mgrc-10q_20190331.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, 2019

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

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 April 29, 2019, 24,236,345 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 the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, regarding McGrath RentCorp’s (the “Company’s”) expectations, strategies, prospects or targets are forward looking statements.  These forward-looking statements also can be identified by the use of forward-looking terminology such as “believes,” “expects,” “will,” or “anticipates” or the negative of these terms or other 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

 

Results of review of interim financial statements

 

We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp, and subsidiaries (the “Company”) as of March 31, 2019 and the related condensed consolidated statements of income, comprehensive income, cash flows and shareholders’ equity for the three-months ended March 31, 2019 and 2018, and the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements 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) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for review results

 

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our reviews in accordance with the standards of the PCAOB. 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 PCAOB, 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.

 

/s/ GRANT THORNTON LLP

San Jose, California

April 30, 2019

 

 

3


McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

(in thousands, except per share amounts)

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Rental

 

$

82,696

 

 

$

74,261

 

Rental related services

 

 

21,455

 

 

 

17,831

 

Rental operations

 

 

104,151

 

 

 

92,092

 

Sales

 

 

16,825

 

 

 

12,091

 

Other

 

 

1,032

 

 

 

902

 

Total revenues

 

 

122,008

 

 

 

105,085

 

Costs and Expenses

 

 

 

 

 

 

 

 

Direct costs of rental operations:

 

 

 

 

 

 

 

 

Depreciation of rental equipment

 

 

18,961

 

 

 

17,777

 

Rental related services

 

 

16,363

 

 

 

13,768

 

Other

 

 

19,733

 

 

 

16,269

 

Total direct costs of rental operations

 

 

55,057

 

 

 

47,814

 

Costs of sales

 

 

9,946

 

 

 

7,101

 

Total costs of revenues

 

 

65,003

 

 

 

54,915

 

Gross profit

 

 

57,005

 

 

 

50,170

 

Selling and administrative expenses

 

 

29,695

 

 

 

28,128

 

Income from operations

 

 

27,310

 

 

 

22,042

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,108

)

 

 

(2,992

)

Foreign currency exchange gain (loss)

 

 

49

 

 

 

(32

)

Income before provision for income taxes

 

 

24,251

 

 

 

19,018

 

Provision for income taxes

 

 

5,802

 

 

 

4,552

 

Net income

 

$

18,449

 

 

$

14,466

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.76

 

 

$

0.60

 

Diluted

 

$

0.75

 

 

$

0.59

 

Shares used in per share calculation:

 

 

 

 

 

 

 

 

Basic

 

 

24,195

 

 

 

24,067

 

Diluted

 

 

24,540

 

 

 

24,478

 

Cash dividends declared per share

 

$

0.375

 

 

$

0.340

 

 

 

 

 

 

 

 

 

 

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)

 

2019

 

 

2018

 

Net income

 

$

18,449

 

 

$

14,466

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(34

)

 

 

(26

)

Tax benefit

 

 

7

 

 

 

4

 

Comprehensive income

 

$

18,422

 

 

$

14,444

 

 

 

 

 

 

 

 

 

 

 

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)

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

1,442

 

 

$

1,508

 

Accounts receivable, net of allowance for doubtful accounts of $1,883 in 2019

   and 2018

 

 

119,403

 

 

 

121,016

 

Rental equipment, at cost:

 

 

 

 

 

 

 

 

Relocatable modular buildings

 

 

834,883

 

 

 

817,375

 

Electronic test equipment

 

 

286,469

 

 

 

285,052

 

Liquid and solid containment tanks and boxes

 

 

314,899

 

 

 

313,573

 

 

 

 

1,436,251

 

 

 

1,416,000

 

Less accumulated depreciation

 

 

(523,373

)

 

 

(514,985

)

Rental equipment, net

 

 

912,878

 

 

 

901,015

 

Property, plant and equipment, net

 

 

127,736

 

 

 

126,899

 

Prepaid expenses and other assets

 

 

43,336

 

 

 

31,816

 

Intangible assets, net

 

 

7,030

 

 

 

7,254

 

Goodwill

 

 

27,808

 

 

 

27,808

 

Total assets

 

$

1,239,633

 

 

$

1,217,316

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Notes payable

 

$

289,464

 

 

$

298,564

 

Accounts payable and accrued liabilities

 

 

102,968

 

 

 

90,844

 

Deferred income

 

 

58,187

 

 

 

49,709

 

Deferred income taxes, net

 

 

208,371

 

 

 

206,664

 

Total liabilities

 

 

658,990

 

 

 

645,781

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding - 24,222 shares as of March 31, 2019 and 24,182 shares as of December 31, 2018

 

 

103,638

 

 

 

103,801

 

Retained earnings

 

 

477,081

 

 

 

467,783

 

Accumulated other comprehensive loss

 

 

(76

)

 

 

(49

)

Total shareholders’ equity

 

 

580,643

 

 

 

571,535

 

Total liabilities and shareholders’ equity

 

$

1,239,633

 

 

$

1,217,316

 

 

 

 

 

 

 

 

 

 

 

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)

 

2019

 

 

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

18,449

 

 

$

14,466

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,100

 

 

 

19,928

 

Impairment of rental assets

 

 

 

 

 

39

 

Provision for doubtful accounts

 

 

156

 

 

 

35

 

Share-based compensation

 

 

1,392

 

 

 

864

 

Gain on sale of used rental equipment

 

 

(4,615

)

 

 

(3,848

)

Foreign currency exchange (gain) loss

 

 

(49

)

 

 

32

 

Amortization of debt issuance costs

 

 

3

 

 

 

13

 

     Change in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,457

 

 

 

7,745

 

Prepaid expenses and other assets

 

 

(11,520

)

 

 

(3,303

)

Accounts payable and accrued liabilities

 

 

9,948

 

 

 

(4,284

)

Deferred income

 

 

8,478

 

 

 

(717

)

Deferred income taxes

 

 

1,707

 

 

 

182

 

Net cash provided by operating activities

 

 

46,506

 

 

 

31,152

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchases of rental equipment

 

 

(34,132

)

 

 

(24,168

)

Purchases of property, plant and equipment

 

 

(2,753

)

 

 

(2,667

)

Proceeds from sales of used rental equipment

 

 

9,233

 

 

 

7,707

 

Net cash used in investing activities

 

 

(27,652

)

 

 

(19,128

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net repayments under bank lines of credit

 

 

(9,103

)

 

 

(2,831

)

Taxes paid related to net share settlement of stock awards

 

 

(1,555

)

 

 

(971

)

Payment of dividends

 

 

(8,248

)

 

 

(6,300

)

Net cash used in financing activities

 

 

(18,906

)

 

 

(10,102

)

Effect of foreign currency exchange rate changes on cash

 

 

(14

)

 

 

25

 

Net increase (decrease) in cash

 

 

(66

)

 

 

1,947

 

Cash balance, beginning of period

 

 

1,508

 

 

 

2,501

 

Cash balance, end of period

 

$

1,442

 

 

$

4,448

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid, during the period

 

$

2,828

 

 

$

2,537

 

Net income taxes paid, during the period

 

$

710

 

 

$

1,572

 

Dividends accrued during the period, not yet paid

 

$

9,088

 

 

$

8,237

 

Rental equipment acquisitions, not yet paid

 

$

11,004

 

 

$

6,930

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


McGrath RentCorp

CONDENSED Consolidated Statements OF SHAREHOLDERS’ EQUITY

(unaudited

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders’

 

(in thousands, except per share amounts)

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2018

 

 

24,182

 

 

$

103,801

 

 

$

467,783

 

 

$

(49

)

 

$

571,535

 

Net income

 

 

 

 

 

 

 

 

18,449

 

 

 

 

 

 

18,449

 

Share-based compensation

 

 

 

 

 

1,392

 

 

 

 

 

 

 

 

 

1,392

 

Common stock issued under stock plans, net of shares

   withheld for employee taxes

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of stock awards

 

 

 

 

 

(1,555

)

 

 

 

 

 

 

 

 

(1,555

)

Dividends accrued of $0.375 per share

 

 

 

 

 

 

 

 

(9,151

)

 

 

 

 

 

(9,151

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

(27

)

Balance at March 31, 2019

 

 

24,222

 

 

$

103,638

 

 

$

477,081

 

 

$

(76

)

 

$

580,643

 

 

 

 

Common Stock

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders’

 

(in thousands, except per share amounts)

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2017

 

 

24,052

 

 

$

102,947

 

 

$

421,405

 

 

$

(168

)

 

$

524,184

 

Net income

 

 

 

 

 

 

 

 

14,466

 

 

 

 

 

 

14,466

 

Share-based compensation

 

 

 

 

 

864

 

 

 

 

 

 

 

 

 

864

 

Common stock issued under stock plans, net of shares

   withheld for employee taxes

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxes paid related to net share settlement of stock awards

 

 

 

 

 

(971

)

 

 

 

 

 

 

 

 

(971

)

Dividends accrued of $0.34 per share

 

 

 

 

 

 

 

 

(8,237

)

 

 

 

 

 

(8,237

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(22

)

 

 

(22

)

Balance at March 31, 2018

 

 

24,102

 

 

$

102,840

 

 

$

427,634

 

 

$

(190

)

 

$

530,284

 

 

8


McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

 

 

NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three months ended March 31, 2019 and 2018 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, 2019 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K, filed with the SEC on February 26, 2019 for the year ended December 31, 2018 (the “2018 Annual Report”).

 

NOTE 2. REVENUE RECOGNITION

The Company’s accounting for revenues is governed by two accounting standards.  The majority of the Company’s revenues are considered lease or lease related and are accounted for in accordance with Topic 842, Leases.   Revenues determined to be non-lease related are accounted for in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The Company accounts for revenues when approval and commitment from both parties have been obtained, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.  The Company typically recognizes non-lease related revenues at a point in time because the customer does not simultaneously consume the benefits of the Company’s promised goods and services, or performance obligations, and obtain control when delivery and installation are complete.  For contracts that have multiple performance obligations, the transaction price is allocated to each performance obligation in the contract based on the Company’s best estimate of the standalone selling prices of each distinct performance obligation in the contract.  The standalone selling price is typically determined based upon the expected cost plus an estimated margin of each performance obligation.  

The Company generally rents and sells to customers on 30 day payment terms.  The Company does not typically offer variable payment terms, or accept non-monetary consideration.  Amounts billed and due from the Company’s customers are classified as Accounts receivable on the Company’s consolidated balance sheet.  For certain sales of modular buildings, progress payments from the customer are received during the manufacturing of new equipment, or the preparation of used equipment.  The advance payments are not considered a significant financing component because the payments are used to meet working capital needs during the contract and to protect the Company from the customer failing to adequately complete their obligations under the contract.  These contract liabilities are included in Deferred income on the Company’s consolidated balance sheet and totaled $26.0 million and $15.7 million at March 31, 2019 and December 31, 2018, respectively.  Sales revenues totaling $3.4 million were recognized during the three months ended March 31, 2019, which were included in the contract liability balance at December 31, 2018.  For certain modular building sales, the customer retains a small portion of the contract price until full completion of the contract, which results in revenue earned in excess of billings.  These unbilled contract assets are included in Accounts receivable on the Company’s consolidated balance sheet and totaled $1.3 million and $1.4 million at March 31, 2019 and December 31, 2018, respectively.

Lease Revenues

Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating segments.  Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned.  Rental related services revenues are primarily associated with relocatable modular building and liquid and solid containment tanks and boxes leases.  For modular building leases, rental related services revenues for modifications, delivery, installation, dismantle and return delivery are lease related because the payments are considered minimum lease payments that are an integral part of the negotiated lease agreement with the customer.  These revenues are recognized on a straight-line basis over the term of the lease. Certain leases are accounted for as finance leases.  For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  Other revenues include interest income on finance leases and rental income on facility leases.

9


Non-Lease Revenues

Non-lease revenues are recognized in the period when control of the performance obligation is transferred, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services.  For liquid and solid containment solutions, portable storage containers and electronic test equipment, rental related services revenues for delivery and return delivery are considered non-lease revenues.    

Sales revenues are typically recognized at a point in time, which occurs upon the completion of delivery, installation and acceptance of the equipment by the customer.    Accounting for non-lease revenues requires judgment in determining the point in time the customer gains control of the equipment and the appropriate accounting period to recognize revenue.

Sales taxes charged to customers are reported on a net basis and are excluded from revenues and expenses.

The following table disaggregates the Company’s revenues by lease (within the scope of Topic 842) and non-lease revenues (within the scope of Topic 606) and the underlying service provided for the three months ended March 31, 2019 and 2018:

 

(in thousands)

 

Mobile

Modular

 

 

TRS-

RenTelco

 

 

Adler

Tanks

 

 

Enviroplex

 

 

Consolidated

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

53,743

 

 

$

24,680

 

 

$

17,084

 

 

$

 

 

$

95,507

 

Non-lease:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Rental related services

 

 

3,304

 

 

 

568

 

 

 

6,081

 

 

 

 

 

 

9,953

 

     Sales

 

 

8,000

 

 

 

4,979

 

 

 

270

 

 

 

2,805

 

 

 

16,054

 

     Other

 

 

45

 

 

 

449

 

 

 

 

 

 

 

 

 

494

 

     Total non-lease

 

 

11,349

 

 

 

5,996

 

 

 

6,351

 

 

 

2,805

 

 

 

26,501

 

          Total revenues

 

$

65,092

 

 

$

30,676

 

 

$

23,435

 

 

$

2,805

 

 

$

122,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

45,271

 

 

$

22,499

 

 

$

15,783

 

 

$

 

 

$

83,553

 

Non-lease:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Rental related services

 

 

3,985

 

 

 

807

 

 

 

5,090

 

 

 

 

 

 

9,882

 

     Sales

 

 

4,593

 

 

 

4,339

 

 

 

305

 

 

 

2,018

 

 

 

11,255

 

     Other

 

 

2

 

 

 

393

 

 

 

 

 

 

 

 

 

395

 

     Total non-lease

 

 

8,580

 

 

 

5,539

 

 

 

5,395

 

 

 

2,018

 

 

 

21,532

 

          Total revenues

 

$

53,851

 

 

$

28,038

 

 

$

21,178

 

 

$

2,018

 

 

$

105,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer returns of rental equipment prior to the end of the rental contract term are typically billed a cancellation fee, which is recorded as rental revenue in the period billed.  Sales of new relocatable modular buildings, portable storage containers, electronic test equipment and related accessories and liquid and solid containment tanks and boxes not manufactured by the Company are typically covered by warranties provided by the manufacturer of the products sold.  The Company typically provides limited 90-day warranties for certain sales of used rental equipment and one-year warranties on equipment manufactured by Enviroplex.  Although the Company’s policy is to provide reserves for warranties when required for specific circumstances, the Company has not found it necessary to establish such reserves to date as warranty costs have not been significant.  

 

The Company’s incremental cost of obtaining lease contracts, which consists of salesperson commissions, are deferred and amortized over the initial lease term for modular leases.  Incremental costs for obtaining a contract for all other operating segments are expensed in the period incurred because the lease term is typically less than 12 months.

 

 

NOTE 3. IMPLEMENTED ACCOUNTING PRONOUNCEMENTS

 

Lease Accounting

Lessee

The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (Subtopic 842-10) effective January 1, 2019.  Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the

10


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 (“ROU”) 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.  The Company adopted the new guidance using the transition method that allowed it to initially apply this guidance at the adoption date.  The adoption did not result in a cumulative-effect adjustment to the Company’s opening retained earnings.  Because of the transition method we used to adopt the new guidance, historical financial information was not updated and the financial disclosures required under the new standard are not provided for periods prior to January 1, 2019.  The new guidance contains additional optional transition practical expedients intended to simplify adoption.  The Company elected the package of practical expedients that allows for not reassessing: (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases.  

The Company leases real estate for certain of its branch offices and rental equipment storage yards, vehicles and equipment used in its rental operations.  The Company determines if an arrangement is a lease at inception.  The Company has leases with lease and non-lease components, which are accounted for separately.  ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred, which are not material.  The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  The Company uses the interest rate stated in the lease as the discount rate.  If the interest rate is not stated, the Company uses its incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.  Many of the Company’s real estate lease agreements include options to extend the lease, which are not included in the minimum lease terms unless they are reasonably certain to be exercised.  These leases include one or more options to renew, with renewal terms that may extend the lease term from one to three years.  The amount of payments associated with such options is not material.  Short-term leases are leases having a term of twelve months or less and exclude leases with a lease term of one month or less.  The Company recognizes short-term leases on a straight-line basis and does not record a related ROU asset or liability for such leases.  The adoption of the new guidance resulted in the recording of $10.8 million of ROU assets and operating lease liabilities, which are included in Prepaid expenses and other assets and Accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheet as of March 31, 2019.

During the three months ended March 31, 2019, operating lease expense was $1.0 million, which includes short term lease expense of $0.1 million.  At March 31, 2019, the weighted-average remaining lease term for operating leases was 4.4 years and the weighted average discount rate was 4.56%.  The Company had no sub-lease income during the three months ended March 31, 2019, and did not have any finance leases as of March 31, 2019.

Supplemental cash flow information related to leases was as follows:  

 

(in thousands)

 

Three Months Ended

 

 

 

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

   Operating cash flows from operating leases

 

$

882

 

 

 

 

 

 

Right of use assets obtained in exchange for lease obligations:

 

 

 

 

   Operating leases

 

$

1,084

 

 

As of March 31, 2019, maturities of operating lease liabilities were as follows:

 

(in thousands)

 

 

 

 

Year ended December 31,

 

 

 

 

2019

 

$

2,562

 

2020

 

 

2,919

 

2021

 

 

2,254

 

2022

 

 

1,683

 

2023

 

 

1,299

 

Thereafter

 

 

1,204

 

   Total lease payments

 

 

11,921

 

Less imputed interest

 

 

(1,094

)

 

 

$

10,827

 

 

 

 

11


Lessor

As a lessor, the Company’s recognition of lease revenue remained consistent with previous guidance.  As a result, the adoption of the lease standard did not have an impact on the Company’s current and previously reported results in the Condensed Consolidated Statements of Income.

The Company’s equipment rentals for each of its operating segments are governed by agreements that detail the lease terms and conditions.  The determination of whether these contracts with customers contain a lease generally does not require significant judgement.  The Company accounts for these rentals as operating leases.  These leases do not include material amounts of variable payments and the Company has made the accounting policy election to exclude all taxes assessed by a governmental authority.  The Company generally does not provide an option for the lessee to purchase the rented equipment at the end of the lease term, thus, does not generate material revenue from sales of equipment under such options.  Initial lease terms vary in length based upon customer needs and generally range from one to sixty months.  Customers have the option to keep equipment on rent beyond the initial lease term on a month-to month basis based upon their needs.  All of the Company’s rental products have long useful lives relative to the typical rental term with the original investment typically recovered in approximately three to five years.  The rental products are typically rented for a majority of the time owned and a significant portion of the original investment is recovered when sold from inventory.  The Company’s lease agreements do not contain residual value guarantees or restrictive covenants.

As of March 31, 2019, maturities of operating lease payments to be received in 2019 and thereafter were as follows:

 

(in thousands)

 

 

 

 

2019

 

$

68,046

 

2020

 

 

31,233

 

2021

 

 

10,180

 

2022

 

 

2,158

 

2023

 

 

595

 

Thereafter

 

 

63

 

 

 

$

112,275

 

In the three months ended March 31, 2019, the Company’s lease revenues were $95.5 million, consisting of $94.6 million of operating lease revenues and $0.9 million of finance lease revenues.  The Company has entered into finance leases to finance certain equipment sales to customers.  The lease agreements have a bargain purchase option at the end of the lease term.  For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis, which results in a constant rate of return on the unrecovered lease investment.  The Company’s finance lease revenues include $0.8 million of sales revenues and $0.1 million of interest income.  The minimum lease payments receivable and the net investment are included in Accounts receivable on the Company’s Consolidated Balance Sheet for such leases, which were as follows:

 

(in thousands)

 

March 31, 2019

 

Gross minimum lease payments receivable

 

$

2,934

 

Less – unearned interest

 

 

(298

)

Net investment in finance lease receivables

 

$

2,636

 

As of March 31, 2019, the future minimum lease payments under non-cancelable finance leases to be received in 2019 and thereafter were as follows:

 

(in thousands)

 

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

$

1,738

 

2020

 

 

775

 

2021

 

 

335

 

2022

 

 

86

 

Total minimum future lease payments

 

$

2,934

 

 

      

NOTE 4. 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

12


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)

 

2019

 

 

2018

 

Weighted-average number of shares of common stock for

   calculating basic earnings per share

 

 

24,195

 

 

 

24,067

 

Effect of potentially dilutive securities from equity-based

   compensation

 

 

345

 

 

 

411

 

Weighted-average number of shares of common stock for

   calculating diluted earnings per share

 

 

24,540

 

 

 

24,478

 

 

 

 

 

 

 

 

 

 

 

There were no anti-dilutive securities excluded from the computation of diluted earnings per share in the three months ended March 31, 2019 and 2018.

 

NOTE 5. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

(dollar amounts in thousands)

 

Estimated

useful life

in years

 

 

March 31,

2019

 

 

December 31,

2018

 

Trade name

 

Indefinite

 

 

$

5,871

 

 

$

5,871

 

Customer relationships

 

 

11

 

 

 

9,849

 

 

 

9,849

 

 

 

 

 

 

 

 

15,720

 

 

 

15,720

 

Less accumulated amortization

 

 

 

 

 

 

(8,690

)

 

 

(8,466

)

 

 

 

 

 

 

$

7,030

 

 

$

7,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 asset’s 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, 2018.  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, 2019 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 2019, and $0.1 million in 2020 through 2025.

 

 

NOTE 6. 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 2018 Annual Report. 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

13


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, 2019 and 2018 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,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

42,261

 

 

$

23,623

 

 

$

16,812

 

 

$        —

 

 

$

82,696

 

Rental related services revenues

 

 

14,471

 

 

 

708

 

 

 

6,276

 

 

 

 

 

 

21,455

 

Sales and other revenues

 

 

8,360

 

 

 

6,345

 

 

 

347

 

 

 

2,805

 

 

 

17,857

 

Total revenues

 

 

65,092

 

 

 

30,676

 

 

 

23,435

 

 

 

2,805

 

 

 

122,008

 

Depreciation of rental equipment

 

 

5,408

 

 

 

9,520

 

 

 

4,033

 

 

 

 

 

 

18,961

 

Gross profit

 

 

30,879

 

 

 

13,667

 

 

 

11,423

 

 

 

1,036

 

 

 

57,005

 

Selling and administrative expenses

 

 

15,370

 

 

 

5,970

 

 

 

7,080

 

 

 

1,275

 

 

 

29,695

 

Income (loss) from operations

 

 

15,509