mgrc-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission file number 0-13292

 

McGRATH RENTCORP

(Exact name of registrant as specified in its Charter)

 

 

California

94-2579843

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

5700 Las Positas Road, Livermore, CA 94551-7800

(Address of principal executive offices)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    No  ¨

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

 

Large accelerated filer

 

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  ¨    No  x

As of July 29, 2015, 25,814,394 shares of Registrant’s Common Stock were outstanding.

 

 


FORWARD LOOKING STATEMENTS

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

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

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

 

 

2


Part I - Financial Information

 

 

Item 1.

Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

McGrath RentCorp

We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp and subsidiaries (the “Company”) as of June 30, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2015 and 2014, and cash flows for the six-month periods ended June 30, 2015 and 2014.  These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and we expressed an unqualified opinion on those consolidated financial statements in our report dated February 26, 2015.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Grant Thornton LLP

San Jose, California

July 30, 2015

 

 

3


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(in thousands, except per share amounts)

2015

 

2014

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Rental

$

67,305

 

$

65,809

 

$

132,807

 

$

128,239

 

Rental related services

 

17,227

 

 

15,146

 

 

32,594

 

 

28,658

 

Rental operations

 

84,532

 

 

80,955

 

 

165,401

 

 

156,897

 

Sales

 

10,968

 

 

14,170

 

 

19,755

 

 

25,208

 

Other

 

526

 

 

620

 

 

1,058

 

 

1,200

 

Total revenues

 

96,026

 

 

95,745

 

 

186,214

 

 

183,305

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs of rental operations:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

19,016

 

 

17,924

 

 

37,698

 

 

35,821

 

Rental related services

 

12,901

 

 

11,366

 

 

24,800

 

 

21,673

 

Other

 

16,226

 

 

15,188

 

 

31,437

 

 

28,738

 

Total direct costs of rental operations

 

48,143

 

 

44,478

 

 

93,935

 

 

86,232

 

Costs of sales

 

6,965

 

 

9,188

 

 

12,274

 

 

16,356

 

Total costs of revenues

 

55,108

 

 

53,666

 

 

106,209

 

 

102,588

 

Gross profit

 

40,918

 

 

42,079

 

 

80,005

 

 

80,717

 

Selling and administrative expenses

 

24,453

 

 

23,840

 

 

49,665

 

 

47,251

 

Income from operations

 

16,465

 

 

18,239

 

 

30,340

 

 

33,466

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,347

)

 

(2,335

)

 

(4,738

)

 

(4,538

)

Gain on sale of property, plant and equipment

 

 

 

812

 

 

 

 

812

 

Foreign currency exchange gain (loss)

 

(85

)

 

78

 

 

(253

)

 

(10

)

Income before provision for income taxes

 

14,033

 

 

16,794

 

 

25,349

 

 

29,730

 

Provision for income taxes

 

5,543

 

 

6,589

 

 

10,013

 

 

11,654

 

Net income

$

8,490

 

$

10,205

 

$

15,336

 

$

18,076

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.33

 

$

0.39

 

$

0.59

 

$

0.70

 

Diluted

$

0.32

 

$

0.39

 

$

0.58

 

$

0.69

 

Shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

26,142

 

 

25,912

 

 

26,117

 

 

25,851

 

Diluted

 

26,273

 

 

26,220

 

 

26,272

 

 

26,223

 

Cash dividends declared per share

$

0.250

 

$

0.245

 

$

0.500

 

$

0.490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

8,490

 

 

$

10,205

 

 

$

15,336

 

 

$

18,076

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

6

 

 

 

(11

)

 

 

89

 

 

 

23

 

Tax benefit (provision)

 

 

 

 

 

2

 

 

 

(16

)

 

 

(4

)

Comprehensive income

 

$

8,496

 

 

$

10,196

 

 

$

15,409

 

 

$

18,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5


McGrath RentCorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

June 30,

 

 

December 31,

 

(in thousands)

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

739

 

 

$

1,167

 

Accounts receivable, net of allowance for doubtful accounts of $2,047 in 2015

   and $2,038 in 2014

 

 

93,974

 

 

 

101,294

 

Rental equipment, at cost:

 

 

 

 

 

 

 

 

Relocatable modular buildings

 

 

699,781

 

 

 

664,340

 

Electronic test equipment

 

 

269,668

 

 

 

261,995

 

Liquid and solid containment tanks and boxes

 

 

307,795

 

 

 

303,303

 

 

 

 

1,277,244

 

 

 

1,229,638

 

Less accumulated depreciation

 

 

(420,755

)

 

 

(403,888

)

Rental equipment, net

 

 

856,489

 

 

 

825,750

 

Property, plant and equipment, net

 

 

110,422

 

 

 

108,628

 

Prepaid expenses and other assets

 

 

33,417

 

 

 

41,424

 

Intangible assets, net

 

 

9,901

 

 

 

10,336

 

Goodwill

 

 

27,808

 

 

 

27,808

 

Total assets

 

$

1,132,750

 

 

$

1,116,407

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

337,177

 

 

$

322,478

 

Accounts payable and accrued liabilities

 

 

76,636

 

 

 

71,357

 

Deferred income

 

 

29,726

 

 

 

29,139

 

Deferred income taxes, net

 

 

262,388

 

 

 

268,902

 

Total liabilities

 

 

705,927

 

 

 

691,876

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, no par value - Authorized 40,000 shares

 

 

 

 

 

 

 

 

Issued and outstanding - 26,106 shares as of June 30, 2015 and 26,051

   shares as of December 31, 2014

 

 

109,232

 

 

 

106,469

 

Retained earnings

 

 

317,620

 

 

 

318,164

 

Accumulated other comprehensive loss

 

 

(29

)

 

 

(102

)

Total shareholders’ equity

 

 

426,823

 

 

 

424,531

 

Total liabilities and shareholders’ equity

 

$

1,132,750

 

 

$

1,116,407

 

 

 

 

 

 

 

 

 

 

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

 

 

6


McGrath RentCorp

CONDENSED Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Six Months Ended June 30,

 

(in thousands)

 

2015

 

 

2014

 

Cash Flows from Operating Activities :

 

 

 

 

 

 

 

 

Net income

 

$

15,336

 

 

$

18,076

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

42,171

 

 

 

39,982

 

Provision for doubtful accounts

 

 

690

 

 

 

1,014

 

Share-based compensation

 

 

1,953

 

 

 

1,984

 

Gain on sale of used rental equipment

 

 

(5,565

)

 

 

(6,444

)

Gain on sale of property, plant and equipment

 

 

 

 

 

(812

)

Foreign currency exchange loss

 

 

253

 

 

 

10

 

Change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,630

 

 

 

(2,448

)

Prepaid expenses and other assets

 

 

8,007

 

 

 

(2,287

)

Accounts payable and accrued liabilities

 

 

1,715

 

 

 

2,236

 

Deferred income

 

 

587

 

 

 

2,080

 

Deferred income taxes

 

 

(6,514

)

 

 

1,781

 

Net cash provided by operating activities

 

 

65,263

 

 

 

55,172

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of rental equipment

 

 

(71,237

)

 

 

(68,105

)

Purchase of property, plant and equipment

 

 

(5,832

)

 

 

(6,101

)

Proceeds from sale of used rental equipment

 

 

11,815

 

 

 

13,757

 

Proceeds from sale of property, plant and equipment

 

 

 

 

 

2,501

 

Net cash used in investing activities

 

 

(65,254

)

 

 

(57,948

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net borrowing (repayments) under bank lines of credit

 

 

34,699

 

 

 

(3,003

)

Borrowing under Series B senior notes

 

 

 

 

 

40,000

 

Principal payment on Series A senior notes

 

 

(20,000

)

 

 

(20,000

)

Proceeds from the exercise of stock options

 

 

1,458

 

 

 

302

 

Excess tax benefit from exercise and disqualifying disposition of

   stock options

 

 

313

 

 

 

1,173

 

Taxes paid related to net share settlement of stock awards

 

 

(584

)

 

 

(3,378

)

Repurchase of common stock

 

 

(3,132

)

 

 

 

Payment of dividends

 

 

(13,176

)

 

 

(12,833

)

Net cash provided by (used in) financing activities

 

 

(422

)

 

 

2,261

 

Effect of exchange rate changes on cash

 

 

(15

)

 

 

26

 

Net decrease in cash

 

 

(428

)

 

 

(489

)

Cash balance, beginning of period

 

 

1,167

 

 

 

1,630

 

Cash balance, end of period

 

$

739

 

 

$

1,141

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, during the period

 

$

4,896

 

 

$

4,198

 

Net income taxes paid, during the period

 

$

1,490

 

 

$

8,526

 

Dividends accrued during the period, not yet paid

 

$

6,588

 

 

$

6,425

 

Rental equipment acquisitions, not yet paid

 

$

8,390

 

 

$

12,033

 

 

 

 

 

 

 

 

 

 

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

 

 

7


McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

 

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three and six months ended June 30, 2015 and 2014 have not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals, consolidating and eliminating entries) necessary for the fair presentation of the consolidated financial position, results of operations and cash flows of McGrath RentCorp (the “Company”) have been made. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated results for the six months ended June 30, 2015 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K filed with the SEC on February 26, 2015 for the year ended December 31, 2014 (the “2014 Annual Report”).

 

 

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Imputation of Interest (Subtopic 835-30).  The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. The Company does not expect the adoption of this accounting guidance to have a significant impact on its consolidated financial statements.

 

 

NOTE 3. EARNINGS PER SHARE

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted-average number of shares of common stock for

   calculating basic earnings per share

 

 

26,142

 

 

 

25,912

 

 

 

26,117

 

 

 

25,851

 

Effect of potentially dilutive securities from

   equity-based compensation

 

 

131

 

 

 

308

 

 

 

155

 

 

 

372

 

Weighted-average number of shares of common stock for

   calculating diluted earnings per share

 

 

26,273

 

 

 

26,220

 

 

 

26,272

 

 

 

26,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Options to purchase shares of common stock

 

 

650

 

 

 

15

 

 

 

215

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


In May 2008, the Company’s Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the Company's outstanding common stock.  The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions and/or through privately negotiated, large block transactions.  Furthermore, in March 2015, pursuant to authorization from the Company’s Board of Directors, the Company entered into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 987,790 shares of the Company’s common stock. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. The following table presents share repurchase activities during the three and six month ended June 30, 2015 and 2014.

 

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(in thousands, except per share amounts)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Number of shares repurchased

 

 

89

 

 

 

 

 

 

102

 

 

 

 

Aggregate purchase price

 

$

2,754

 

 

 

 

 

$

3,132

 

 

 

 

Average price per repurchased shares

 

$

30.79

 

 

 

 

 

$

30.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015, 1,898,347 shares remain authorized for repurchase.

 

 

NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

 

Estimated

useful life

in years

 

 

June 30,

2015

 

 

December 31,

2014

 

Trade name

 

Indefinite

 

 

$

5,700

 

 

$

5,700

 

Customer relationships

 

 

11

 

 

 

9,611

 

 

 

9,611

 

 

 

 

 

 

 

 

15,311

 

 

 

15,311

 

Less accumulated amortization

 

 

 

 

 

 

(5,410

)

 

 

(4,975

)

 

 

 

 

 

 

$

9,901

 

 

$

10,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

The Company typically conducts its annual impairment analysis in the fourth quarter of its fiscal year.  The impairment analysis did not result in an impairment charge for the fiscal year ended December 31, 2014.  Determining the fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions.  The Company based its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.

Intangible assets with finite useful lives are amortized over their respective useful lives.  Based on the carrying values at June 30, 2015 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $0.4 million for the remainder of fiscal year 2015 and $0.8 million in each of the fiscal years 2016 through 2020.

 

 

NOTE 5. SEGMENT REPORTING

The Company’s four reportable segments are (1) its modular building rental division (“Mobile Modular”); (2) its electronic test equipment rental division (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids division (“Adler Tanks”); and (4) its classroom manufacturing division selling modular buildings used primarily as classrooms in California (“Enviroplex”). The operations of each of these segments are described in Part I – Item 1, “Business,” and the accounting policies of the segments are described in “Note 2 – Significant Accounting Policies” in the Company’s annual report on Form 10-K for the year ended December 31, 2014. Management focuses on several key measures to evaluate and assess each segment’s

9


performance, including rental revenue growth, gross profit, income from operations and income before provision for income taxes. Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are generally allocated to Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of direct revenues. Interest expense is allocated among Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental equipment at cost, intangible assets, accounts receivable, deferred income and customer security deposits. The Company does not report total assets by business segment.  Summarized financial information for the six months ended June 30, 2015 and 2014 for the Company’s reportable segments is shown in the following table:

 

(dollar amounts in thousands)

 

Mobile

Modular

 

 

TRS-

RenTelco

 

 

Adler

Tanks

 

 

Enviroplex 1

 

 

Consolidated

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

54,088

 

 

$

44,000

 

 

$

34,719

 

 

$

 

 

$

132,807

 

Rental related services revenues

 

 

19,591

 

 

 

1,450

 

 

 

11,553

 

 

 

 

 

 

32,594

 

Sales and other revenues

 

 

7,325

 

 

 

10,545

 

 

 

742

 

 

 

2,201

 

 

 

20,813

 

Total revenues

 

 

81,004

 

 

 

55,995

 

 

 

47,014

 

 

 

2,201

 

 

 

186,214

 

Depreciation of rental equipment

 

 

9,280

 

 

 

20,477

 

 

 

7,941

 

 

 

 

 

 

37,698

 

Gross profit

 

 

32,266

 

 

 

22,751

 

 

 

24,380

 

 

 

608

 

 

 

80,005

 

Selling and administrative expenses

 

 

22,642

 

 

 

11,611

 

 

 

13,819

 

 

 

1,593

 

 

 

49,665

 

Income (loss) from operations

 

 

9,624

 

 

 

11,140

 

 

 

10,561

 

 

 

(985

)

 

 

30,340

 

Interest (expense) income allocation

 

 

(2,481

)

 

 

(1,053

)

 

 

(1,297

)

 

 

93

 

 

 

(4,738

)

Income (loss) before provision for income taxes

 

 

7,143

 

 

 

9,834

 

 

 

9,264

 

 

 

(892

)

 

 

25,349

 

Rental equipment acquisitions

 

 

38,691

 

 

 

30,077

 

 

 

5,919

 

 

 

 

 

 

74,687

 

Accounts receivable, net (period end)

 

 

46,913

 

 

 

23,547

 

 

 

20,310

 

 

 

3,204

 

 

 

93,974

 

Rental equipment, at cost (period end)

 

 

699,781

 

 

 

269,668

 

 

 

307,795

 

 

 

 

 

 

1,277,244

 

Rental equipment, net book value (period end)

 

 

501,071

 

 

 

112,275

 

 

 

243,143

 

 

 

 

 

 

856,489

 

Utilization (period end) 2

 

 

74.3

%

 

 

60.3

%

 

 

61.7

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

74.3

%

 

 

59.8

%

 

 

60.9

%

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

44,212

 

 

$

48,184

 

 

$

35,843

 

 

$

 

 

$

128,239

 

Rental related services revenues

 

 

15,328

 

 

 

1,617

 

 

 

11,713

 

 

 

 

 

 

28,658

 

Sales and other revenues

 

 

11,415

 

 

 

11,977

 

 

 

769

 

 

 

2,247

 

 

 

26,408

 

Total revenues

 

 

70,955

 

 

 

61,778

 

 

 

48,325

 

 

 

2,247

 

 

 

183,305

 

Depreciation of rental equipment

 

 

7,842

 

 

 

20,539

 

 

 

7,440

 

 

 

 

 

 

35,821

 

Gross profit

 

 

25,774

 

 

 

28,138

 

 

 

26,060

 

 

 

745

 

 

 

80,717

 

Selling and administrative expenses

 

 

19,830

 

 

 

12,004

 

 

 

13,836

 

 

 

1,581

 

 

 

47,251

 

Income (loss) from operations

 

 

5,944

 

 

 

16,134

 

 

 

12,224

 

 

 

(836

)

 

 

33,466

 

Interest (expense) income allocation

 

 

(2,290

)

 

 

(1,053

)

 

 

(1,284

)

 

 

89

 

 

 

(4,538

)

Gain on sale of property, plant and equipment

 

 

341

 

 

 

276

 

 

 

195

 

 

 

 

 

 

812

 

Income (loss) before provision for income taxes

 

 

3,995

 

 

 

15,347

 

 

 

11,135

 

 

 

(747

)

 

 

29,730

 

Rental equipment acquisitions

 

 

38,177

 

 

 

18,387

 

 

 

15,092

 

 

 

 

 

 

71,656

 

Accounts receivable, net (period end)

 

 

42,947

 

 

 

22,500

 

 

 

21,057

 

 

 

2,580

 

 

 

89,084

 

Rental equipment, at cost (period end)

 

 

626,457

 

 

 

259,907

 

 

 

298,248

 

 

 

 

 

 

1,184,612

 

Rental equipment, net book value (period end)

 

 

443,086

 

 

 

103,816

 

 

 

248,630

 

 

 

 

 

 

795,532

 

Utilization (period end) 2

 

 

71.6

%

 

 

62.2

%

 

 

61.5

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

70.2

%

 

 

58.3

%

 

 

61.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Gross Enviroplex sales revenues were $2,208 and $3,323 for the six months ended June 30, 2015 and 2014, respectively, which includes inter-segment sales to Mobile Modular of $7 and $1,076, respectively, which have been eliminated in consolidation.

2.

Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding accessory equipment and for Mobile Modular and Adler Tanks excluding new equipment inventory.  The Average Utilization for the period is calculated using the average costs of rental equipment.

No single customer accounted for more than 10% of total revenues for the six months ended June 30, 2015 and 2014. Revenues from foreign country customers accounted for 6% of the Company’s total revenues for the same periods.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors.  These factors include, but are not limited to, those set forth under this Item, those discussed in Part II—Item 1A, “Risk Factors” and elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 26, 2015 (the “2014 Annual Report”) and those that may be identified from time to time in our reports and registration statements filed with the SEC.

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Part I—Item 1 of this Form 10-Q and the Consolidated Financial Statements and related Notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2014 Annual Report.  In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2014 Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.  We undertake no duty to update any of these forward-looking statements after the date of filing of this Form 10-Q to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

General

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

The Mobile Modular segment includes the results of operations of Mobile Modular Portable Storage, which represented 6% of the Company’s total revenues in the six months ended June 30, 2015. Mobile Modular Portable Storage commenced operations in 2008 and offers portable storage units and high security portable office units for rent, lease and purchase.

In the six months ended June 30, 2015, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 28%, 39%, 37% and negative 4% of the Company’s income before provision for income taxes (the equivalent of “pretax income”), respectively, compared to 13%, 52%, 38% and negative 3% for the same period in 2014. Although managed as a separate business unit, Enviroplex’s revenues, pretax income contribution and total assets are not significant relative to the Company’s consolidated financial position.  Accordingly, we have not presented a separate discussion of Enviroplex’s results of operations in this MD&A.

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

The Company’s modular revenues (consisting of revenues from Mobile Modular, Mobile Modular Portable Storage and Enviroplex) are derived from rentals and sales to education and commercial customers, with a majority of revenues generated by education customers.  Modular revenues are primarily affected by demand for classrooms, which in turn is affected by shifting and fluctuating school populations, the levels of state funding to public schools, the need for temporary classroom space during reconstruction of older schools and changes in policies regarding class size. As a result of any reduced funding, lower expenditures by these schools may result in certain planned programs to increase the number of classrooms, such as those that the Company provides, to be postponed or terminated. However, reduced expenditures may also result in schools reducing their long-term facility construction projects in favor of using the Company’s modular classroom solutions.  At this time, the Company can provide no assurances as to whether public schools will either reduce or increase their demand for the Company's modular classrooms as a result of fluctuations in state funding of public schools. Looking forward, the Company believes that any interruption in the passage of facility bonds or contraction of class size reduction programs by public schools may have a material adverse effect on both rental and sales revenues of the Company. (For more information, see “Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12)” in the Company’s 2014 Annual Report and “Item 1A. Risk Factors – Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future,  a reduction in our revenues and profitability” in Part II – Other Information of this Form 10-Q.)

11


Revenues of TRS-RenTelco 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 primarily in the electronics, communications, aerospace and defense industries.  Electronic test equipment revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance.

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

The Company’s rental operations include rental and rental related service revenues which comprised approximately 89% and 86% of consolidated revenues in the six months ended June 30, 2015 and 2014, respectively.  Of the total rental operations revenues for the six months ended June 30, 2015, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 45%, 27% and 28%, respectively, compared to 38%, 32% and 30%, respectively, in the same period of 2014. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment (if any), and other direct costs of rental operations, which include direct labor, supplies, repairs, insurance, property taxes, license fees, cost of sub-rentals and amortization of certain lease costs.

The Company’s Mobile Modular, TRS-RenTelco and Adler Tanks business segments sell modular units, electronic test equipment and liquid and solid containment tanks and boxes, respectively, which are either new or previously rented.  In addition, Enviroplex sells new modular buildings used primarily as classrooms in California.    For the six months ended June 30, 2015 and 2014, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 11% and 14%, respectively, of the Company’s consolidated revenues. Of the total sales and other revenues for the six months ended June 30, 2015 and 2014, Mobile Modular and Enviroplex together comprised 46% and 52%, respectively, and TRS-RenTelco comprised 51% and 45%, respectively. Adler Tanks sales and other revenues for the six months ended June 30, 2015 and 2014 were 3% of the Company’s total sales and other revenues. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold, such as delivery, installation, modifications and related site work.

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

Adjusted EBITDA

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

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

Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non−GAAP measures used by other companies.  Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include 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 Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash

12


flow.  In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison. The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation. Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance.  Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP.

Reconciliation of Net Income to Adjusted EBITDA                                                                                                                                          

 

(dollar amounts in thousands)

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

Twelve Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

8,490

 

 

$

10,205

 

 

$

15,336

 

 

$

18,076

 

 

$

42,969

 

 

$

42,410

 

Provision for income taxes

 

 

5,543

 

 

 

6,589

 

 

 

10,013

 

 

 

11,654

 

 

 

29,211

 

 

 

27,340

 

Interest