mgrc-10q_20150930.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 September 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 October 28, 2015, 23,885,220 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 September 30, 2015, and the related condensed consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, and cash flows for the nine-month periods ended September 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

October 29, 2015

 

 

3


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(in thousands, except per share amounts)

2015

 

 

2014

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental

$

70,195

 

 

$

69,642

 

$

203,002

 

$

197,881

 

Rental related services

 

21,862

 

 

 

17,871

 

 

54,456

 

 

46,529

 

Rental operations

 

92,057

 

 

 

87,513

 

 

257,458

 

 

244,410

 

Sales

 

20,426

 

 

 

24,998

 

 

40,181

 

 

50,206

 

Other

 

565

 

 

 

514

 

 

1,623

 

 

1,714

 

Total revenues

 

113,048

 

 

 

113,025

 

 

299,262

 

 

296,330

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs of rental operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

18,809

 

 

 

18,298

 

 

56,507

 

 

54,119

 

Rental related services

 

15,802

 

 

 

13,506

 

 

40,602

 

 

35,179

 

Other

 

14,032

 

 

 

14,955

 

 

45,469

 

 

43,693

 

Total direct costs of rental operations

 

48,643

 

 

 

46,759

 

 

142,578

 

 

132,991

 

Costs of sales

 

14,259

 

 

 

16,968

 

 

26,533

 

 

33,324

 

Total costs of revenues

 

62,902

 

 

 

63,727

 

 

169,111

 

 

166,315

 

Gross profit

 

50,146

 

 

 

49,298

 

 

130,151

 

 

130,015

 

Selling and administrative expenses

 

24,996

 

 

 

24,200

 

 

74,661

 

 

71,451

 

Income from operations

 

25,150

 

 

 

25,098

 

 

55,490

 

 

58,564

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,444

)

 

 

(2,386

)

 

(7,182

)

 

(6,924

)

Gain on sale of property, plant and equipment

 

 

 

 

 

 

 

 

812

 

Foreign currency exchange loss

 

(201

)

 

 

(103

)

 

(454

)

 

(113

)

Income before provision for income taxes

 

22,505

 

 

 

22,609

 

 

47,854

 

 

52,339

 

Provision for income taxes

 

8,889

 

 

 

8,863

 

 

18,902

 

 

20,517

 

Net income

$

13,616

 

 

$

13,746

 

$

28,952

 

$

31,822

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.54

 

 

$

0.53

 

$

1.12

 

$

1.23

 

Diluted

$

0.54

 

 

$

0.53

 

$

1.12

 

$

1.22

 

Shares used in per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

25,334

 

 

 

25,953

 

 

25,853

 

 

25,885

 

Diluted

 

25,408

 

 

 

26,152

 

 

25,954

 

 

26,177

 

Cash dividends declared per share

$

0.250

 

 

$

0.245

 

$

0.750

 

$

0.735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

13,616

 

 

$

13,746

 

 

$

28,952

 

 

$

31,822

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(31

)

 

 

(48

)

 

 

58

 

 

 

(25

)

Tax benefit (provision)

 

 

7

 

 

 

8

 

 

 

(23

)

 

 

4

 

Comprehensive income

 

$

13,592

 

 

$

13,706

 

 

$

28,987

 

 

$

31,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5


McGrath RentCorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

757

 

 

$

1,167

 

Accounts receivable, net of allowance for doubtful accounts of $2,082 in 2015

   and $2,038 in 2014

 

 

107,560

 

 

 

101,294

 

Rental equipment, at cost:

 

 

 

 

 

 

 

 

Relocatable modular buildings

 

 

717,892

 

 

 

664,340

 

Electronic test equipment

 

 

266,034

 

 

 

261,995

 

Liquid and solid containment tanks and boxes

 

 

309,779

 

 

 

303,303

 

 

 

 

1,293,705

 

 

 

1,229,638

 

Less accumulated depreciation

 

 

(429,428

)

 

 

(403,888

)

Rental equipment, net

 

 

864,277

 

 

 

825,750

 

Property, plant and equipment, net

 

 

110,530

 

 

 

108,628

 

Prepaid expenses and other assets

 

 

28,480

 

 

 

41,424

 

Intangible assets, net

 

 

9,683

 

 

 

10,336

 

Goodwill

 

 

27,808

 

 

 

27,808

 

Total assets

 

$

1,149,095

 

 

$

1,116,407

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

382,113

 

 

$

322,478

 

Accounts payable and accrued liabilities

 

 

70,963

 

 

 

71,357

 

Deferred income

 

 

40,172

 

 

 

29,139

 

Deferred income taxes, net

 

 

266,383

 

 

 

268,902

 

Total liabilities

 

 

759,631

 

 

 

691,876

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding - 24,355 shares as of September 30, 2015 and 26,051 shares

   as of December 31, 2014

 

 

103,642

 

 

 

106,469

 

Retained earnings

 

 

285,889

 

 

 

318,164

 

Accumulated other comprehensive loss

 

 

(67

)

 

 

(102

)

Total shareholders’ equity

 

 

389,464

 

 

 

424,531

 

Total liabilities and shareholders’ equity

 

$

1,149,095

 

 

$

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)

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2015

 

 

2014

 

Cash Flows from Operating Activities :

 

 

 

 

 

 

 

 

Net income

 

$

28,952

 

 

$

31,822

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

63,303

 

 

 

60,383

 

Provision for doubtful accounts

 

 

1,179

 

 

 

1,480

 

Share-based compensation

 

 

2,863

 

 

 

3,010

 

Gain on sale of used rental equipment

 

 

(9,066

)

 

 

(10,777

)

Gain on sale of property, plant and equipment

 

 

 

 

 

(812

)

Foreign currency exchange loss

 

 

454

 

 

 

113

 

Change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,445

)

 

 

(17,400

)

Prepaid expenses and other assets

 

 

12,944

 

 

 

(2,293

)

Accounts payable and accrued liabilities

 

 

(1,055

)

 

 

7,370

 

Deferred income

 

 

11,033

 

 

 

8,772

 

Deferred income taxes

 

 

(2,519

)

 

 

3,295

 

Net cash provided by operating activities

 

 

100,643

 

 

 

84,963

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of rental equipment

 

 

(104,884

)

 

 

(112,972

)

Purchase of property, plant and equipment

 

 

(8,045

)

 

 

(9,078

)

Proceeds from sale of used rental equipment

 

 

19,681

 

 

 

22,864

 

Proceeds from sale of property, plant and equipment

 

 

 

 

 

2,501

 

Net cash used in investing activities

 

 

(93,248

)

 

 

(96,685

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net borrowing under bank lines of credit

 

 

79,635

 

 

 

12,277

 

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

 

 

 

318

 

Excess tax benefit from exercise and disqualifying disposition of

   stock options

 

 

349

 

 

 

1,314

 

Taxes paid related to net share settlement of stock awards

 

 

(729

)

 

 

(3,777

)

Repurchase of common stock

 

 

(48,785

)

 

 

 

Payment of dividends

 

 

(19,728

)

 

 

(19,189

)

Net cash provided by (used in) financing activities

 

 

(7,800

)

 

 

10,943

 

Effect of exchange rate changes on cash

 

 

(5

)

 

 

(77

)

Net decrease in cash

 

 

(410

)

 

 

(856

)

Cash balance, beginning of period

 

 

1,167

 

 

 

1,630

 

Cash balance, end of period

 

$

757

 

 

$

774

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, during the period

 

$

7,224

 

 

$

6,316

 

Net income taxes paid, during the period

 

$

2,240

 

 

$

15,694

 

Dividends accrued during the period, not yet paid

 

$

6,159

 

 

$

6,471

 

Rental equipment acquisitions, not yet paid

 

$

5,707

 

 

$

12,655

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three and nine months ended September 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 nine months ended September 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 consolidated 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 amendments are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect the adoption of this accounting guidance to have a significant impact on its consolidated financial statements.

In April 2015, the FASB issued accounting guidance on the presentation of debt issuance costs in the balance sheet. This standard requires that certain 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 debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this guidance. The Company will apply this guidance prospectively beginning in the fiscal year ended December 31, 2017. The application of this guidance will result in a reclassification of debt financing costs from prepaid expenses and other assets to a reduction of the specific debt liability, and will not affect the Company’s statement of operations or cash flow.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendment is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  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

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted-average number of shares of common stock for

   calculating basic earnings per share

 

 

25,334

 

 

 

25,953

 

 

 

25,853

 

 

 

25,885

 

Effect of potentially dilutive securities from

   equity-based compensation

 

 

74

 

 

 

199

 

 

 

101

 

 

 

292

 

Weighted-average number of shares of common stock for

   calculating diluted earnings per share

 

 

25,408

 

 

 

26,152

 

 

 

25,954

 

 

 

26,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8


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

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Options to purchase shares of common stock

 

 

1,326

 

 

 

9

 

 

 

746

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to repurchase an additional 2,000,000 shares of the Company's outstanding common stock.  The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other factors, including management’s discretion.  All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the repurchase program may be modified, extended or terminated by the board of directors at any time. The following table presents share repurchase activities during the three and nine months ended September 30, 2015 and 2014.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands, except share and per share amounts)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Number of shares repurchased

 

 

1,754,636

 

 

 

 

 

 

1,856,289

 

 

 

 

Aggregate purchase price

 

$

45,653

 

 

 

 

 

$

48,784

 

 

 

 

Average price per repurchased shares

 

$

26.02

 

 

 

 

 

$

26.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015, 2,143,711 shares remain authorized for repurchase.

 

 

NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

 

Estimated

useful life

in years

 

 

September 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

 

 

 

 

 

 

(5,628

)

 

 

(4,975

)

 

 

 

 

 

 

$

9,683

 

 

$

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 bases its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.

9


Intangible assets with finite useful lives are amortized over their respective useful lives.  Based on the carrying values at September 30, 2015 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $0.2 million for the remainder of fiscal year 2015 and $0.8 million in each of the fiscal years 2016 through 2020.

 

 

10


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 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 nine months ended September 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

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

84,242

 

 

$

66,612

 

 

$

52,148

 

 

$

 

 

$

203,002

 

Rental related services revenues

 

 

33,904

 

 

 

2,271

 

 

 

18,281

 

 

 

 

 

 

54,456

 

Sales and other revenues

 

 

15,971

 

 

 

16,385

 

 

 

1,082

 

 

 

8,366

 

 

 

41,804

 

Total revenues

 

 

134,117

 

 

 

85,268

 

 

 

71,511

 

 

 

8,366

 

 

 

299,262

 

Depreciation of rental equipment

 

 

14,218

 

 

 

30,335

 

 

 

11,954

 

 

 

 

 

 

56,507

 

Gross profit

 

 

56,263

 

 

 

35,293

 

 

 

36,383

 

 

 

2,212

 

 

 

130,151

 

Selling and administrative expenses

 

 

34,436

 

 

 

17,059

 

 

 

20,755

 

 

 

2,411

 

 

 

74,661

 

Income (loss) from operations

 

 

21,827

 

 

 

18,234

 

 

 

15,628

 

 

 

(199

)

 

 

55,490

 

Interest (expense) income allocation

 

 

(3,790

)

 

 

(1,580

)

 

 

(1,953

)

 

 

141

 

 

 

(7,182

)

Income (loss) before provision for income taxes

 

 

18,037

 

 

 

16,200

 

 

 

13,675

 

 

 

(58

)

 

 

47,854

 

Rental equipment acquisitions

 

 

59,501

 

 

 

37,822

 

 

 

8,328

 

 

 

 

 

 

105,651

 

Accounts receivable, net (period end)

 

 

60,132

 

 

 

23,649

 

 

 

20,312

 

 

 

3,467

 

 

 

107,560

 

Rental equipment, at cost (period end)

 

 

717,892

 

 

 

266,034

 

 

 

309,779

 

 

 

 

 

 

1,293,705

 

Rental equipment, net book value (period end)

 

 

515,207

 

 

 

107,801

 

 

 

241,269

 

 

 

 

 

 

864,277

 

Utilization (period end) 2

 

 

77.9

%

 

 

60.5

%

 

 

57.0

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

75.3

%

 

 

60.2

%

 

 

59.9

%

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

69,644

 

 

$

73,665

 

 

$

54,572

 

 

$

 

 

$

197,881

 

Rental related services revenues

 

 

25,493

 

 

 

2,463

 

 

 

18,573

 

 

 

 

 

 

46,529

 

Sales and other revenues

 

 

22,057

 

 

 

18,369

 

 

 

893

 

 

 

10,601

 

 

 

51,920

 

Total revenues

 

 

117,194

 

 

 

94,497

 

 

 

74,038

 

 

 

10,601

 

 

 

296,330

 

Depreciation of rental equipment

 

 

12,114

 

 

 

30,709

 

 

 

11,296

 

 

 

 

 

 

54,119

 

Gross profit

 

 

43,296

 

 

 

43,916

 

 

 

39,779

 

 

 

3,024

 

 

 

130,015

 

Selling and administrative expenses

 

 

30,786

 

 

 

17,848

 

 

 

20,338

 

 

 

2,479

 

 

 

71,451

 

Income from operations

 

 

12,510

 

 

 

26,068

 

 

 

19,441

 

 

 

545

 

 

 

58,564

 

Interest (expense) income allocation

 

 

3,524

 

 

 

1,584

 

 

 

1,950

 

 

 

(134

)

 

 

6,924

 

Gain on sale of property, plant and equipment

 

 

341

 

 

 

276

 

 

 

195

 

 

 

 

 

 

812

 

Income before provision for income taxes

 

 

9,327

 

 

 

24,647

 

 

 

17,686

 

 

 

679

 

 

 

52,339

 

Rental equipment acquisitions

 

 

65,100

 

 

 

32,903

 

 

 

19,088

 

 

 

 

 

 

117,091

 

Accounts receivable, net (period end)

 

 

55,525

 

 

 

22,228

 

 

 

21,190

 

 

 

4,627

 

 

 

103,570

 

Rental equipment, at cost (period end)

 

 

649,206

 

 

 

263,712

 

 

 

302,168

 

 

 

 

 

 

1,215,086

 

Rental equipment, net book value (period end)

 

 

462,722

 

 

 

106,460

 

 

 

248,716

 

 

 

 

 

 

817,898

 

Utilization (period end) 2

 

 

74.2

%

 

 

64.2

%

 

 

65.1

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

71.4

%

 

 

59.6

%

 

 

62.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Gross Enviroplex sales revenues were $9,077 and $12,133 for the nine months ended September 30, 2015 and 2014, respectively, which includes inter-segment sales to Mobile Modular of $711 and $1,532, respectively, which have been eliminated in consolidation.

11


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 nine months ended September 30, 2015 and 2014. Revenues from foreign country customers accounted for 5% and 4% of the Company’s total revenues for the same periods, respectively.

 

 

12


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 nine months ended September 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 nine months ended September 30, 2015, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 38%, 34%, 29% and negative 1% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 18%, 47%, 34% and 1% 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

13


caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future,  a reduction in our revenues and profitability” in Part II – Other Information of this Form 10-Q.)

Revenues of TRS-RenTelco are derived from the rental and sale of general purpose 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 86% and 82% of consolidated revenues in the nine months ended September 30, 2015 and 2014, respectively.  Of the total rental operations revenues for the nine months ended September 30, 2015, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 46%, 27% and 27%, respectively, compared to 39%, 31% 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 nine months ended September 30, 2015 and 2014, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 14% and 18%, respectively, of the Company’s consolidated revenues. Of the total sales and other revenues for the nine months ended September 30, 2015 and 2014, Mobile Modular and Enviroplex together comprised 58% and 63%, respectively, and TRS-RenTelco comprised 39% and 35%, respectively. Adler Tanks sales and other revenues for the nine months ended September 30, 2015 and 2014 were 3% and 2%, respectively, of the Company’s total sales and other revenues. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold, such as delivery, installation, modifications and related site work.

Selling and administrative expenses primarily include personnel and benefit costs, which include 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

14


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 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

September 30,

 

 

Nine Months Ended

September 30,

 

 

Twelve Months Ended

September 30,

 

 

 

2015