mgrc-10q_20170331.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, 2017

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      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      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”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period of complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 1, 2017, 23,981,608 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”), and the related condensed consolidated statements of income, comprehensive income, and cash flows as of March 31, 2017 and for the three-month periods ended March 31, 2017 and 2016. 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, 2016, 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 28, 2017. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, 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 2, 2017

 

 

3


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

Three Months Ended March 31,

 

(in thousands, except per share amounts)

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

Rental

$

67,978

 

 

$

66,532

 

Rental related services

 

17,935

 

 

 

17,591

 

Rental operations

 

85,913

 

 

 

84,123

 

Sales

 

8,295

 

 

 

9,034

 

Other

 

629

 

 

 

542

 

Total revenues

 

94,837

 

 

 

93,699

 

Costs and Expenses

 

 

 

 

 

 

 

Direct costs of rental operations:

 

 

 

 

 

 

 

Depreciation of rental equipment

 

17,379

 

 

 

18,540

 

Rental related services

 

13,833

 

 

 

13,180

 

Other

 

15,359

 

 

 

15,827

 

Total direct costs of rental operations

 

46,571

 

 

 

47,547

 

Costs of sales

 

4,596

 

 

 

5,497

 

Total costs of revenues

 

51,167

 

 

 

53,044

 

Gross profit

 

43,670

 

 

 

40,655

 

Selling and administrative expenses

 

27,848

 

 

 

26,397

 

Income from operations

 

15,822

 

 

 

14,258

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(2,789

)

 

 

(3,556

)

Foreign currency exchange gain

 

226

 

 

 

151

 

Income before provision for income taxes

 

13,259

 

 

 

10,853

 

Provision for income taxes

 

5,286

 

 

 

4,287

 

Net income

$

7,973

 

 

$

6,566

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$

0.33

 

 

$

0.28

 

Diluted

$

0.33

 

 

$

0.27

 

Shares used in per share calculation:

 

 

 

 

 

 

 

Basic

 

23,950

 

 

 

23,862

 

Diluted

 

24,232

 

 

 

23,911

 

Cash dividends declared per share

$

0.260

 

 

$

0.255

 

 

 

 

 

 

 

 

 

 

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)

 

2017

 

 

2016

 

Net income

 

$

7,973

 

 

$

6,566

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(78

)

 

 

(92

)

Tax benefit

 

 

25

 

 

 

34

 

Comprehensive income

 

$

7,920

 

 

$

6,508

 

 

 

 

 

 

 

 

 

 

 

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)

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

1,680

 

 

$

852

 

Accounts receivable, net of allowance for doubtful accounts of $2,087 in 2017

   and 2016

 

 

92,552

 

 

 

96,877

 

Rental equipment, at cost:

 

 

 

 

 

 

 

 

Relocatable modular buildings

 

 

773,597

 

 

 

769,190

 

Electronic test equipment

 

 

248,291

 

 

 

246,325

 

Liquid and solid containment tanks and boxes

 

 

309,131

 

 

 

308,542

 

 

 

 

1,331,019

 

 

 

1,324,057

 

Less accumulated depreciation

 

 

(474,038

)

 

 

(467,686

)

Rental equipment, net

 

 

856,981

 

 

 

856,371

 

Property, plant and equipment, net

 

 

116,217

 

 

 

112,190

 

Prepaid expenses and other assets

 

 

27,119

 

 

 

25,583

 

Intangible assets, net

 

 

8,377

 

 

 

8,595

 

Goodwill

 

 

27,808

 

 

 

27,808

 

Total assets

 

$

1,130,734

 

 

$

1,128,276

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

323,843

 

 

$

326,266

 

Accounts payable and accrued liabilities

 

 

78,811

 

 

 

78,205

 

Deferred income

 

 

39,887

 

 

 

37,499

 

Deferred income taxes, net

 

 

291,568

 

 

 

292,019

 

Total liabilities

 

 

734,109

 

 

 

733,989

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding - 23,956 shares as of March 31, 2017 and 23,948 shares as of December 31, 2016

 

 

102,483

 

 

 

101,821

 

Retained earnings

 

 

294,250

 

 

 

292,521

 

Accumulated other comprehensive loss

 

 

(108

)

 

 

(55

)

Total shareholders’ equity

 

 

396,625

 

 

 

394,287

 

Total liabilities and shareholders’ equity

 

$

1,130,734

 

 

$

1,128,276

 

 

 

 

 

 

 

 

 

 

 

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)

 

2017

 

 

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,973

 

 

$

6,566

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,405

 

 

 

20,860

 

Provision for doubtful accounts

 

 

289

 

 

 

498

 

Share-based compensation

 

 

806

 

 

 

856

 

Gain on sale of used rental equipment

 

 

(2,943

)

 

 

(2,966

)

Foreign currency exchange gain

 

 

(226

)

 

 

(151

)

     Amortization of debt issuance cost

 

 

13

 

 

 

13

 

Change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,036

 

 

 

2,882

 

Income taxes receivable

 

 

 

 

11,000

 

Prepaid expenses and other assets

 

 

(1,536

)

 

 

1,949

 

Accounts payable and accrued liabilities

 

 

(3,924

)

 

 

(4,360

)

Deferred income

 

 

2,388

 

 

 

536

 

Deferred income taxes

 

 

(451

)

 

 

1,851

 

Net cash provided by operating activities

 

 

25,830

 

 

 

39,534

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of rental equipment

 

 

(15,914

)

 

 

(22,814

)

Purchases of property, plant and equipment

 

 

(5,835

)

 

 

(881

)

Proceeds from sales of used rental equipment

 

 

5,505

 

 

 

6,098

 

Net cash used in investing activities

 

 

(16,244

)

 

 

(17,597

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net repayments under bank lines of credit

 

 

(2,436

)

 

 

(15,522

)

Proceeds from the exercise of stock options

 

 

 

 

37

 

Taxes paid related to net share settlement of stock awards

 

 

(143

)

 

 

(344

)

Payment of dividends

 

 

(6,155

)

 

 

(6,136

)

Net cash used in financing activities

 

 

(8,734

)

 

 

(21,965

)

Effect of foreign currency exchange rate changes on cash

 

 

(24

)

 

 

(13

)

Net increase (decrease) in cash

 

 

828

 

 

 

(41

)

Cash balance, beginning of period

 

 

852

 

 

 

1,103

 

Cash balance, end of period

 

$

1,680

 

 

$

1,062

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, during the period

 

$

2,303

 

 

$

2,986

 

Net income taxes paid, during the period

 

$

5,565

 

 

$

706

 

Dividends accrued during the period, not yet paid

 

$

6,190

 

 

$

6,120

 

Rental equipment acquisitions, not yet paid

 

$

7,513

 

 

$

3,752

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

 

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 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, 2017 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 28, 2017 for the year ended December 31, 2016 (the “2016 Annual Report”).

 

 

NOTE 2. RECENT 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 for reporting useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.  The FASB has continued to issue ASUs to clarify and provide implementation guidance related to Revenue from Contracts with Customers, including ASU 2016-08, Revenue from Contract with Customers: Principal versus Agent Considerations, ASU 2016-10,  Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, ASU 2016-12,  Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients and ASU 2016-20, Revenue from Contracts with Customers: Technical Correction and Improvements. These amendments address a number of areas, including the entity’s identification of its performance obligations in a contract, collectability, non-cash consideration, presentation of sales tax and an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. These standards are effective for the interim and annual reporting periods beginning after December 31, 2017.  The new standard permits two methods of adoption:  retrospectively to each prior period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).  While the Company is still evaluating the potential impact of this guidance, including the method of adoption, the Company believes the majority of its revenue, as such revenue relates to rental contractual revenue, is excluded from the scope of this standard, and the remaining revenue streams will not be materially affected.  As a result, the Company currently does not anticipate the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.  

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) on 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. While the Company is still evaluating the potential impact of this guidance, as a lessor, the Company does not believe the accounting for operating lease revenues will be materially affected by this standard.  The Company anticipates it’s lessee accounting to increase its total assets and liabilities; however, the Company is currently evaluating the magnitude of the impact the adoption of this guidance will have on the Company’s consolidated financial statements.

 

During the first quarter 2017, the Company adopted ASU No. 2016-09 Improvements to Employee Share-Based Payment Accounting (ASU 2016-09).  As a result of the adoption, the Company recognized $18,000 of excess tax benefits related to share-based payments as a reduction to the provision for income taxes for the three months ended March 31, 2017.  These tax benefits, or shortfalls, were historically recorded in equity.  In addition, cash flows related to excess tax benefits, or shortfalls, are now classified as an operating activity with the prior period adjusted accordingly.  Cash paid on employees’ behalf related to shares withheld for tax purposes is classified as a financing activity, consistent with prior year’s presentation.  Retrospective application of the cash flow presentation requirements resulted in decreases to both net cash provided by operations and net cash used in financing activities of $111,000 for the three months ended March 31, 2016.  The Company’s compensation expense for each period continues to reflect forfeitures as they occur, rather than based upon estimated expected forfeitures.

 

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)

 

2017

 

 

2016

 

Weighted-average number of shares of common stock for

   calculating basic earnings per share

 

 

23,950

 

 

 

23,862

 

Effect of potentially dilutive securities from

   equity-based compensation

 

 

282

 

 

 

49

 

Weighted-average number of shares of common stock for

   calculating diluted earnings per share

 

 

24,232

 

 

 

23,911

 

 

 

 

 

 

 

 

 

 

 

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)

 

2017

 

 

2016

 

Options to purchase shares of common stock

 

 

7

 

 

 

1,019

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 4. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

 

Estimated

useful life

(In years)

 

 

March 31,

2017

 

 

December 31,

2016

 

Trade name

 

Indefinite

 

 

$

5,700

 

 

$

5,700

 

Customer relationships

 

 

11

 

 

 

9,611

 

 

 

9,611

 

 

 

 

 

 

 

 

15,311

 

 

 

15,311

 

Less accumulated amortization

 

 

 

 

 

 

(6,934

)

 

 

(6,716

)

 

 

 

 

 

 

$

8,377

 

 

$

8,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2016.  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, 2017 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 2017, $0.9 million in each of the fiscal years 2018 and 2019 and $0.2 million in 2020.

9


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, 2016. 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, 2017 and 2016 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,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

33,654

 

 

$

19,746

 

 

$

14,578

 

 

$       —

 

 

$

67,978

 

Rental related services revenues

 

 

11,588

 

 

 

658

 

 

 

5,689

 

 

 

 

 

17,935

 

Sales and other revenues

 

 

3,061

 

 

 

4,910

 

 

 

194

 

 

 

759

 

 

 

8,924

 

Total revenues

 

 

48,303

 

 

 

25,314

 

 

 

20,461

 

 

 

759

 

 

 

94,837

 

Depreciation of rental equipment

 

 

5,333

 

 

 

8,091

 

 

 

3,955

 

 

 

 

 

 

17,379

 

Gross profit

 

 

22,444

 

 

 

11,393

 

 

 

9,555

 

 

 

278

 

 

 

43,670

 

Selling and administrative expenses

 

 

13,800

 

 

 

5,689

 

 

 

7,267

 

 

 

1,092

 

 

 

27,848

 

Income (loss) from operations

 

 

8,644

 

 

 

5,704

 

 

 

2,288

 

 

 

(814

)

 

 

15,822

 

Interest (expense) income allocation

 

 

(1,591

)

 

 

(546

)

 

 

(738

)

 

 

86

 

 

 

(2,789

)

Income (loss) before provision for income taxes

 

 

7,053

 

 

 

5,384

 

 

 

1,550

 

 

 

(728

)

 

 

13,259

 

Rental equipment acquisitions

 

 

7,782

 

 

 

12,021

 

 

 

749

 

 

 

 

 

20,552

 

Accounts receivable, net (period end)

 

 

53,779

 

 

 

18,603

 

 

 

15,814

 

 

 

4,356

 

 

 

92,552

 

Rental equipment, at cost (period end)

 

 

773,597

 

 

 

248,291

 

 

 

309,131

 

 

 

 

 

1,331,019

 

Rental equipment, net book value (period end)

 

 

545,953

 

 

 

92,561

 

 

 

218,467

 

 

 

 

 

856,981

 

Utilization (period end) 2

 

 

76.5

%

 

 

62.1

%

 

 

53.4

%

 

 

 

 

 

 

 

 

Average utilization 2

 

 

76.8

%

 

 

62.2

%

 

 

52.3

%

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.

Gross Enviroplex sales revenues were $759 and $148 for the three months ended March 31, 2017 and 2016, respectively. There were no inter-segment sales to Mobile Modular in those periods requiring elimination in consolidation.

2.

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

10


No single customer accounted for more than 10% of total revenues for the three months ended March 31, 2017 and 2016. Revenues from foreign country customers accounted for 5% of the Company’s total revenues for the same periods.

 

 

11


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, 2016, as filed with the SEC on February 28, 2017 (the “2016 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 2016 Annual Report.  In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2016 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 9% of the Company’s total revenues in the three months ended March 31, 2017. 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, 2017, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 53%, 41%, 12% and negative 6% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 57%, 43%, 7% and negative 7% for the same period in 2016. 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 2016 Annual Report and “Item 1A. Risk Factors – Significant reductions of, or delays in, funding to public schools have

12


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 Company’s rental operations include rental and rental related service revenues which comprised approximately 91% and 90% of consolidated revenues in the three months ended March 31, 2017 and 2016, respectively.  Of the total rental operations revenues for the three months ended March 31, 2017, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 53%, 24% and 23%, respectively, compared to 50%, 26% and 24%, respectively, in the same period of 2016. 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, 2017 and 2016, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 9% and 10%, respectively, of the Company’s consolidated revenues. Of the total sales and other revenues for the three months ended March 31, 2017 and 2016, Mobile Modular and Enviroplex together comprised 43% and 30%, respectively, TRS-RenTelco comprised 55% and 65%, respectively, and Adler Tanks comprised 2% and 5%, 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 EBITDA is not in accordance with or an alternative for GAAP, and may be different from non−GAAP measures used by other

13


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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

7,973

 

 

$

6,566

 

 

$

39,658

 

 

$

40,190

 

Provision for income taxes

 

 

5,286

 

 

 

4,287

 

 

 

29,679

 

 

 

25,724

 

Interest

 

 

2,789

 

 

 

3,556

 

 

 

11,440

 

 

 

11,257

 

Depreciation and amortization

 

 

19,404

 

 

 

20,860

 

 

 

79,723

 

 

 

84,234

 

EBITDA

 

 

35,452

 

 

 

35,269

 

 

 

160,500

 

 

 

161,405

 

Share-based compensation

 

 

806

 

 

 

856

 

 

 

3,041

 

 

 

3,324

 

Adjusted EBITDA 1

 

$

36,258

 

 

$

36,125

 

 

$

163,541

 

 

$

164,729

 

Adjusted EBITDA margin 2

 

 

38

%

 

 

39

%

 

 

38

%

 

 

40

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Adjusted EBITDA 1

 

$

36,258

 

 

$

36,125

 

 

$

163,541

 

 

$

164,729

 

Interest paid

 

 

(2,420

)

 

 

(2,986

)

 

 

(11,870

)

 

 

(11,019

)

Net income taxes paid

 

 

(5,565

)

 

 

(706

)

 

 

(20,414

)

 

 

(2,888

)

Gain on sale of used rental equipment

 

 

(2,943

)

 

 

(2,966

)

 

 

(13,716

)

 

 

(11,999

)

Foreign currency exchange loss (gain)

 

 

(226

)

 

 

(151

)

 

 

46

 

 

 

149

 

Amortization of debt issuance costs

 

 

13

 

 

 

13

 

 

 

52

 

 

 

52

 

Change in certain assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

4,325

 

 

 

3,380

 

 

 

(915

)

 

 

(2,776

)

Income taxes receivable

 

 

 

 

11,000

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,536

)

 

 

1,949

 

 

 

(1,536

)

 

 

8,735

 

Accounts payable and other liabilities

 

 

(4,464

)

 

 

(6,660

)

 

 

10,370

 

 

 

(2,996

)

Deferred income

 

 

2,388

 

 

 

536

 

 

 

2,388

 

 

 

7,465

 

Net cash provided by operating activities

 

$

25,830

 

 

$

39,534

 

 

$

127,946

 

 

$

149,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

14


Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, and Series A Senior Notes, Series B Senior Notes and Series C Senior Notes (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A).  These instruments contain financial covenants requiring the Company to not:

 

Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Facility and the Note Purchase Agreement (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A)) of Adjusted EBITDA (as defined in the Credit Facility and the Note Purchase Agreement) to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1.  At March 31, 2017, the actual ratio was 3.73 to 1.

 

Permit the Consolidated Leverage Ratio of funded debt (as defined in the Credit Facility and the Note Purchase Agreement) to Adjusted EBITDA at any time during any period of four consecutive quarters to be greater than 2.75 to 1.  At March 31, 2017, the actual ratio was 1.98 to 1.

At March 31, 2017, the Company was in compliance with each of the aforementioned covenants.  There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although, significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants.

Recent Developments

On February 28, 2017, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.26 per common share for the quarter ended March 31, 2017, an increase of 2% over the prior year’s comparable quarter.

 

 

15


Results of Operations

Three Months Ended March 31, 2017 Compared to

Three Months Ended March 31, 2016

Overview

Consolidated revenues for the three months ended March 31, 2017 increased 1% to $94.8 million from $93.7 million in the same period in 2016.  Consolidated net income for the three months ended March 31, 2017 increased 21% to $8.0 million, from $6.6 million for the same period in 2016. Earnings per diluted share for the three months ended March 31, 2017 increased 22% to $0.33 from $0.27 for the same period in 2016.

For the three months ended March 31, 2017, on a consolidated basis:

 

Gross profit increased $3.0 million, or 7%, to $43.7 million in 2017. Mobile Modular’s gross profit increased $1.8 million, or 9%, due to higher gross profit on rental revenues, partly offset by lower gross profit on rental related services revenues. Adler Tanks’ gross profit increased $0.6 million, or 7%, primarily due to higher gross profit on rental and rental related services revenues. TRS-RenTelco’s gross profit increased $0.4 million, or 3%, primarily due to higher gross profit on rental revenues, partly offset by lower gross profit on rental related services and sales revenues. Enviroplex’s gross profit increased $0.2 million, primarily due to higher sales revenues.

 

Selling and administrative expenses increased $1.5 million, or 5%, to $27.8 million, primarily due to increased corporate administrative expenses and increased employee headcount, salaries and employee benefit costs.

 

Interest expense decreased $0.8 million, or 22%, to $2.8 million in 2017 compared to the same period in 2016, due to 14% lower average debt levels of the Company and 8% lower net average interest rates of 3.45% in 2017 compared to 3.77% in 2016.  In March 2016, the Company secured a new line of credit with a syndicate of banks.  This new line of credit replaced the Company’s prior $420.0 million line of credit.  As a result, the remaining $0.5 million of prepaid debt issuance costs related to the prior line of credit were charged to interest expense during the three months ended March 31, 2016.

 

Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 53%, 41% and 12%, respectively, compared to 57%, 43% and 7%, respectively, for the comparable 2016 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was a negative 6% in 2017 compared to a negative 7% in 2016.

 

Adjusted EBITDA increased $0.1 million to $36.3 million in 2017.

 

 

16


Mobile Modular

For the three months ended March 31, 2017, Mobile Modular’s total revenues increased $3.2 million, or 7%, to $48.3 million compared to the same period in 2016, primarily due to higher rental, rental related services and sales revenues. The revenue increase, together with higher gross margin on rental revenues, partly offset by lower gross profit on rental related services and sales revenues and higher selling and administrative expenses, resulted in a 13% increase in pre-tax income to $7.1 million for the three months ended March 31, 2017, from $6.2 million for the same period in 2016.

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

Mobile Modular – Three Months Ended 3/31/17 compared to Three Months Ended 3/31/16 (Unaudited)