mgrc-10q_20160331.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 March 31, 2016

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 May 2, 2016, 23,898,389 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 March 31, 2016, and the related condensed consolidated statements of income, comprehensive income, and cash flows for the three-month periods ended March 31, 2016 and 2015. 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, 2015, 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 25, 2016. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2015, 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

May 3, 2016

 

 

3


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

Three Months Ended March 31,

 

(in thousands, except per share amounts)

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

Rental

$

66,532

 

 

$

65,502

 

Rental related services

 

17,591

 

 

 

15,367

 

Rental operations

 

84,123

 

 

 

80,869

 

Sales

 

9,034

 

 

 

8,787

 

Other

 

542

 

 

 

532

 

Total revenues

 

93,699

 

 

 

90,188

 

Costs and Expenses

 

 

 

 

 

 

 

Direct costs of rental operations:

 

 

 

 

 

 

 

Depreciation of rental equipment

 

18,540

 

 

 

18,682

 

Rental related services

 

13,180

 

 

 

11,899

 

Other

 

15,827

 

 

 

15,211

 

Total direct costs of rental operations

 

47,547

 

 

 

45,792

 

Costs of sales

 

5,497

 

 

 

5,309

 

Total costs of revenues

 

53,044

 

 

 

51,101

 

Gross profit

 

40,655

 

 

 

39,087

 

Selling and administrative expenses

 

26,397

 

 

 

25,212

 

Income from operations

 

14,258

 

 

 

13,875

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(3,556

)

 

 

(2,391

)

Foreign currency exchange gain (loss)

 

151

 

 

 

(168

)

Income before provision for income taxes

 

10,853

 

 

 

11,316

 

Provision for income taxes

 

4,287

 

 

 

4,470

 

Net income

$

6,566

 

 

$

6,846

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$

0.28

 

 

$

0.26

 

Diluted

$

0.27

 

 

$

0.26

 

Shares used in per share calculation:

 

 

 

 

 

 

 

Basic

 

23,862

 

 

 

26,091

 

Diluted

 

23,911

 

 

 

26,276

 

Cash dividends declared per share

$

0.255

 

 

$

0.250

 

 

 

 

 

 

 

 

 

 

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 March 31,

 

(in thousands)

 

2016

 

 

2015

 

Net income

 

$

6,566

 

 

$

6,846

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(92

)

 

 

88

 

Tax benefit (provision)

 

 

34

 

 

 

(16

)

Comprehensive income

 

$

6,508

 

 

$

6,918

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5


McGrath RentCorp

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

(in thousands)

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

1,062

 

 

$

1,103

 

Accounts receivable, net of allowance for doubtful accounts of $2,305 in 2016

   and $2,087 in 2015

 

 

91,883

 

 

 

95,263

 

Income taxes receivable

 

 

 

 

11,000

 

Rental equipment, at cost:

 

 

 

 

 

 

 

 

Relocatable modular buildings

 

 

747,475

 

 

 

736,875

 

Electronic test equipment

 

 

260,324

 

 

 

262,945

 

Liquid and solid containment tanks and boxes

 

 

309,823

 

 

 

310,263

 

 

 

 

1,317,622

 

 

 

1,310,083

 

Less accumulated depreciation

 

 

(450,407

)

 

 

(440,482

)

Rental equipment, net

 

 

867,215

 

 

 

869,601

 

Property, plant and equipment, net

 

 

108,532

 

 

 

109,753

 

Prepaid expenses and other assets

 

 

26,607

 

 

 

28,556

 

Intangible assets, net

 

 

9,248

 

 

 

9,465

 

Goodwill

 

 

27,808

 

 

 

27,808

 

Total assets

 

$

1,132,355

 

 

$

1,152,549

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

365,772

 

 

$

381,281

 

Accounts payable and accrued liabilities

 

 

64,045

 

 

 

71,942

 

Deferred income

 

 

36,824

 

 

 

36,288

 

Deferred income taxes, net

 

 

285,202

 

 

 

283,351

 

Total liabilities

 

 

751,843

 

 

 

772,862

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding - 23,880 shares as of March 31, 2016 and 23,851 shares as of December 31, 2015

 

 

101,485

 

 

 

101,046

 

Retained earnings

 

 

279,152

 

 

 

278,708

 

Accumulated other comprehensive loss

 

 

(125

)

 

 

(67

)

Total shareholders’ equity

 

 

380,512

 

 

 

379,687

 

Total liabilities and shareholders’ equity

 

$

1,132,355

 

 

$

1,152,549

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6


McGrath RentCorp

CONDENSED Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2016

 

 

2015

 

Cash Flows from Operating Activities :

 

 

 

 

 

 

 

 

Net income

 

$

6,566

 

 

$

6,846

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

20,860

 

 

 

20,906

 

Provision for doubtful accounts

 

 

498

 

 

 

333

 

Share-based compensation

 

 

856

 

 

 

931

 

Gain on sale of used rental equipment

 

 

(2,966

)

 

 

(2,869

)

Foreign currency exchange loss (gain)

 

 

(151

)

 

 

168

 

Change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,882

 

 

 

11,600

 

Income taxes receivable

 

 

11,000

 

 

 

Prepaid expenses and other assets

 

 

1,949

 

 

 

6,124

 

Accounts payable and accrued liabilities

 

 

(4,249

)

 

 

(6,421

)

Deferred income

 

 

536

 

 

 

220

 

Deferred income taxes

 

 

1,851

 

 

 

(3,218

)

Net cash provided by operating activities

 

 

39,632

 

 

 

34,620

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of rental equipment

 

 

(22,814

)

 

 

(29,974

)

Purchase of property, plant and equipment

 

 

(881

)

 

 

(3,005

)

Proceeds from sale of used rental equipment

 

 

6,098

 

 

 

6,111

 

Net cash used in investing activities

 

 

(17,597

)

 

 

(26,868

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net repayments under bank lines of credit

 

 

(15,522

)

 

 

(1,555

)

Amortization of debt issuance costs

 

 

13

 

 

 

13

 

Proceeds from the exercise of stock options

 

 

37

 

 

 

958

 

Excess tax benefit (shortfall) from exercise of stock awards

 

 

(111

)

 

 

19

 

Taxes paid related to net share settlement of stock awards

 

 

(344

)

 

 

(582

)

Repurchase of common stock

 

 

 

 

(377

)

Payment of dividends

 

 

(6,136

)

 

 

(6,639

)

Net cash used in financing activities

 

 

(22,063

)

 

 

(8,163

)

Effect of exchange rate changes on cash

 

 

(13

)

 

 

21

 

Net decrease in cash

 

 

(41

)

 

 

(390

)

Cash balance, beginning of period

 

 

1,103

 

 

 

1,167

 

Cash balance, end of period

 

$

1,062

 

 

$

777

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, during the period

 

$

2,986

 

 

$

2,008

 

Net income taxes paid, during the period

 

$

673

 

 

$

316

 

Dividends accrued during the period, not yet paid

 

$

6,120

 

 

$

6,552

 

Rental equipment acquisitions, not yet paid

 

$

3,752

 

 

$

10,220

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

 

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three months ended March 31, 2016 and 2015 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 three months ended March 31, 2016 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 25, 2016 for the year ended December 31, 2015 (the “2015 Annual Report”).

 

 

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.  The objective of this guidance is to establish the principles to report useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.  In August 2015, the FASB issued an update to defer the effective date of this guidance by one year. The guidance in the update is effective for the interim and annual reporting periods beginning after December 15, 2017.  The Company is currently evaluating the impact of the adoption of this accounting guidance on its consolidated financial statements.

 

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 on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts.  The implementation of this update resulted in a reclassification of $0.2 million of debt issuance costs from prepaid expenses and other assets to notes payable at December 31, 2015.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Subtopic 842-10).  Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and b) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is evaluating the impact of this guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718). Under the new guidance, all excess tax benefits and tax deficiencies will be recognized in the income statement as they occur.  This will replace the current guidance, which requires tax benefits that exceed compensation cost (windfalls) to be recognized in equity.  It will also eliminate the need to maintain a “windfall pool,” and will remove the requirement to delay recognizing a windfall until it reduces current taxes payable.  The new guidance will also change the cash flow presentation of excess tax benefits, classifying them as operating inflows, consistent with other cash flows related to income taxes.  The amendments in this guidance are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company is evaluating the impact of this new guidance on its consolidated financial statements.

 

 

 

 

8


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

March 31,

 

(in thousands)

 

2016

 

 

2015

 

Weighted-average number of shares of common stock for

   calculating basic earnings per share

 

 

23,862

 

 

 

26,091

 

Effect of potentially dilutive securities from

   equity-based compensation

 

 

49

 

 

 

185

 

Weighted-average number of shares of common stock for

   calculating diluted earnings per share

 

 

23,911

 

 

 

26,276

 

 

 

 

 

 

 

 

 

 

 

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

March 31,

 

(in thousands)

 

2016

 

 

2015

 

Options to purchase shares of common stock

 

 

1,019

 

 

 

26

 

 

 

 

 

 

 

 

 

 

 

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 shares authorized for repurchase 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 months ended March 31, 2016 and 2015.

 

 

 

Three Months Ended

March 31,

 

(in thousands, except share and per share amounts)

 

2016

 

 

2015

 

Number of shares repurchased

 

 

 

 

 

12,210

 

Aggregate purchase price

 

$

 

 

$

377

 

Average price per repurchased shares

 

$

 

 

$

30.91

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016, 1,592,026 shares remain authorized for repurchase.

 

 

9


NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

 

Estimated

useful life

in years

 

 

March 31,

2016

 

 

December 31,

2015

 

Trade name

 

Indefinite

 

 

$

5,700

 

 

$

5,700

 

Customer relationships

 

 

11

 

 

 

9,611

 

 

 

9,611

 

 

 

 

 

 

 

 

15,311

 

 

 

15,311

 

Less accumulated amortization

 

 

 

 

 

 

(6,063

)

 

 

(5,846

)

 

 

 

 

 

 

$

9,248

 

 

$

9,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015.  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.

Intangible assets with finite useful lives are amortized over their respective useful lives.  Based on the carrying values at March 31, 2016 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $0.7 million for the remainder of fiscal year 2016, $0.9 million in each of the fiscal years 2017 through 2019 and $0.2 million in 2020.

 

 

10


NOTE 5. SEGMENT REPORTING

The Company’s four reportable segments are (1) its modular building and portable storage segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing segment 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, 2015. 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 three months ended March 31, 2016 and 2015 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

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

31,155

 

 

$

20,928

 

 

$

14,449

 

 

$       —

 

 

$

66,532

 

Rental related services revenues

 

 

11,205

 

 

 

784

 

 

 

5,602

 

 

 

 

 

 

17,591

 

Sales and other revenues

 

 

2,724

 

 

 

6,272

 

 

 

432

 

 

 

148

 

 

 

9,576

 

Total revenues

 

 

45,084

 

 

 

27,984

 

 

 

20,483

 

 

 

148

 

 

 

93,699

 

Depreciation of rental equipment

 

 

5,126

 

 

 

9,388

 

 

 

4,026

 

 

 

 

 

 

18,540

 

Gross profit

 

 

20,653

 

 

 

11,016

 

 

 

8,942

 

 

 

44

 

 

 

40,655

 

Selling and administrative expenses

 

 

12,462

 

 

 

5,797

 

 

 

7,262

 

 

 

876

 

 

 

26,397

 

Income (loss) from operations

 

 

8,191

 

 

 

5,219

 

 

 

1,680

 

 

 

(832

)

 

 

14,258

 

Interest (expense) income allocation

 

 

(1,947

)

 

 

(730

)

 

 

(934

)

 

 

55

 

 

 

(3,556

)

Income (loss) before provision for income taxes

 

 

6,244

 

 

 

4,640

 

 

 

746

 

 

 

(777

)

 

 

10,853

 

Rental equipment acquisitions

 

 

11,579

 

 

 

7,729

 

 

 

(18

)

 

 

 

 

19,290

 

Accounts receivable, net (period end)

 

 

50,915

 

 

 

21,393

 

 

 

15,386

 

 

 

4,189

 

 

 

91,883

 

Rental equipment, at cost (period end)

 

 

747,475

 

 

 

260,324

 

 

 

309,823

 

 

 

 

 

1,317,622

 

Rental equipment, net book value (period end)

 

 

535,308

 

 

 

98,291

 

 

 

233,616

 

 

 

 

 

867,215

 

Utilization (period end) 2

 

 

75.4

%

 

 

59.9

%

 

 

51.0

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

76.1

%

 

 

59.6

%

 

 

50.3

%

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

26,408

 

 

$

22,111

 

 

$

16,983

 

 

$       —

 

 

$

65,502

 

Rental related services revenues

 

 

9,103

 

 

 

656

 

 

 

5,608

 

 

 

 

 

15,367

 

Sales and other revenues

 

 

3,373

 

 

 

5,327

 

 

 

307

 

 

 

312

 

 

 

9,319

 

Total revenues

 

 

38,884

 

 

 

28,094

 

 

 

22,898

 

 

 

312

 

 

 

90,188

 

Depreciation of rental equipment

 

 

4,561

 

 

 

10,152

 

 

 

3,969

 

 

 

 

 

 

18,682

 

Gross profit

 

 

15,704

 

 

 

11,310

 

 

 

12,007

 

 

 

66

 

 

 

39,087

 

Selling and administrative expenses

 

 

11,356

 

 

 

6,118

 

 

 

6,918

 

 

 

820

 

 

 

25,212

 

Income (loss) from operations

 

 

4,348

 

 

 

5,192

 

 

 

5,089

 

 

 

(754

)

 

 

13,875

 

Interest (expense) income allocation

 

 

(1,253

)

 

 

(529

)

 

 

(657

)

 

 

48

 

 

 

(2,391

)

Income (loss) before provision for income taxes

 

 

3,095

 

 

 

4,495

 

 

 

4,432

 

 

 

(706

)

 

 

11,316

 

Rental equipment acquisitions

 

 

16,359

 

 

 

16,230

 

 

 

2,665

 

 

 

 

 

35,254

 

Accounts receivable, net (period end)

 

 

45,818

 

 

 

23,095

 

 

 

18,316

 

 

 

2,132

 

 

 

89,361

 

Rental equipment, at cost (period end)

 

 

678,990

 

 

 

269,575

 

 

 

305,751

 

 

 

 

 

1,254,316

 

Rental equipment, net book value (period end)

 

 

484,598

 

 

 

109,887

 

 

 

244,593

 

 

 

 

 

839,078

 

Utilization (period end) 2

 

 

74.5

%

 

 

58.6

%

 

 

61.1

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

74.2

%

 

 

59.9

%

 

 

61.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Gross Enviroplex sales revenues were $148 and $316 for the three months ended March 31, 2016 and 2015, respectively, which include inter-segment sales to Mobile Modular of $0 and $4, 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.

11


No single customer accounted for more than 10% of total revenues for the three months ended March 31, 2016 and 2015. Revenues from foreign country customers accounted for 5% and 6% 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, 2015, as filed with the SEC on February 25, 2016 (the “2015 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 2015 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 reportable business segments: (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing segment selling modular buildings used primarily as classrooms in California (“Enviroplex”).

The Mobile Modular business segment includes the results of operations of Mobile Modular Portable Storage division, which represented approximately 8% of the Company’s total revenues in the three months ended March 31, 2016. Mobile Modular Portable Storage offers portable storage units and high security portable office units for rent, lease and purchase.

In the three months ended March 31, 2016, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 57%, 43%, 7% and negative 7% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 27%, 40%, 39% and negative 6% for the same period in 2015. 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 less cash operating costs 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 are usually above its net book value.

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 2015 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 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.

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 90% of consolidated revenues in the three months ended March 31, 2016 and 2015.  Of the total rental operations revenues for the three months ended March 31, 2016, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 50%, 26% and 24%, respectively, compared to 44%, 28% and 28%, respectively, in the same period of 2015. 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 three months ended March 31, 2016 and 2015, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 10%, of the Company’s consolidated revenues. Of the total sales and other revenues for the three months ended March 31, 2016 and 2015, Mobile Modular and Enviroplex together comprised 30% and 40%, respectively, TRS-RenTelco comprised 65% and 57%, respectively, and Adler Tanks comprised 5% and 3%, respectively. 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

March 31,

 

 

Twelve Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

6,566

 

 

$

6,846

 

 

$

40,190

 

 

$

44,684

 

Provision for income taxes

 

 

4,287

 

 

 

4,470

 

 

 

25,724

 

 

 

30,257

 

Interest

 

 

3,556

 

 

 

2,391

 

 

 

11,257

 

 

 

9,468

 

Depreciation and amortization

 

 

20,860

 

 

 

20,906

 

 

 

84,234

 

 

 

82,099

 

EBITDA

 

 

35,269

 

 

 

34,613

 

 

 

161,405

 

 

 

166,508

 

Share-based compensation

 

 

856

 

 

 

931

 

 

 

3,324

 

 

 

3,830

 

Adjusted EBITDA 1

 

$

36,125

 

 

$

35,544

 

 

$

164,729

 

 

$

170,338

 

Adjusted EBITDA margin 2

 

 

39

%

 

 

39

%

 

 

40

%

 

 

41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities

 

(dollar amounts in thousands)

 

Three Months Ended

March 31,

 

 

Twelve Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Adjusted EBITDA 1

 

$

36,125

 

 

$

35,544

 

 

$

164,729

 

 

$

170,338

 

Interest paid

 

 

(2,986

)

 

 

(2,008

)

 

 

(11,019

)

 

 

(9,925

)

Net income taxes paid

 

 

(706

)

 

 

(316

)

 

 

(2,888

)

 

 

(22,252

)

Gain on sale of used rental equipment

 

 

(2,966

)

 

 

(2,869

)

 

 

(11,999

)

 

 

(15,737

)

Gain on sale of property, plant and equipment

 

 

 

 

 

 

 

 

(812

)

Foreign currency exchange loss (gain)

 

 

(151

)

 

 

168

 

 

 

149

 

 

 

411

 

Change in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

3,380

 

 

 

11,933

 

 

 

(2,522

)

 

 

(6,290

)

Income taxes receivable

 

 

11,000

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

1,949

 

 

 

6,124

 

 

 

8,481

 

 

 

(10,154

)

Accounts payable and other liabilities

 

 

(6,549

)

 

 

(14,176

)

 

 

(2,884

)

 

 

6,265

 

Deferred income

 

 

536

 

 

 

220

 

 

 

7,465

 

 

 

7,671

 

Net cash provided by operating activities

 

$

39,632

 

 

$

34,620

 

 

$

149,512

 

 

$

119,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

15


Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, and Series A Senior