales revenues. |
| Selling and administrative expenses increased $2.5 million, or 3% to $88.8 million, primarily due to $3.1 million higher salary and employee benefit costs, $0.8 million higher maintenance expense, partly offset by $2.1 million lower bad debt expenses. |
| Interest expense decreased $0.5 million, or 5%, to $8.7 million, primarily due to 6% lower average debt levels of the Company, partly offset by 1% higher net average interest rates (3.02% in 2013 compared to 2.99% in 2012). |
| Pretax income contribution was 51%, 34% and 13% by TRS-RenTelco, Adler Tanks and Mobile Modular, respectively, in 2013, compared to 46%, 37% and 18%, respectively, in 2012. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex was 2% in 2013 compared to negative 1% in 2012. |
| Provision for income taxes resulted in an effective tax rate of 39.2%, up from 38.6% in 2012. |
| Adjusted EBITDA increased $2.3 million, or 1%, to $160.6 million compared to $158.3 million in 2012. Adjusted EBITDA is a non-GAAP financial measure and is defined as net income before interest expense, provision for income taxes, depreciation, amortization and share-based compensation. A reconciliation of Adjusted EBITDA to net cash provided by operating activities and net income to Adjusted EBITDA can be found in Item 6. Selected Financial Data. on page 35. |
-46-
Mobile Modular
For 2013, Mobile Modulars total revenues increased $12.9 million, or 11%, to $132.7 million compared to 2012, primarily due to higher sales, rental related services and rental revenues. The revenue increase together with lower interest expense, offset by lower gross margin on rental revenues and higher selling and administrative expenses, resulted in a decrease in pre-tax income of $3.8 million, or 28%, to $9.6 million in 2013.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax income, and other selected data.
Mobile Modular2013 compared to 2012 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Rental |
$ | 82,503 | $ | 79,518 | $ | 2,985 | 4 | % | ||||||||
Rental related services |
28,891 | 25,775 | 3,116 | 12 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
111,394 | 105,293 | 6,101 | 6 | % | |||||||||||
Sales |
20,831 | 14,026 | 6,805 | 49 | % | |||||||||||
Other |
436 | 448 | (12 | ) | -3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
132,661 | 119,767 | 12,894 | 11 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Costs and Expenses |
||||||||||||||||
Direct costs of rental operations: |
||||||||||||||||
Depreciation of rental equipment |
14,459 | 13,942 | 517 | 4 | % | |||||||||||
Rental related services |
20,980 | 19,492 | 1,488 | 8 | % | |||||||||||
Other |
31,167 | 23,735 | 7,432 | 31 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total direct costs of rental operations |
66,606 | 57,169 | 9,437 | 17 | % | |||||||||||
Costs of sales |
15,632 | 10,576 | 5,056 | 48 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total costs of revenues |
82,238 | 67,745 | 14,493 | 21 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Gross Profit |
||||||||||||||||
Rental |
36,877 | 41,841 | (4,964 | ) | -12 | % | ||||||||||
Rental related services |
7,911 | 6,283 | 1,628 | 26 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
44,788 | 48,124 | (3,336 | ) | -7 | % | ||||||||||
Sales |
5,199 | 3,450 | 1,749 | 51 | % | |||||||||||
Other |
436 | 448 | (12 | ) | -3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
50,423 | 52,022 | (1,599 | ) | -3 | % | ||||||||||
Selling and administrative expenses |
36,488 | 34,032 | 2,457 | 7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Income from operations |
13,935 | 17,990 | (4,056 | ) | -23 | % | ||||||||||
Interest expense allocation |
(4,318 | ) | (4,547 | ) | (229 | ) | -5 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Pre-tax income |
$ | 9,617 | $ | 13,443 | $ | (3,827 | ) | -28 | % | |||||||
|
|
|
|
|
|
|||||||||||
Other Information |
||||||||||||||||
Average rental equipment1 |
$ | 546,540 | $ | 524,084 | $ | 22,456 | 4 | % | ||||||||
Average rental equipment on rent1 |
$ | 373,116 | $ | 347,981 | $ | 25,135 | 7 | % | ||||||||
Average monthly total yield2 |
1.26 | % | 1.26 | % | 0 | % | ||||||||||
Average utilization3 |
68.3 | % | 66.4 | % | 3 | % | ||||||||||
Average monthly rental rate4 |
1.84 | % | 1.90 | % | -3 | % | ||||||||||
Period end rental equipment1 |
$ | 564,909 | $ | 534,158 | $ | 30,752 | 6 | % | ||||||||
Period end utilization3 |
70.7 | % | 66.7 | % | 6 | % |
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. |
-47-
Mobile Modulars gross profit for 2013 decreased $1.6 million to $50.4 million from $52.0 million in 2012. For the year ended December 31, 2013 compared to the year ended December 31, 2012:
| Gross Profit on Rental RevenuesRental revenues increased $3.0 million, or 4%, compared to 2012, due to 7% higher average rental equipment on rent, partly offset by 3% lower average monthly rental rates. As a percentage of rental revenues, depreciation was 17% in 2013 and 2012 and other direct costs were 38% in 2013 and 30% in 2012, which resulted in gross margin percentage of 45% in 2013 compared to 53% in 2012. The higher rental revenues, offset by lower rental margins, resulted in gross profit on rental revenues decreasing 12%, to $36.9 million from $41.8 million in 2012. |
| Gross Profit on Rental Related ServicesRental related services revenues increased $3.1 million, or 12%, 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 amortization of delivery and return delivery and dismantle revenues, higher delivery and return delivery at Mobile Modular Portable Storage and higher repair revenues. The higher revenues and higher gross margin percentage of 27% in 2013 compared to 24% in 2012 resulted in rental related services gross profit increasing 26%, to $7.9 million from $6.3 million in 2012. |
| Gross Profit on SalesSales revenues increased $6.8 million, or 49%, compared to 2012 and gross profit increased $1.7 million, or 51%, primarily due to higher new and used equipment sales revenues and higher gross margins on sales of new equipment in 2013. Sales occur routinely as a normal part of Mobile Modulars rental business; however, these sales can fluctuate from period to period depending on customer requirements, equipment availability and funding. |
For 2013, Mobile Modulars selling and administrative expenses increased $2.5 million, or 7%, to $36.5 million from $34.0 million in 2012, primarily due to higher salary and employee benefit costs.
-48-
TRS-RenTelco
For 2013, TRS-RenTelcos total revenues increased $1.9 million, or 1%, to $135.0 million compared to 2012, primarily due to higher sales and rental revenues. Pre-tax income increased $3.0 million, or 9%, to $36.6 million for 2013 from $33.6 million for 2012, primarily due to higher gross profit on sales revenues and lower selling and administrative expenses.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax income, and other selected data.
TRS-RenTelco2013 compared to 2012 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
Revenues |
||||||||||||||||
Rental |
$ | 102,101 | $ | 101,645 | $ | 456 | 0 | % | ||||||||
Rental related services |
3,095 | 3,673 | (578 | ) | -16 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
105,196 | 105,318 | (122 | ) | 0 | % | ||||||||||
Sales |
28,277 | 26,192 | 2,085 | 8 | % | |||||||||||
Other |
1,580 | 1,628 | (48 | ) | -3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total revenues |
135,053 | 133,138 | 1,915 | 1 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Costs and Expenses |
||||||||||||||||
Direct costs of rental operations: |
||||||||||||||||
Depreciation of rental equipment |
39,953 | 38,174 | 1,779 | 5 | % | |||||||||||
Rental related services |
2,681 | 3,456 | (775 | ) | -22 | % | ||||||||||
Other |
12,963 | 13,811 | (848 | ) | -6 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total direct costs of rental operations |
55,597 | 55,441 | 156 | 0 | % | |||||||||||
Costs of sales |
15,936 | 15,649 | 287 | 2 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total costs of revenues |
71,533 | 71,090 | 443 | 1 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Gross Profit |
||||||||||||||||
Rental |
49,185 | 49,660 | (475 | ) | -1 | % | ||||||||||
Rental related services |
414 | 217 | 197 | 91 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Rental operations |
49,599 | 49,877 | (278 | ) | -1 | % | ||||||||||
Sales |
12,341 | 10,543 | 1,798 | 17 | % | |||||||||||
Other |
1,580 | 1,628 | (48 | ) | -3 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Total gross profit |
63,520 | 62,048 | 1,472 | 2 | % | |||||||||||
Selling and administrative expenses |
24,542 | 26,068 | (1,526 | ) | -6 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Income from operations |
38,978 | 35,980 | 2,998 | 8 | % | |||||||||||
Interest expense allocation |
(2,156 | ) | (2,384 | ) | (228 | ) | -10 | % | ||||||||
Foreign currency exchange gain (loss) |
(189 | ) | 35 | (224 | ) | nm | ||||||||||
|
|
|
|
|
|
|||||||||||
Pre-tax income |
$ | 36,633 | $ | 33,631 | $ | 3,002 | 9 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Other Information |
||||||||||||||||
Average rental equipment1 |
$ | 266,444 | $ | 266,912 | $ | (468 | ) | 0 | % | |||||||
Average rental equipment on rent1 |
$ | 167,035 | $ | 175,659 | $ | (8,624 | ) | -5 | % | |||||||
Average monthly total yield2 |
3.19 | % | 3.18 | % | 0 | % | ||||||||||
Average utilization3 |
62.7 | % | 65.8 | % | -5 | % | ||||||||||
Average monthly rental rate4 |
5.09 | % | 4.83 | % | 5 | % | ||||||||||
Period end rental equipment1 |
$ | 267,206 | $ | 266,456 | $ | 750 | 0 | % | ||||||||
Period end utilization3 |
58.2 | % | 64.1 | % | -9 | % |
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. |
nm = not meaningful
-49-
TRS-RenTelcos gross profit for 2013 increased 2% to $63.5 million from $62.0 million in 2012. For the year ended December 31, 2013 compared to the year ended December 31, 2012:
| Gross Profit on Rental RevenuesRental revenues increased $0.5 million to $102.1 million with depreciation expense increasing $1.8 million, or 5%, and other direct costs decreasing $0.8 million, or 6%, resulting in a decrease in gross profit on rental revenues of $0.5 million, or 1%, to $49.2 million in 2013. As a percentage of rental revenues, depreciation was 39% in 2013 compared to 38% in 2012 and other direct costs was 13% in 2013 compared to 14% in 2012, which resulted in gross margin percentage of 48% in 2013 compared to 49% in 2012. The rental revenues decrease was due to 5% lower average rental equipment on rent, partly offset by 5% higher average monthly rental rates. |
| Gross Profit on SalesSales revenues increased $2.1 million, or 8%, compared to 2012. Gross margin percentage was 44% in 2013, compared to 40% in 2012, primarily due to higher gross margin on new and used equipment sales resulting in gross profit on sales increasing 17%, to $12.3 million from $10.5 million in 2012. In 2012, TRS-RenTelcos used equipment sales revenues included the November 2, 2012 sale of the Companys TRS-Environmental rental assets for $3.7 million, which resulted in a $0.4 million loss. The sale was a result of the Companys July 2, 2012 decision to exit the environmental test equipment rental business. Sales occur routinely as a normal part of TRS-RenTelcos rental business; however, these sales and related gross margins can fluctuate from period to period depending on customer requirements, equipment availability and funding. |
For 2013, TRS-RenTelcos selling and administrative expenses decreased $1.5 million, or 6%, to $24.5 million from $26.1 million in 2012, primarily due to decreased salary and benefit costs related to the exit of the environmental test equipment business in November 2012.
-50-
Adler Tanks
For 2013, Adler Tanks total revenues increased $6.6 million, or 8%, to $93.9 million compared to 2012, primarily due to higher rental and rental related services revenues during 2013. The revenue increase and higher gross margin on rental related services revenues, offset by higher selling and administrative expenses and lower gross margin on rental and sales revenues resulted in a pre-tax income decrease of $2.7 million, or 10%, to $24.0 million for the year ended December 31, 2013.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.
Adler Tanks 2013 compared to 2012 |
||||||||||||||||
(dollar amounts in thousands) | Year
Ended December 31, |
Increase (Decrease) |
||||||||||||||
2013 | 2012 | $ | % | |||||||||||||
Revenues |