|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
For the quarterly period ended
Commission file number
(Exact name of registrant as specified in its Charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Registrant’s telephone number: (
Securities registered pursuant to Section 12(b) of the Act
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
|
|
|
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.
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).
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.
|
|
|
☒ |
|
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
As of April 27, 2022,
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 “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plan,” “predict,” “project,” or “will,” 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 (a California Corporation), and subsidiaries (the “Company”) as of March 31, 2022, and the related condensed consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three-months ended March 31, 2022 and 2021, 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, 2021, 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 23, 2022, 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, 2021, 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 28, 2022
3
McGRATH RENTCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands, except per share amounts) |
|
2022 |
|
|
2021 |
|
||
|
Revenues |
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
|
|
|
$ |
|
|
|
Rental related services |
|
|
|
|
|
|
|
|
|
Rental operations |
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
Direct costs of rental operations: |
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
|
|
|
|
|
|
|
Rental related services |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total direct costs of rental operations |
|
|
|
|
|
|
|
|
|
Costs of sales |
|
|
|
|
|
|
|
|
|
Total costs of revenues |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Foreign currency exchange gain (loss) |
|
|
|
|
|
|
( |
) |
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
Cash dividends declared per share |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2022 |
|
|
2021 |
|
||
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax impact |
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2022 |
|
|
2021 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable, net of allowance for credit losses of $ |
|
|
|
|
|
|
|
|
|
Rental equipment, at cost: |
|
|
|
|
|
|
|
|
|
Relocatable modular buildings |
|
|
|
|
|
|
|
|
|
Electronic test equipment |
|
|
|
|
|
|
|
|
|
Liquid and solid containment tanks and boxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Rental equipment, net |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
|
|
|
$ |
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
|
|
|
Deferred income |
|
|
|
|
|
|
|
|
|
Deferred income taxes, net |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
Common stock, par value - Authorized |
|
|
|
|
|
|
|
|
|
Issued and outstanding - of December 31, 2021 |
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
Total shareholders’ equity |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Share-based compensation |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Taxes paid related to net share settlement of stock awards |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Dividends accrued of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
|
Common Stock |
|
|
Retained |
|
|
Accumulated Other Comprehensive |
|
|
Total Shareholders’ |
|
||||||||
|
(in thousands, except per share amounts) |
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|||||
|
Balance at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Share-based compensation |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Common stock issued under stock plans, net of shares withheld for employee taxes |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Taxes paid related to net share settlement of stock awards |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Dividends accrued of $ |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
McGrath RentCorp
CONDENSED Consolidated Statements of Cash Flows
(unaudited)
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands) |
|
2022 |
|
|
2021 |
|
||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
|
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
Gain on sale of used rental equipment |
|
|
( |
) |
|
|
( |
) |
|
Foreign currency exchange (gain) loss |
|
|
( |
) |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
Change in: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
|
( |
) |
|
|
( |
) |
|
Deferred income |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Purchases of rental equipment |
|
|
( |
) |
|
|
( |
) |
|
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from sales of used rental equipment |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Net repayment under bank lines of credit |
|
|
( |
) |
|
|
( |
) |
|
Taxes paid related to net share settlement of stock awards |
|
|
( |
) |
|
|
( |
) |
|
Payment of dividends |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Effect of foreign currency exchange rate changes on cash |
|
|
|
|
|
|
( |
) |
|
Net increase in cash |
|
|
|
|
|
|
|
|
|
Cash balance, beginning of period |
|
|
|
|
|
|
|
|
|
Cash balance, end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
Interest paid, during the period |
|
$ |
|
|
|
$ |
|
|
|
Net income taxes paid, during the period |
|
$ |
|
|
|
$ |
|
|
|
Dividends accrued during the period, not yet paid |
|
$ |
|
|
|
$ |
|
|
|
Rental equipment acquisitions, not yet paid |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
McGRATH RENTCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2022
NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 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, 2022 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 23, 2022 for the year ended December 31, 2021 (the “2021 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 Accounting Standards Codification (ASC) 842, Leases. Revenues determined to be non-lease related are accounted for in accordance with ASC 606, Revenue from Contracts with Customers. 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 obtains 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
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 buildings 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.
In the three months ended March 31, 2022, the Company’s lease revenues were $
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 ASC 842) and non-lease revenues (within the scope of ASC 606) and the underlying service provided for the three months ended March 31, 2022 and 2021:
|
(in thousands) |
|
Mobile Modular |
|
|
TRS- RenTelco |
|
|
Adler Tanks |
|
|
Enviroplex |
|
|
Consolidated |
|
|||||
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Non-lease: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental related services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Total non-lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Non-lease: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental related services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total non-lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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
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.
10
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.
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands) |
|
2022 |
|
|
2021 |
|
||
|
Weighted-average number of shares of common stock for calculating basic earnings per share |
|
|
|
|
|
|
|
|
|
Effect of potentially dilutive securities from equity-based compensation |
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock for calculating diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were
The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to repurchase up to
NOTE 4. INTANGIBLE ASSETS
Intangible assets consist of the following:
|
(dollar amounts in thousands) |
|
Estimated useful life in years |
|
Average remaining life in years |
|
|
Cost |
|
|
Accumulated amortization |
|
|
Net book value |
|
||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Customer backlog |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
Trade name |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total amortizing |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Trade name - non-amortizing |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
Non-compete agreements |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Customer backlog |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
Trade name |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total amortizing |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Trade name - non-amortizing |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
12
NOTE 5. SEGMENT REPORTING
The Company’s
|
(dollar amounts in thousands) |
|
Mobile Modular |
|
|
TRS- RenTelco |
|
|
Adler Tanks |
|
|
Enviroplex 1 |
|
|
Consolidated |
|
|||||
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ — |
|
|
$ |
|
|
|
|
Rental related services revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Sales and other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Interest (expense) income allocation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Income (loss) before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Rental equipment acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Accounts receivable, net (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental equipment, at cost (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Rental equipment, net book value (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Utilization (period end) 2 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
Average utilization 2 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ — |
|
|
$ |
|
|
|
|
Rental related services revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Sales and other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Interest (expense) income allocation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Income (loss) before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Rental equipment acquisitions |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
|
|
|
Accounts receivable, net (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental equipment, at cost (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Rental equipment, net book value (period end) |
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
Utilization (period end) 2 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
Average utilization 2 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. |
|
|
2. |
|
13
NOTE 6. ACQUISITIONS
On May 17, 2021, the Company completed the purchase of substantially all of the assets of Design Space Modular Buildings PNW, LP (“Design Space”) for $
On April 1, 2021 the Company completed the purchase of assets of GRS Holding LLC, DBA Kitchens To Go (“Kitchens To Go”) for $
Design Space:
|
(dollar amounts in thousands) |
|
|
|
|
|
Rental equipment |
|
$ |
|
|
|
Intangible assets: |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Non-compete |
|
|
|
|
|
Customer backlog |
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
( |
) |
|
Deferred income |
|
|
( |
) |
|
Total purchase price |
|
$ |
|
|
Kitchens To Go:
|
(dollar amounts in thousands) |
|
|
|
|
|
Rental equipment |
|
$ |
|
|
|
Intangible assets: |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Trade name |
|
|
|
|
|
Non-compete |
|
|
|
|
|
Customer backlog |
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
( |
) |
|
Deferred income |
|
|
( |
) |
|
Total purchase price |
|
$ |
|
|
14
The value assigned to identifiable intangible assets have been determined based on discounted estimated future cash flows associated with such assets to their present value. The combined acquired goodwill of $
The following unaudited pro forma financial information shows the combined results of operations of the Company, Design Space and Kitchens To Go as if the acquisitions occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of the purchased intangible assets and depreciation expense of acquired rental equipment valuation step up, interest expense on the debt incurred to finance the acquisitions. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the combined federal and state statutory rate of
|
|
|
(Unaudited) |
|
|||||
|
|
|
Three months ended March 31, |
|
|||||
|
(dollar amounts in thousands, except for per share amounts) |
|
2022 |
|
|
2021 |
|
||
|
Pro-forma total revenues |
|
$ |
|
|
|
$ |
|
|
|
Pro-forma net income |
|
$ |
|
|
|
$ |
|
|
|
Pro-forma basic earnings per share |
|
$ |
|
|
|
$ |
|
|
|
Pro-forma diluted earnings per share |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Design Space and Kitchens To Go |
|
|
|
|
|
|
|
|
|
Actual total revenues |
|
$ |
|
|
|
|
|
|
|
Actual net income |
|
$ |
|
|
|
|
|
|
|
Actual basic earnings per share |
|
$ |
|
|
|
|
|
|
|
Actual diluted earnings per share |
|
$ |
|
|
|
|
|
|
On December 31, 2021 the Company completed the purchase of the assets of Titan Storage Containers, LLC (“Titan”) for $
15
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 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 Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022 (the “2021 Annual Report”). In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2021 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 the Mobile Modular Portable Storage division, which represented approximately 12% of the Company’s total revenues in the three months ended March 31, 2022. Mobile Modular Portable Storage offers portable storage units and high security portable office units for rent, lease and purchase. Kitchens To Go was acquired on April 1, 2021, with its results included in the Mobile Modular segment since that date. Design Space was acquired on May 17, 2021, with its results included in the Mobile Modular segment since that date. See Note 6 to the Condensed Consolidated Financial Statements for the three months ended March 31, 2022, for more details about the acquisitions.
In the three months ended March 31, 2022, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 67%, 31%, 6% and negative 4% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 66%, 36%, 2% and negative 4% for the same period in 2021.
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, Kitchens To Go and Enviroplex) are derived from rentals and sales to commercial and education customers. Modular revenues are 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 2021 Annual Report and “Item 1a. Risk Factors – Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability” in Part II – Other Information of this Form 10-Q.)
16
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 88% and 87% of consolidated revenues in the three months ended March 31, 2022 and 2021, respectively. Of the total rental operations revenues for the three months ended March 31, 2022, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 62%, 23% and 15%, respectively, compared to 57%, 27% and 16%, respectively, in the same period of 2021. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment (if applicable), 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, 2022 and 2021, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 12% and 13% of the Company’s consolidated revenues, respectively. Of the total sales and other revenues for the three months ended March 31, 2022 and 2021, Mobile Modular and Enviroplex together comprised 69% and 59%, respectively, TRS-RenTelco comprised 26% and 36%, respectively, and Adler Tanks comprised 5% for both periods. 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 assurances as to the Company’s ability to maintain a large installed customer base or ability to sustain its historical operating margins.
Recent Developments
Dividends
On February 23, 2022, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.455 per common share for the quarter ended March 31, 2022, an increase of 5% over the prior year’s comparable quarter.
COVID-19
The outbreak of a new strain of coronavirus, COVID-19, which began in December 2019, has continued to spread globally including to every state in the United States. The Center for Disease Control (“CDC”) and World Health Organization (“WHO”) recognized this outbreak as a pandemic, which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence and business sentiment. The Company has taken a number of precautionary health and safety measures to safeguard its employees and customers, while maintaining business continuity. The Company has implemented remote work policies and enhanced cleaning and hygiene protocols in all of its facilities, products and vehicles. The Company is continuing to monitor and assess orders issued by federal, state and local governments to ensure compliance with evolving COVID-19 guidelines. The Company also continues to monitor the impact of COVID-19 on its existing customers who themselves may be impacted by governmental shutdowns and other impacts due to the governmental orders.
While the Company has not seen a significant impact from COVID-19 in the financial results for the quarter ended March 31, 2022 as set forth in the below section discussing the results of operations for the quarter ended March 31, 2022, the Company is currently unable to determine or predict the full nature, duration or scope of the overall impact the COVID-19 pandemic and related business and operational pressures will have on its business, results of operations, liquidity or capital resources. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of employees, customers and shareholders.
17
Results of Operations
Three Months Ended March 31, 2022 Compared to
Three Months Ended March 31, 2021
Overview
Consolidated revenues for the three months ended March 31, 2022 increased 20% to $145.4 million from $121.2 million in the same period in 2021. Consolidated net income for the three months ended March 31, 2022 increased 8% to $18.8 million, from $17.4 million for the same period in 2021. Earnings per diluted share for the three months ended March 31, 2022 increased 8% to $0.77 from $0.71 for the same period in 2021.
For the three months ended March 31, 2022, on a consolidated basis:
|
|
• |
Gross profit increased $9.4 million, or 16%, to $66.5 million in 2022. Mobile Modular’s gross profit increased $8.2 million, or 23%, primarily due to higher gross profit on rental, rental related services, and sales revenues. TRS-RenTelco’s gross profit was comparable at $14.7 million. Adler Tanks’ gross profit increased $1.4 million, or 20%, primarily due to higher gross profit on rental and other revenues. Enviroplex’s gross profit decreased $0.1 million, primarily due to $0.3 million lower sales revenues in 2022 and lower gross margins of 22% compared to 28% in 2021. |
|
|
• |
Selling and administrative expenses increased $6.0 million, or 18%, to $39.1 million, primarily due to increased headcount and employees’ salaries and benefit costs totaling $4.3 million, primarily due to the addition of Design Space and Kitchens To Go employees, and $1.4 million higher amortization of intangible assets primarily from the Design Space and Kitchens To Go acquisitions. |
|
|
• |
Interest expense increased $1.0 million, or 58%, to $2.8 million due to 94% higher average debt levels of the Company, partly offset by 19% lower net average interest rates of 2.68% in 2022 compared to 3.29% in 2021. |
|
|
• |
Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 67%, 31% and 6%, respectively, compared to 66%, 36% and 2%, respectively, for the comparable 2021 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was negative 4% in 2022 and 2021, respectively. |
|
|
• |
The provision for income taxes resulted in an effective tax rate of 23.5% and 21.3% for the quarters ended March 31, 2022 and 2021, respectively. The higher rate in 2022 was due to lower excess tax benefit from stock compensation and increased business activity levels in higher tax rate states. |
|
|
• |
Adjusted EBITDA increased $7.6 million, or 15%, to $56.7 million in 2022. |
18
Mobile Modular
For the three months ended March 31, 2022, Mobile Modular’s total revenues increased $22.0 million, or 32%, to $90.6 million compared to the same period in 2021, primarily due to higher rental, rental related services, and sales revenues. The revenue increase, together with higher gross profit on rental, rental related services and sales revenues, partly offset by higher selling and administrative expenses, resulted in a 13% increase in pre-tax income to $16.6 million for the three months ended March 31, 2022, from $14.7 million for the same period in 2021.
The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.
Mobile Modular – Three Months Ended 3/31/22 compared to Three Months Ended 3/31/21 (Unaudited)
|
(dollar amounts in thousands) |
|
Three Months Ended March 31, |
|
|
Increase (Decrease) |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
61,538 |
|
|
$ |
46,657 |
|
|
$ |
14,881 |
|
|
|
32 |
% |
|
Rental related services |
|
|
18,361 |
|
|
|
14,051 |
|
|
|
4,310 |
|
|
|
31 |
% |
|
Rental operations |
|
|
79,899 |
|
|
|
60,708 |
|
|
|
19,191 |
|
|
|
32 |
% |
|
Sales |
|
|
10,375 |
|
|
|
7,620 |
|
|
|
2,755 |
|
|
|
36 |
% |
|
Other |
|
|
371 |
|
|
|
320 |
|
|
|
51 |
|
|
|
16 |
% |
|
Total revenues |
|
|
90,645 |
|
|
|
68,648 |
|
|
|
21,997 |
|
|
|
32 |
% |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of rental operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
7,833 |
|
|
|
5,819 |
|
|
|
2,014 |
|
|
|
35 |
% |
|
Rental related services |
|
|
13,180 |
|
|
|
10,072 |
|
|
|
3,108 |
|
|
|
31 |
% |
|
Other |
|
|
20,162 |
|
|
|
12,875 |
|
|
|
7,287 |
|
|
|
57 |
% |
|
Total direct costs of rental operations |
|
|
41,175 |
|
|
|
28,766 |
|
|
|
12,409 |
|
|
|
43 |
% |
|
Costs of sales |
|
|
6,329 |
|
|
|
4,948 |
|
|
|
1,381 |
|
|
|
28 |
% |
|
Total costs of revenues |
|
|
47,504 |
|
|
|
33,714 |
|
|
|
13,790 |
|
|
|
41 |
% |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
33,543 |
|
|
|
27,963 |
|
|
|
5,580 |
|
|
|
20 |
% |
|
Rental related services |
|
|
5,181 |
|
|
|
3,979 |
|
|
|
1,202 |
|
|
|
30 |
% |
|
Rental operations |
|
|
38,724 |
|
|
|
31,942 |
|
|
|
6,782 |
|
|
|
21 |
% |
|
Sales |
|
|
4,046 |
|
|
|
2,672 |
|
|
|
1,374 |
|
|
|
51 |
% |
|
Other |
|
|
371 |
|
|
|
320 |
|
|
|
51 |
|
|
|
16 |
% |
|
Total gross profit |
|
|
43,141 |
|
|
|
34,934 |
|
|
|
8,207 |
|
|
|
23 |
% |
|
Selling and administrative expenses |
|
|
24,692 |
|
|
|
19,237 |
|
|
|
5,455 |
|
|
|
28 |
% |
|
Income from operations |
|
|
18,449 |
|
|
|
15,697 |
|
|
|
2,752 |
|
|
|
18 |
% |
|
Interest expense allocation |
|
|
(1,821 |
) |
|
|
(1,046 |
) |
|
|
775 |
|
|
|
74 |
% |
|
Pre-tax income |
|
$ |
16,628 |
|
|
$ |
14,651 |
|
|
$ |
1,977 |
|
|
|
13 |
% |
|
Other Selected Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
30,405 |
|
|
$ |
23,955 |
|
|
$ |
6,450 |
|
|
|
27 |
% |
|
Average rental equipment 1 |
|
$ |
1,006,903 |
|
|
$ |
836,893 |
|
|
$ |
170,010 |
|
|
|
20 |
% |
|
Average rental equipment on rent |
|
$ |
776,360 |
|
|
$ |
634,648 |
|
|
$ |
141,712 |
|
|
|
22 |
% |
|
Average monthly total yield 2 |
|
|
2.04 |
% |
|
|
1.86 |
% |
|
|
|
|
|
|
10 |
% |
|
Average utilization 3 |
|
|
77.1 |
% |
|
|
75.8 |
% |
|
|
|
|
|
|
2 |
% |
|
Average monthly rental rate 4 |
|
|
2.64 |
% |
|
|
2.45 |
% |
|
|
|
|
|
|
8 |
% |
|
Period end rental equipment 1 |
|
$ |
1,013,791 |
|
|
$ |
838,479 |
|
|
$ |
175,312 |
|
|
|
21 |
% |
|
Period end utilization 3 |
|
|
77.6 |
% |
|
|
75.8 |
% |
|
|
|
|
|
|
2 |
% |
|
1. |
Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. |
|
2. |
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. |
|
3. |
Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. |
|
4. |
Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. |
19
Mobile Modular’s gross profit for the three months ended March 31, 2022 increased $8.2 million, or 23%, to $43.1 million. For the three months ended March 31, 2022 compared to the same period in 2021:
|
|
• |
Gross Profit on Rental Revenues – Rental revenues increased $14.9 million, or 32%, due to 22% higher average rental equipment on rent and 8% higher average monthly rental rate in 2022. As a percentage of rental revenues, depreciation was 13% in 2022 and 12% in 2021, and other direct costs were 33% in 2022 and 28% in 2021, which resulted in gross margin percentages of 55% in 2022 compared to 60% in 2021. The higher rental revenues and lower rental margins, resulted in gross profit on rental revenues increasing $5.6 million, or 20%, to $33.5 million in 2022. |
|
|
• |
Gross Profit on Rental Related Services – Rental related services revenues increased $4.3 million, or 31%, compared to 2021. Most of these service revenues are negotiated with the initial modular building lease and are recognized on a straight-line basis with the associated costs over the initial term of the lease. The increase in rental related services revenues was primarily attributable to higher amortization of modular building delivery and return delivery and dismantle revenues, higher site related revenues and revenues derived from other services performed during the lease and increased delivery and return delivery revenues at Portable Storage. The higher revenues and comparable gross margin percentage of 28% in 2022 and 2021, resulted in rental related services gross profit increasing $1.2 million, or 30%, to $5.2 million in 2022. |
|
|
• |
Gross Profit on Sales – Sales revenues increased $2.8 million, or 36%, compared to 2021, due to higher new and used equipment sales. The higher gross margin percentage of 39% in 2022 compared to 35% in 2021, and higher sales revenue resulted in gross profit on sales increasing $1.4 million, or 51%, to $4.0 million. The higher gross margin on sales in 2022 was primarily due to higher margins on used sales. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding. |
For the three months ended March 31, 2022, selling and administrative expenses increased $5.5 million, or 28%, to $24.7 million, primarily due to increased employee salaries and benefit costs totaling $2.8 million, primarily due to the addition of Design Space and Kitchens To Go employees, $1.4 million higher amortization of intangible assets primarily due to the Design Space and Kitchens To Go acquisitions and $1.6 million higher allocated corporate expenses, partly offset by lower marketing and administrative expenses.
20
TRS-RenTelco
For the three months ended March 31, 2022, TRS-RenTelco’s total revenues decreased $0.1 million to $33.5 million compared to the same period in 2021, primarily due to lower sales revenues, partly offset by higher rental revenues. Higher selling and administrative expenses and a decrease in gross profit resulted in a 6% decrease in pre-tax income to $7.5 million for the three months ended March 31, 2022, from $8.0 million for the same period in 2021.
The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.
TRS-RenTelco – Three Months Ended 3/31/22 compared to Three Months Ended 3/31/21 (Unaudited)
|
(dollar amounts in thousands) |
|
Three Months Ended March 31, |
|
|
Increase (Decrease) |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
28,512 |
|
|
$ |
27,276 |
|
|
$ |
1,236 |
|
|
|
5 |
% |
|
Rental related services |
|
|
671 |
|
|
|
740 |
|
|
|
(69 |
) |
|
|
(9 |
)% |
|
Rental operations |
|
|
29,183 |
|
|
|
28,016 |
|
|
|
1,167 |
|
|
|
4 |
% |
|
Sales |
|
|
3,927 |
|
|
|
5,149 |
|
|
|
(1,222 |
) |
|
|
(24 |
)% |
|
Other |
|
|
381 |
|
|
|
438 |
|
|
|
(57 |
) |
|
|
(13 |
)% |
|
Total revenues |
|
|
33,491 |
|
|
|
33,603 |
|
|
|
(112 |
) |
|
|
(0 |
)% |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of rental operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
12,029 |
|
|
|
11,362 |
|
|
|
667 |
|
|
|
6 |
% |
|
Rental related services |
|
|
580 |
|
|
|
653 |
|
|
|
(73 |
) |
|
|
(11 |
)% |
|
Other |
|
|
4,692 |
|
|
|
4,534 |
|
|
|
158 |
|
|
|
3 |
% |
|
Total direct costs of rental operations |
|
|
17,301 |
|
|
|
16,549 |
|
|
|
752 |
|
|
|
5 |
% |
|
Costs of sales |
|
|
1,500 |
|
|
|
2,301 |
|
|
|
(801 |
) |
|
|
(35 |
)% |
|
Total costs of revenues |
|
|
18,801 |
|
|
|
18,850 |
|
|
|
(49 |
) |
|
|
(0 |
)% |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
11,791 |
|
|
|
11,380 |
|
|
|
411 |
|
|
|
4 |
% |
|
Rental related services |
|
|
91 |
|
|
|
87 |
|
|
|
4 |
|
|
|
5 |
% |
|
Rental operations |
|
|
11,882 |
|
|
|
11,467 |
|
|
|
415 |
|
|
|
4 |
% |
|
Sales |
|
|
2,427 |
|
|
|
2,848 |
|
|
|
(421 |
) |
|
|
(15 |
)% |
|
Other |
|
|
381 |
|
|
|
438 |
|
|
|
(57 |
) |
|
|
(13 |
)% |
|
Total gross profit |
|
|
14,690 |
|
|
|
14,753 |
|
|
|
(63 |
) |
|
|
(0 |
)% |
|
Selling and administrative expenses |
|
|
6,590 |
|
|
|
6,298 |
|
|
|
292 |
|
|
|
5 |
% |
|
Income from operations |
|
|
8,100 |
|
|
|
8,455 |
|
|
|
(355 |
) |
|
|
(4 |
)% |
|
Interest expense allocation |
|
|
(586 |
) |
|
|
(420 |
) |
|
|
166 |
|
|
|
40 |
% |
|
Foreign currency exchange gain (loss) |
|
|
13 |
|
|
|
(55 |
) |
|
|
(68 |
) |
|
|
124 |
% |
|
Pre-tax income |
|
$ |
7,527 |
|
|
$ |
7,980 |
|
|
$ |
(453 |
) |
|
|
(6 |
)% |
|
Other Selected Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
20,653 |
|
|
$ |
20,392 |
|
|
$ |
261 |
|
|
|
1 |
% |
|
Average rental equipment 1 |
|
$ |
366,667 |
|
|
$ |
334,781 |
|
|
$ |
31,886 |
|
|
|
10 |
% |
|
Average rental equipment on rent |
|
$ |
236,889 |
|
|
$ |
227,866 |
|
|
$ |
9,023 |
|
|
|
4 |
% |
|
Average monthly total yield 2 |
|
|
2.59 |
% |
|
|
2.72 |
% |
|
|
|
|
|
|
(5 |
)% |
|
Average utilization 3 |
|
|
64.6 |
% |
|
|
68.1 |
% |
|
|
|
|
|
|
(5 |
)% |
|
Average monthly rental rate 4 |
|
|
4.01 |
% |
|
|
3.99 |
% |
|
|
|
|
|
|
1 |
% |
|
Period end rental equipment 1 |
|
$ |
374,392 |
|
|
$ |
339,363 |
|
|
$ |
35,029 |
|
|
|
10 |
% |
|
Period end utilization 3 |
|
|
64.7 |
% |
|
|
69.2 |
% |
|
|
|
|
|
|
(7 |
)% |
|
1. |
Average and Period end rental equipment represents the cost of rental equipment, excluding accessory equipment. |
|
2. |
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. |
|
3. |
Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. |
|
4. |
Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. |
nm = Not meaningful
21
TRS-RenTelco’s gross profit for the three months ended March 31, 2022 decreased $0.1 million, to $14.7 million. For the three months ended March 31, 2022 compared to the same period in 2021:
|
|
• |
Gross Profit on Rental Revenues – Rental revenues increased $1.2 million, or 5%, depreciation expense increased $0.7 million, or 6%, and other direct costs increased $0.2 million or 3%, resulting in a 4% increase in gross profit on rental revenues to $11.8 million. As a percentage of rental revenues, depreciation was 42% in 2022 and 2021, and other direct costs were 16% in 2022 and 17% in 2021, which resulted in a gross margin percentage of 41% in 2022 compared to 42% in 2021. The rental revenues increase was due to 4% higher average rental equipment on rent and 1% higher average monthly rental rates in 2022 as compared to 2021. |
|
|
• |
Gross Profit on Sales – Sales revenues decreased $1.2 million, or 24%, to $3.9 million in 2022. Gross profit on sales decreased 15%, to $2.4 million, with gross margin percentage of 62% in 2022, compared to 55% in 2021. Sales occur as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements and related mix of equipment sold, equipment availability and funding. |
For the three months ended March 31, 2022, selling and administrative expenses increased $0.3 million, or 5%, to $6.6 million.
22
Adler Tanks
For the three months ended March 31, 2022, Adler Tanks’ total revenues increased $2.6 million, or 15%, to $20.3 million compared to the same period in 2021, due to higher rental, rental related services and sales revenues. Higher gross profit on rental revenues, partly offset by an increase in selling and administrative expenses and higher allocated interest expense, resulted in a $1.0 million increase in pre-tax income to $1.4 million for the three months ended March 31, 2022, compared to the same period in 2021.
The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.
Adler Tanks – Three Months Ended 3/31/22 compared to Three Months Ended 3/31/21 (Unaudited)
|
(dollar amounts in thousands) |
|
Three Months Ended March 31, |
|
|
Increase (Decrease) |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
14,191 |
|
|
$ |
12,154 |
|
|
$ |
2,037 |
|
|
|
17 |
% |
|
Rental related services |
|
|
5,285 |
|
|
|
4,878 |
|
|
|
407 |
|
|
|
8 |
% |
|
Rental operations |
|
|
19,476 |
|
|
|
17,032 |
|
|
|
2,444 |
|
|
|
14 |
% |
|
Sales |
|
|
657 |
|
|
|
608 |
|
|
|
49 |
|
|
|
8 |
% |
|
Other |
|
|
187 |
|
|
|
70 |
|
|
|
117 |
|
|
|
167 |
% |
|
Total revenues |
|
|
20,320 |
|
|
|
17,710 |
|
|
|
2,610 |
|
|
|
15 |
% |
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of rental operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of rental equipment |
|
|
4,012 |
|
|
|
4,074 |
|
|
|
(62 |
) |
|
|
(2 |
)% |
|
Rental related services |
|
|
4,383 |
|
|
|
3,879 |
|
|
|
504 |
|
|
|
13 |
% |
|
Other |
|
|
2,969 |
|
|
|
2,298 |
|
|
|
671 |
|
|
|
29 |
% |
|
Total direct costs of rental operations |
|
|
11,364 |
|
|
|
10,251 |
|
|
|
1,113 |
|
|
|
11 |
% |
|
Costs of sales |
|
|
502 |
|
|
|
416 |
|
|
|
86 |
|
|
|
21 |
% |
|
Total costs of revenues |
|
|
11,866 |
|
|
|
10,667 |
|
|
|
1,199 |
|
|
|
11 |
% |
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
|
7,210 |
|
|
|
5,782 |
|
|
|
1,428 |
|
|
|
25 |
% |
|
Rental related services |
|
|
902 |
|
|
|
999 |
|
|
|
(97 |
) |
|
|
(10 |
)% |
|
Rental operations |
|
|
8,112 |
|
|
|
6,781 |
|
|
|
1,331 |
|
|
|
20 |
% |
|
Sales |
|
|
155 |
|
|
|
192 |
|
|
|
(37 |
) |
|
|
(19 |
)% |
|
Other |
|
|
187 |
|
|
|
70 |
|
|
|
117 |
|
|
|
167 |
% |
|
Total gross profit |
|
|
8,454 |
|
|
|
7,043 |
|
|
|
1,411 |
|
|
|
20 |
% |
|
Selling and administrative expenses |
|
|
6,522 |
|
|
|
6,267 |
|
|
|
255 |
|
|
|
4 |
% |
|
Income from operations |
|
|
1,932 |
|
|
|
776 |
|
|
|
1,156 |
|
|
|
149 |
% |
|
Interest expense allocation |
|
|
(544 |
) |
|
|
(431 |
) |
|
|
113 |
|
|
|
26 |
% |
|
Pre-tax income |
|
$ |
1,388 |
|
|
$ |
345 |
|
|
$ |
1,043 |
|
|
nm |
|
|
|
Other Selected Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
6,707 |
|
|
$ |
5,700 |
|
|
$ |
1,007 |
|
|
|
18 |
% |
|
Average rental equipment 1 |
|
$ |
308,533 |
|
|
$ |
313,873 |
|
|
$ |
(5,340 |
) |
|
|
(2 |
)% |
|
Average rental equipment on rent |
|
$ |
149,141 |
|
|
$ |
126,343 |
|
|
$ |
22,798 |
|
|
|
18 |
% |
|
Average monthly total yield 2 |
|
|
1.53 |
% |
|
|
1.29 |
% |
|
|
|
|
|
|
19 |
% |
|
Average utilization 3 |
|
|
48.3 |
% |
|
|
40.3 |
% |
|
|
|
|
|
|
20 |
% |
|
Average monthly rental rate 4 |
|
|
3.17 |
% |
|
|
3.21 |
% |
|
|
|
|
|
|
(1 |
)% |
|
Period end rental equipment 1 |
|
$ |
307,842 |
|
|
$ |
313,434 |
|
|
$ |
(5,592 |
) |
|
|
(2 |
)% |
|
Period end utilization 3 |
|
|
50.4 |
% |
|
|
43.0 |
% |
|
|
|
|
|
|
17 |
% |
|
1. |
Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. |
|
2. |
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. |
|
3. |
Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. |
|
4. |
Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. |
nm = Not meaningful
23
Adler Tanks’ gross profit for the three months ended March 31, 2022 increased $1.4 million, or 20%, to $8.5 million. For the three months ended March 31, 2022 compared to the same period in 2021:
|
|
• |
Gross Profit on Rental Revenues – Rental revenues increased $2.0 million, or 17%, primarily due to 18% higher average equipment on rent in 2022 compared to 2021. As a percentage of rental revenues, depreciation was 28% in 2022 and 34% in 2021, and other direct costs were 21% and 19% in 2022 and 2021, respectively, which resulted in gross margin percentages of 51% and 48% in 2022 and 2021, respectively. The higher rental revenues and higher rental margins resulted in an increase in gross profit on rental revenues of $1.4 million, or 25%, to $7.2 million in 2022 compared to 2021. |
|
|
• |
Gross Profit on Rental Related Services – Rental related services revenues increased $0.4 million, or 8%, to $5.3 million compared to 2021. The higher rental related services revenues with lower gross margin percentage of 17% in 2022 compared to 21% in 2021, resulted in rental related services gross profit decreasing 10% to $0.9 million in 2022. |
For the three months ended March 31, 2022, selling and administrative expenses increased 4% to $6.5 million compared to the same period in 2021, primarily due to higher allocated corporate expenses.
Adjusted EBITDA
To supplement the Company’s financial data presented on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”), the Company presents “Adjusted EBITDA”, which is defined by the Company as net income before interest expense, provision for income taxes, depreciation, amortization and share-based compensation. The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the Company.
Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, compliance with financial covenants in the Company’s revolving lines of credit and senior notes and the Company’s ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including share-based compensation, is useful in measuring the Company’s cash available for operations and performance of the Company. Because management finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance.
Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non−GAAP measures used by other companies. Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include share-based compensation charges. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash 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, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Net income |
$ |
18,793 |
|
|
$ |
17,398 |
|
|
$ |
91,100 |
|
|
$ |
99,223 |
|
|
Provision for income taxes |
|
5,762 |
|
|
|
4,708 |
|
|
|
33,105 |
|
|
|
28,313 |
|
|
Interest expense |
|
2,820 |
|
|
|
1,783 |
|
|
|
11,492 |
|
|
|
7,918 |
|
|
Depreciation and amortization |
|
27,584 |
|
|
|
23,460 |
|
|
|
110,819 |
|
|
|
94,241 |
|
|
EBITDA |
|
54,959 |
|
|
|
47,349 |
|
|
|
246,516 |
|
|
|
229,695 |
|
|
Share-based compensation |
|
1,760 |
|
|
|
1,777 |
|
|
|
7,649 |
|
|
|
5,603 |
|
|
Adjusted EBITDA 1 |
$ |
56,719 |
|
|
$ |
49,126 |
|
|
$ |
254,165 |
|
|
$ |
235,298 |
|
|
Adjusted EBITDA margin 2 |
|
39 |
% |
|
|
41 |
% |
|
|
40 |
% |
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
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, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Adjusted EBITDA 1 |
$ |
56,719 |
|
|
$ |
49,126 |
|
|
$ |
254,165 |
|
|
$ |
235,298 |
|
|
Interest paid |
|
(2,137 |
) |
|
|
(1,625 |
) |
|
|
(10,838 |
) |
|
|
(7,816 |
) |
|
Income taxes paid, net of refunds received |
|
(420 |
) |
|
|
(372 |
) |
|
|
(9,135 |
) |
|
|
(34,912 |
) |
|
Gain on sale of used rental equipment |
|
(5,364 |
) |
|
|
(4,794 |
) |
|
|
(26,011 |
) |
|
|
(19,335 |
) |
|
Foreign currency exchange (gain) loss |
|
(13 |
) |
|
|
55 |
|
|
|
142 |
|
|
|
(459 |
) |
|
Amortization of debt issuance costs |
|
4 |
|
|
|
3 |
|
|
|
16 |
|
|
|
11 |
|
|
Change in certain assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
7,935 |
|
|
|
1,108 |
|
|
|
(17,119 |
) |
|
|
3,626 |
|
|
Prepaid expenses and other assets |
|
4,213 |
|
|
|
(94 |
) |
|
|
(2,509 |
) |
|
|
3,350 |
|
|
Accounts payable and other liabilities |
|
(14,417 |
) |
|
|
(10,385 |
) |
|
|
11,449 |
|
|
|
4,013 |
|
|
Deferred income |
|
5,223 |
|
|
|
4,587 |
|
|
|
9,718 |
|
|
|
(11,345 |
) |
|
Net cash provided by operating activities |
$ |
51,743 |
|
|
$ |
37,609 |
|
|
$ |
209,878 |
|
|
$ |
172,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, the Note Purchase Agreement, Series C Senior Notes, Series D Senior Notes and Series E 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, 2022, the actual ratio was 4.12 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, 2022, the actual ratio was 1.67 to 1. |
At March 31, 2022, 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.
Liquidity and Capital Resources
The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company for the three months ended March 31, 2022 compared to the same period in 2021 are summarized as follows:
Cash Flows from Operating Activities: The Company’s operations provided net cash of $51.3 million in 2022, compared to $37.6 million in 2021. The 36% increase in net cash provided by operating activities was primarily attributable to higher income from operations, a decrease in accounts receivable and prepaid expenses and other assets, partly offset by a decrease in accounts payable and accrued liabilities.
Cash Flows from Investing Activities: Net cash used in investing activities was $34.5 million in 2022, compared to $8.5 million in 2021. The $26.0 million increase was primarily attributable to $21.4 million higher purchases of rental equipment and $4.4 million higher purchases of property, plant and equipment during 2022.
Cash Flows from Financing Activities: Net cash used in financing activities was $16.6 million in 2022, compared to $28.0 million in 2021. The $11.4 million change was primarily attributable to lower net repayments under bank lines of credit.
Significant capital expenditures are required to maintain and grow the Company’s rental assets. During the last three years, the Company has financed its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and from borrowings. Sales occur routinely as a normal part of the Company’s rental business. However, these
25
sales can fluctuate from period to period depending on customer requirements and funding. Although the net proceeds received from sales may fluctuate from period to period, the Company believes its liquidity will not be adversely impacted from lower sales in any given year because it believes it has the ability to increase its bank borrowings and conserve its cash in the future by reducing the amount of cash it uses to purchase rental equipment, pay dividends, or repurchase the Company’s common stock.
Unsecured Revolving Lines of Credit
On March 31, 2020, the Company entered into an amended and restated credit agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender, L/C Issuer and lender, and other lenders named therein (the “Credit Facility”). The Credit Facility provides for a $420.0 million unsecured revolving credit facility (which may be further increased to $670.0 million by adding one or more tranches of term loans and/or increasing the aggregate revolving commitments), which includes a $25.0 million sublimit for the issuance of standby letters of credit and a $10.0 million sublimit for swingline loans. The proceeds of the Credit Facility are available to be used for general corporate purposes, including permitted acquisitions. The Credit Facility permits the Company’s existing indebtedness to remain, which includes the Company’s $12.0 million Treasury Sweep Note due March 31, 2025, the Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as of April 21, 2011 (as amended, the “the Prior NPA”): (i) the $40.0 million aggregate outstanding principal of notes issued March 17, 2014 which were repaid on March 17, 2021, and (ii) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015 and due November 5, 2022. In addition, the Company may incur additional senior note indebtedness in an aggregate amount not to exceed $250.0 million. The Credit Facility matures on March 31, 2025 and replaced the Company’s prior $420.0 million credit facility dated March 31, 2016 with Bank of America, N.A., as agent, as amended. All obligations outstanding under the prior credit facility as of the date of the Credit Facility were refinanced by the Credit Facility on March 31, 2020.
On March 30, 2020, the Company entered into an amended and restated Credit Facility Letter Agreement and a Credit Line Note in favor of MUFG Union Bank, N.A., which provides for a $12.0 million line of credit facility related to its cash management services (“Sweep Service Facility”). The Sweep Service Facility matures on the earlier of March 31, 2025, or the date the Company ceases to utilize MUFG Union Bank, N.A. for its cash management services. The Sweep Service Facility replaced the Company’s prior $12.0 million sweep service facility, dated as of March 31, 2016.
At March 31, 2022, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up to $432.0 million of which $264.0 million was outstanding, and had capacity to borrow up to an additional $168.0 million. The Credit Facility contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Credit Facility):
|
|
• |
Permit the Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than 2.50 to 1. At March 31, 2022, the actual ratio was 4.12 to 1. |
|
|
• |
Permit the Consolidated Leverage Ratio at any time during any period of four consecutive fiscal quarters to be greater than 2.75 to 1. At March 31, 2022, the actual ratio was 1.67 to 1. |
At March 31, 2022, 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.
Note Purchase and Private Shelf Agreement
On March 31, 2020, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series B and Series C Notes previously issued pursuant to the Prior NPA, among the Company and the other parties to the Note Purchase Agreement. The Note Purchase Agreement amended and restated, and superseded in its entirety, the Prior NPA. Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 3.68% Series B Senior Notes, which were repaid on March 17, 2021, and (ii) $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes due November 5, 2022, to which the terms of the Note Purchase Agreement shall apply.
In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf Notes”) in the aggregate principal amount of (x) $250 million minus (y) the amount of other notes (such as the Series C Senior Notes, Series D Senior Notes and Series E Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes may be issued and sold from time to time at the discretion of the Company’s Board of Directors and in such amounts as the Board of Directors may determine, subject to prospective purchasers’ agreement to purchase the Shelf Notes. The Company will sell the Shelf Notes directly to such purchasers.
26
The full net proceeds of each Shelf Note will be used in the manner described in the applicable Request for Purchase with respect to such Shelf Note.
3.84% Senior Notes Due in 2022
On November 5, 2015, the Company issued and sold to the purchasers a $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes (the “Series C Senior Notes”) pursuant to the terms of the Prior NPA. The Series C Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 3.84% per annum and mature on November 5, 2022. Interest on the Series C Senior Notes is payable semi-annually beginning on May 5, 2016 and continuing thereafter on November 5 and May 5 of each year until maturity. The principal balance is due when the notes mature on November 5, 2022. The full net proceeds from the Series C Senior Notes were used to reduce the outstanding balance on the Company’s revolving credit line. At March 31, 2022, the principal balance outstanding under the Series C Senior Notes was $60.0 million.
2.57% Senior Notes Due in 2028
On March 17, 2021, the Company issued and sold to the purchasers $40 million aggregate principal amount of 2.57% Series D Notes (the “Series D Senior Notes”) pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series D Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.57% per annum and mature on March 17, 2028. Interest on the Series D Senior Notes is payable semi-annually beginning on September 17, 2021 and continuing thereafter on March 17 and September 17 of each year until maturity. The principal balance is due when the notes mature on March 17, 2028. The full net proceeds from the Series D Senior Notes were used to pay off the Company’s $40 million Series B Senior Notes. At March 31, 2022, the principal balance outstanding under the Series D Senior Notes was $40.0 million.
2.35% Senior Notes Due in 2026
On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026. Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of each year until maturity. The principal balance is due when the notes mature on June 16, 2026. The full net proceeds from the Series E Senior Notes were used to pay down the Company’s credit facility. At March 31, 2022, the principal balance outstanding under the Series E Senior Notes was $60.0 million.
Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series C Senior Notes, Series D Senior Notes and Series E Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement):
|
|
• |
Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At March 31, 2022, the actual ratio was 4.12 to 1. |
|
|
• |
Permit the Consolidated Leverage Ratio of funded debt to EBITDA at any time during any period of four consecutive quarters to be greater than 2.75 to 1. At March 31, 2022, the actual ratio was 1.67 to 1. |
At March 31, 2022, 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.
Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit and issue senior notes adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment. Furthermore, the Company believes it has the financial resources to weather any short-term impacts of COVID-19. However, the Company has limited insight into the extent to which its business may be impacted by COVID-19, and there are many uncertainties, including how long and how severely the Company will be impacted. An extended and severe impact may materially and adversely affect the Company’s future operations, financial position and liquidity.
Common Stock Purchase
The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to
27
repurchase up to 2,000,000 shares of the Company's outstanding common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the Repurchase Plan may be modified, extended or terminated by the Company’s Board of Directors at any time. There were no shares repurchased in the three months ended March 31, 2022 and 2021. As of March 31, 2022, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan.
Contractual Obligations and Commitments
We believe that our contractual obligations and commitments have not changed materially from those included in our 2021 Annual Report.
Critical Accounting Estimates
There were no material changes in our judgments and assumptions associated with the development of our critical accounting estimates during the period ended March 31, 2022. Refer to our 2021 Annual Report for a discussion of our critical accounting policies and estimates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company’s market risk exposures from those reported in our 2021 Annual Report.
Item 4. Controls and Procedures
The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), the Company’s principal executive officer and principal financial officer, respectively, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2022. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of March 31, 2022. There were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
28
Part II -Other Information
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company’s management does not expect that the outcome in the current proceedings, individually or collectively, will have a material adverse effect on the Company’s financial condition, operating results or cash flows.
Item 1a. Risk Factors
You should carefully consider the following discussion of various risks and uncertainties. We believe these risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Our business, financial condition, and results of operations could be seriously harmed if any of these risks or uncertainties actually occur or materialize. In that event, the market price for our common stock could decline, and you may lose all or part of your investment. The risk factors below are intended to supersede in their entirety the risk factors contained in “Item 1. A Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.
RISKS RELATED TO OUR STRATEGY AND OPERATION:
Our future operating results may fluctuate, fail to match past performance or fail to meet expectations, which may result in a decrease in our stock price.
Our operating results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of a number of factors, some of which are beyond our control including but not limited to:
|
|
• |
general economic conditions in the geographies and industries where we rent and sell our products; |
|
|
• |
legislative and educational policies where we rent and sell our products; |
|
|
• |
the budgetary constraints of our customers; |
|
|
• |
seasonality of our rental businesses and our end-markets; |
|
|
• |
success of our strategic growth initiatives; |
|
|
• |
costs associated with the launching or integration of new or acquired businesses; |
|
|
• |
the timing and type of equipment purchases, rentals and sales; |
|
|
• |
the nature and duration of the equipment needs of our customers; |
|
|
• |
the timing of new product introductions by us, our suppliers and our competitors; |
|
|
• |
the volume, timing and mix of maintenance and repair work on our rental equipment; |
|
|
• |
supply chain delays or disruptions; |
|
|
• |
our equipment mix, availability, utilization and pricing; |
|
|
• |
inflation in the cost of materials, labor and new rental equipment; |
|
|
• |
the mix, by state and country, of our revenues, personnel and assets; |
|
|
• |
rental equipment impairment from excess, obsolete or damaged equipment; |
|
|
• |
movements in interest rates or tax rates; |
|
|
• |
changes in, and application of, accounting rules; |
|
|
• |
changes in the regulations applicable to us; and |
|
|
• |
litigation matters. |
As a result of these factors, our historical financial results are not necessarily indicative of our future results or stock price.
29
Our stock price has fluctuated and may continue to fluctuate in the future, which may result in a decline in the value of your investment in our common stock.
The market price of our common stock fluctuates on the NASDAQ Global Select Market and is likely to be affected by a number of factors including but not limited to:
|
|
• |
our operating performance and the performance of our competitors, and in particular any variations in our operating results or dividend rate from our stated guidance or from investors’ expectations; |
|
|
• |
any changes in general conditions in the global economy, the industries in which we operate or the global financial markets; |
|
|
• |
investors’ reaction to our press releases, public announcements or filings with the SEC; |
|
|
• |
the stock price performance of our competitors or other comparable companies; |
|
|
• |
any changes in research analysts’ coverage, recommendations or earnings estimates for us or for the stocks of other companies in our industry; |
|
|
• |
any sales of common stock by our directors, executive officers and our other large shareholders, particularly in light of the limited trading volume of our stock; |
|
|
• |
any merger and acquisition activity that involves us or our competitors; and |
|
|
• |
other announcements or developments affecting us, our industry, customers, suppliers or competitors. |
In addition, in recent years the U.S. stock market has experienced significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. Additionally, the most recent global credit crisis adversely affected the prices of most publicly traded stocks as many stockholders became more willing to divest their stock holdings at lower values to increase their cash flow and reduce exposure to such fluctuations. These broad market fluctuations and any other negative economic trends may cause declines in the market price of our common stock and may be based upon factors that have little or nothing to do with our Company or its performance, and these fluctuations and trends could materially reduce our stock price.
The impact of COVID-19 on our operations, and the operations of our customers, suppliers and logistics providers, may harm our business.
We continue to monitor the ongoing impact of COVID-19 outbreak around the globe. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. Significant uncertainty continues to exist concerning the magnitude of the impact and duration of the COVID-19 pandemic and related variants. While the Company’s operating segments and branch locations currently continue to operate, the Company’s results of operations may be negatively impacted by project delays, supply chain delays or disruptions; elevated costs for materials and labor; early returns of equipment currently on rent with customers; overall decreased customer demand for new rental orders, rental related services and sales of new and used rental equipment; and payment delay, or non-payment, by customers who are significantly impacted by COVID-19.
Our ability to retain our executive management and to recruit, retain and motivate key qualified employees is critical to the success of our business.
If we cannot successfully recruit and retain qualified personnel, our operating results and stock price may suffer. We believe that our success is directly linked to the competent people in our organization, including our executive officers, senior managers and other key personnel, and in particular, Joe Hanna, our Chief Executive Officer. Personnel turnover can be costly and could materially and adversely impact our operating results and can potentially jeopardize the success of our current strategic initiatives. We need to attract and retain highly qualified personnel to replace personnel when turnover occurs, as well as add to our staff levels as growth occurs. Our business and stock price likely will suffer if we are unable to fill, or experience delays in filling open positions, or fail to retain key personnel.
30
Failure by third parties to manufacture and deliver our products to our specifications or on a timely basis may harm our reputation and financial condition.
We depend on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. In the future, we may be limited as to the number of third-party suppliers for some of our products. Although in general we make advance purchases of some products to help ensure an adequate supply, currently we do not have any long-term purchase contracts with any third-party supplier. We may experience supply problems as a result of financial or operating difficulties or failure of our suppliers, or shortages and discontinuations resulting from product obsolescence or other shortages or allocations by our suppliers. Unfavorable economic conditions may also adversely affect our suppliers or the terms on which we purchase products. In the future, we may not be able to negotiate arrangements with third parties to secure products that we require in sufficient quantities or on reasonable terms. If we cannot negotiate arrangements with third parties to produce our products or if the third parties fail to produce our products to our specifications or in a timely manner, our reputation and financial condition could be harmed.
We are subject to information technology system failures, network disruptions and breaches in data security which could subject us to liability, reputational damage or interrupt the operation of our business.
We rely upon our information technology systems and infrastructure for our business. We sustained an immaterial cybersecurity attack in 2021 involving ransomware that impacted certain of our systems, but was unsuccessful in its ability to disrupt our network. Our investigation revealed that an unauthorized third party copied some personal information relating to certain current and former employees, directors, contractor workers and their dependents and certain other persons. Upon detection, we promptly undertook steps to address the incident, restored network systems and resumed normal operations. The attack did not result in any material disruption to our operations or ability to service our customers, and did not affect our financial performance.
In the future, we could experience additional breaches of our security measures resulting in the theft of confidential information or reputational damage from industrial espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers. Similarly, additional data privacy breaches by those who access our systems may pose a risk that sensitive data, including intellectual property, trade secrets or personal information belonging to us, our employees, customers or other business partners, may be exposed to unauthorized persons or to the public.
The immaterial breach of our information technology system and any future breaches could subject us to reputational damage. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. There can be no assurance that our efforts to protect our data and information technology systems will prevent future breaches in our systems (or that of our third-party providers) that could adversely affect our business and result in financial and reputational harm to us, theft of trade secrets and other proprietary information, legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties.
Disruptions in our information technology systems or failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail, become unavailable for any period of time or are not upgraded, this could limit our ability to effectively monitor and control our operations and adversely affect our operations.
Our information technology systems facilitate our ability to transact business, monitor and control our operations and adjust to changing market conditions. We sustained an immaterial cybersecurity attack in 2021 involving ransomware that impacted certain of our systems, but was unsuccessful in its ability to disrupt our network. Upon detection, we promptly undertook steps to address the incident, restored network systems and resumed normal operations. Any future cybersecurity attack causing disruption in our information technology systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively transact business, monitor and control our operations and adjust to changing market conditions in a timely manner.
In addition, because of recent advances in technology and well-known efforts on the part of computer hackers and cyber-terrorists to breach data security of companies, we face risks associated with failure to adequately protect critical corporate, customer and employee data, which could adversely impact our customer relationships, our reputation, and even violate privacy laws. As part of our business, we develop, receive and retain confidential data about our company and our customers.
Further, the delay or failure to implement information system upgrades and new systems effectively could disrupt our business, distract management’s focus and attention from our business operations and growth initiatives, and increase our implementation and operating costs, any of which could negatively impact our operations and operating results.
31
We have engaged in acquisitions and may engage in future acquisitions that could negatively impact our results of operations, financial condition and business.
In the second quarter 2021, we acquired the assets of Design Space Modular Buildings PNW, LP (“Design Space”), a provider of modular buildings and portable storage containers for rental and sale to customers in the West and Pacific Northwest states in the U.S. and GRS Holding LLC, DBA Kitchens to Go (“Kitchens To Go”), a provider of interim and permanent modular solutions for foodservice providers that require flexible facilities to continue or expand operations. We anticipate that we will continue to consider acquisitions in the future that meet our strategic growth plans. We are unable to predict whether or when any prospective acquisition will be completed. Acquisitions involve numerous risks, including the following:
|
|
• |
difficulties in integrating the operations, technologies, products and personnel of the acquired companies; |
|
|
• |
diversion of management’s attention from normal daily operations of our business; |
|
|
• |
difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets may have stronger market positions; |
|
|
• |
difficulties in complying with regulations applicable to any acquired business, such as environmental regulations, and managing risks related to an acquired business; |
|
|
• |
timely completion of necessary financing and required amendments, if any, to existing agreements; |
|
|
• |
an inability to implement uniform standards, controls, procedures and policies; |
|
|
• |
undiscovered and unknown problems, defects, damaged assets liabilities, or other issues related to any acquisition that become known to us only after the acquisition; |
|
|
• |
negative reactions from our customers to an acquisition; |
|
|
• |
disruptions among employees related to any acquisition which may erode employee morale; |
|
|
• |
loss of key employees, including costly litigation resulting from the termination of those employees; |
|
|
• |
an inability to realize cost efficiencies or synergies that we may anticipate when selecting acquisition candidates; |
|
|
• |
recording of goodwill and non-amortizable intangible assets that will be subject to future impairment testing and potential periodic impairment charges; |
|
|
• |
incurring amortization expenses related to certain intangible assets; and |
|
|
• |
becoming subject to litigation. |
Acquisitions are inherently risky, and no assurance can be given that our recent and future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. The success of our acquisition strategy depends upon our ability to successfully complete acquisitions and integrate any businesses that we acquire into our existing business. The difficulties of integration could be increased by the necessity of coordinating geographically dispersed organizations; maintaining acceptable standards, controls, procedures and policies; integrating personnel with disparate business backgrounds; combining different corporate cultures; and the impairment of relationships with employees and customers as a result of any integration of new management and other personnel. In addition, if we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing shareholders’ ownership could be diluted significantly. If we were to proceed with one or more significant future acquisitions in which the consideration included cash, we could be required to use, to the extent available, a substantial portion of our Credit Facility. If we increase the amount borrowed against our available credit line, we would increase the risk of breaching the covenants under our credit facilities with our lenders. In addition, it would limit our ability to make other investments, or we may be required to seek additional debt or equity financing. Any of these items could adversely affect our results of operations.
If we determine that our goodwill and intangible assets have become impaired, we may incur impairment charges, which would negatively impact our operating results.
At March 31, 2022, we had $177.9 million of goodwill and intangible assets, net, on our consolidated balance sheets. Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Under accounting principles generally accepted in the United States of America, we assess potential impairment of our goodwill and intangible assets at least annually, as well as on an interim basis to the extent that factors or indicators become apparent that could reduce the fair value of any of our businesses below book value. Impairment may result from significant changes in the manner of use of the acquired asset, negative industry or economic trends and significant underperformance relative to historic or projected operating results.
32
Our rental equipment is subject to residual value risk upon disposition, and may not sell at the prices or in the quantities we expect.
The market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:
|
|
• |
the market price for new equipment of a like kind; |
|
|
• |
the age of the equipment at the time it is sold, as well as wear and tear on the equipment relative to its age; |
|
|
• |
the supply of used equipment on the market; |
|
|
• |
technological advances relating to the equipment; |
|
|
• |
worldwide and domestic demand for used equipment; and |
|
|
• |
general economic conditions. |
We include in income from operations the difference between the sales price and the depreciated value of an item of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gain or loss realized upon disposal of equipment. Sales of our used rental equipment at prices that fall significantly below our projections or in lesser quantities than we anticipate will have a negative impact on our results of operations and cash flows.
If we do not effectively manage our credit risk, collect on our accounts receivable or recover our rental equipment from our customers’ sites, it could have a material adverse effect on our operating results.
We generally rent and sell to customers on 30 day payment terms, individually perform credit evaluation procedures on our customers for each transaction and require security deposits or other forms of security from our customers when a significant credit risk is identified. Historically, accounts receivable write-offs and write-offs related to equipment not returned by customers have not been significant and have averaged less than 1% of total revenues over the last five years. If economic conditions deteriorate, we may see an increase in bad debt relative to historical levels, which may materially and adversely affect our operations. Business segments that experience significant market disruptions or declines may experience increased customer credit risk and higher bad debt expense. Failure to manage our credit risk and receive timely payments on our customer accounts receivable may result in write-offs and/or loss of equipment, particularly electronic test equipment. If we are not able to effectively manage credit risk issues, or if a large number of our customers should have financial difficulties at the same time, our receivables and equipment losses could increase above historical levels. If this should occur, our results of operations may be materially and adversely affected.
Effective management of our rental assets is vital to our business. If we are not successful in these efforts, it could have a material adverse impact on our results of operations.
Our modular, electronics and liquid and solid containment rental products have long useful lives and managing those assets is a critical element to each of our rental businesses. Generally, we design units and find manufacturers to build them to our specifications for our modular and liquid and solid containment tanks and boxes. Modular asset management requires designing and building the product for a long life that anticipates the needs of our customers, including anticipating potential changes in legislation, regulations, building codes and local permitting in the various markets in which the Company operates. Electronic test equipment asset management requires understanding, selecting and investing in equipment technologies that support market demand, including anticipating technological advances and changes in manufacturers’ selling prices. Liquid and solid containment asset management requires designing and building the product for a long life, using quality components and repairing and maintaining the products to prevent leaks. For each of our modular, electronic test equipment and liquid and solid containment assets, we must successfully maintain and repair this equipment cost-effectively to maximize the useful life of the products and the level of proceeds from the sale of such products. To the extent that we are unable to do so, our result of operations could be materially adversely affected.
The nature of our businesses, including the ownership of industrial property, exposes us to the risk of litigation and liability under environmental, health and safety and products liability laws. Violations of environmental or health and safety related laws or associated liability could have a material adverse effect on our business, financial condition and results of operations.
We are subject to national, state, provincial and local environmental laws and regulations concerning, among other things, solid and liquid waste and hazardous substances handling, storage and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with applicable environmental or health and safety laws. We also could incur costs or liabilities related to waste disposal or remediating soil or groundwater contamination at our properties, at our customers’ properties or at third party landfill and disposal sites. These liabilities can be imposed on the parties generating, transporting or disposing of such substances or on the owner or operator of any affected property, often without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances.
33
Several aspects of our businesses involve risks of environmental and health and safety liability. For example, our operations involve the use of petroleum products, solvents and other hazardous substances in the construction and maintaining of modular buildings and for fueling and maintaining our delivery trucks and vehicles. We also own, transport and rent tanks and boxes in which waste materials are placed by our customers. The historical operations at some of our previously or currently owned or leased and newly acquired or leased properties may have resulted in undiscovered soil or groundwater contamination or historical non-compliance by third parties for which we could be held liable. Future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination or non-compliance, may also give rise to liabilities or other claims based on these operations that may be material. In addition, compliance with future environmental or health and safety laws and regulations may require significant capital or operational expenditures or changes to our operations.
Accordingly, in addition to potential penalties for non-compliance, we may become liable, either contractually or by operation of law, for investigation, remediation and monitoring costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property. In addition, certain parties may be held liable for more than their “fair” share of environmental investigation and cleanup costs. Contamination and exposure to hazardous substances or other contaminants such as mold can also result in claims for remediation or damages, including personal injury, property damage, and natural resources damage claims. Although expenses related to environmental compliance, health and safety issues, and related matters have not been material to date, we cannot assure that we will not have to make significant expenditures in the future in order to comply with applicable laws and regulations. Violations of environmental or health and safety related laws or associated liability could have a material adverse effect on our business, financial condition and results of operations.
In general, litigation in the industries in which we operate, including class actions that seek substantial damages, arises with increasing frequency. Enforcement of environmental and health and safety requirements is also frequent. Such proceedings are invariably expensive, regardless of the merit of the plaintiffs’ or prosecutors’ claims. We may be named as a defendant in the future, and there can be no assurance, irrespective of the merit of such future actions, that we will not be required to make substantial settlement payments in the future. Further, a significant portion of our business is conducted in California which is one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new laws, regulations or litigation may be greater than companies with a less significant California presence.
The nature of our business also subjects us to property damage and product liability claims, especially in connection with our modular buildings and tank and box rental businesses. Although we maintain liability coverage that we believe is commercially reasonable, an unusually large property damage or product liability claim or a series of claims could exceed our insurance coverage or result in damage to our reputation.
Our routine business activities expose us to risk of litigation from employees, vendors and other third parties, which could have a material adverse effect on our results of operations.
We may be subject to claims arising from disputes with employees, vendors and other third parties in the normal course of our business; these risks may be difficult to assess or quantify and their existence and magnitude may remain unknown for substantial periods of time. If the plaintiffs in any suits against us were to successfully prosecute their claims, or if we were to settle any such suits by making significant payments to the plaintiffs, our operating results and financial condition would be harmed. Even if the outcome of a claim proves favorable to us, litigation can be time consuming and costly and may divert management resources. In addition, our organizational documents require us to indemnify our senior executives to the maximum extent permitted by California law. We maintain directors’ and officers’ liability insurance that we believe is commercially reasonable in connection with such obligations, but if our senior executives were named in any lawsuit, our indemnification obligations could magnify the costs of these suits and/or exceed the coverage of such policies.
If we suffer loss to our facilities, equipment or distribution system due to catastrophe, our insurance policies could be inadequate or depleted, our operations could be seriously harmed, which could negatively affect our operating results.
Our facilities, rental equipment and distribution systems may be subject to catastrophic loss due to fire, flood, hurricane, earthquake, terrorism or other natural or man-made disasters. In particular, our headquarters, three operating facilities, and certain of our rental equipment are located in areas of California, with above average seismic activity and could be subject to catastrophic loss caused by an earthquake. Our rental equipment and facilities in Texas, Louisiana, Florida, North Carolina and Georgia are located in areas subject to hurricanes and other tropical storms. In addition to customers’ insurance on rented equipment, we carry property insurance on our rental equipment in inventory and operating facilities as well as business interruption insurance. We believe our insurance policies have adequate limits and deductibles to mitigate the potential loss exposure of our business. We do not maintain financial reserves for policy deductibles and our insurance policies contain exclusions that are customary for our industry, including exclusions for earthquakes, flood and terrorism. If any of our facilities or a significant amount of our rental equipment were to experience a catastrophic loss, it could disrupt our operations, delay orders, shipments and revenue recognition and result in expenses to repair or replace the damaged rental equipment and facility not covered by insurance, which could have a material adverse effect on our results of operations.
34
INTEREST RATE AND INDEBTEDNESS RISKS:
Our debt instruments contain covenants that restrict or prohibit our ability to enter into a variety of transactions and may limit our ability to finance future operations or capital needs. If we have an event of default under these instruments, our indebtedness could be accelerated and we may not be able to refinance such indebtedness or make the required accelerated payments.
The agreements governing our Series C, D and E Senior Notes (as defined and more fully described under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”) and our Credit Facility contain various covenants that limit our discretion in operating our business. In particular, we are limited in our ability to merge, consolidate, reorganize or transfer substantially all of our assets, make investments, pay dividends or distributions, redeem or repurchase stock, change the nature of our business, enter into transactions with affiliates, incur indebtedness and create liens on our assets to secure debt. In addition, we are required to meet certain financial covenants under these instruments. These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise.
A failure to comply with the restrictions contained in these agreements could lead to an event of default, which could result in an acceleration of our indebtedness. In the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any required accelerated payments. If we default on our indebtedness, our business financial condition and results of operations could be materially and adversely affected.
The majority of our indebtedness is subject to variable interest rates, which makes us vulnerable to increases in interest rates, which could negatively affect our net income.
Our indebtedness exposes us to interest rate increases because the majority of our indebtedness is subject to variable rates. At present, we do not have any derivative financial instruments such as interest rate swaps or hedges to mitigate interest rate variability. The interest rates under our credit facilities are reset at varying periods. These interest rate adjustments could cause periodic fluctuations in our operating results and cash flows. Our annual debt service obligations increase by approximately $2.7 million per year for each 1% increase in the average interest rate we pay based on the $266.5 million balance of variable rate debt outstanding at December 31, 2021. If interest rates rise in the future, and, particularly if they rise significantly, interest expense will increase and our net income will be negatively affected.
GENERAL RISKS:
Our effective tax rate may change and become less predictable as our business expands, or as a result of federal and state tax law changes, making our future earnings less predictable.
We continue to consider expansion opportunities domestically and internationally for our rental businesses. Since the Company’s effective tax rate depends on business levels, personnel and assets located in various jurisdictions, further expansion into new markets or acquisitions may change the effective tax rate in the future and may make it, and consequently our earnings, less predictable going forward. Further, the enactment of future tax law changes by federal and state taxing authorities may impact the Company’s current period tax provision and its deferred tax liabilities. In addition, the amount and timing of stock-based compensation may also impact the Company’s current tax provision.
Changes in financial accounting standards may cause lower than expected operating results and affect our reported results of operations.
Changes in accounting standards and their application may have a significant effect on our reported results on a going-forward basis and may also affect the recording and disclosure of previously reported transactions. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred in the past and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
SPECIFIC RISKS RELATED TO OUR RELOCATABLE MODULAR BUILDINGS BUSINESS SEGMENT:
Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability.
Rentals and sales of modular buildings to public school districts for use as classrooms, restroom buildings, and administrative offices for K-12 represent a significant portion of Mobile Modular’s rental and sales revenues. Funding for public school facilities is derived from a variety of sources including the passage of both statewide and local facility bond measures, developer fees and various taxes levied to support school operating budgets. Many of these funding sources are subject to financial and political considerations, which vary from district to district and are not tied to demand. Historically, we have benefited from the passage of statewide and local facility bond measures and believe these are essential to our business.
35
The state of California is our largest market for classroom rentals. The strength of this market depends heavily on public funding from voter passage of both state and local facility bond measures, and the ability of the state to sell such bonds in the public market. A lack of passage of state and local facility bond measures, or the inability to sell bonds in the public markets in the future could reduce our revenues and operating income, and consequently have a material adverse effect on the Company’s financial condition. Furthermore, even if voters have approved facility bond measures and the state has raised bond funds, there is no guarantee that individual school projects will be funded in a timely manner.
As a consequence of the most recent economic recession, many states and local governments experienced large budget deficits resulting in severe budgetary constraints among public school districts. To the extent public school districts’ funding is reduced for the rental and purchase of modular buildings, our business could be harmed and our results of operations negatively impacted. We believe that interruptions or delays in the passage of facility bond measures or completion of state budgets, an insufficient amount of state funding, a significant reduction of funding to public schools, or changes negatively impacting enrollment may reduce the rental and sale demand for our educational products. Any reductions in funding available to the school districts from the states in which we do business may cause school districts to experience budget shortfalls and to reduce their demand for our products despite growing student populations, class size reduction initiatives and modernization and reconstruction project needs, which could reduce our revenues and operating income and consequently have a material adverse effect on the Company’s financial condition.
Public policies that create demand for our products and services may change, resulting in decreased demand for or the pricing of our products and services, which could negatively affect our revenues and operating income.
Various states that we operate enacted laws and constitutional amendments to provide funding for school districts to limit the number of students that may be grouped in a single classroom. School districts with class sizes in excess of state limits have been and continue to be a significant source of our demand for modular classrooms. In California, efforts to address aging infrastructure and deferred maintenance have resulted in modernization and reconstruction projects by public school districts including seismic retrofitting, asbestos abatement and various building repairs and upgrades, which has been another source of demand for our modular classrooms. The most recent economic recession caused state and local budget shortfalls, which reduced school districts’ funding and their ability to comply with state class size reduction requirements. If educational priorities and policies shift away from class-size reduction or modernization and reconstruction projects, demand and pricing for our products and services may decline, not grow as quickly as, or not reach the levels that we anticipate. Significant equipment returns may result in lower utilization until equipment can be redeployed or sold, which may cause rental rates to decline and negatively affect our revenues and operating income.
Failure to comply with applicable regulations could harm our business and financial condition, resulting in lower operating results and cash flows.
Similar to conventionally constructed buildings, the modular building industry, including the manufacturers and lessors of portable classrooms, are subject to regulations by multiple governmental agencies at the federal, state and local level relating to environmental, zoning, health, safety, energy efficiency, labor and transportation matters, among other matters. Failure to comply with these laws or regulations could impact our business or harm our reputation and result in higher capital or operating expenditures or the imposition of penalties or restrictions on our operations.
As with conventional construction, typically new codes and regulations are not retroactively applied. Nonetheless, new governmental regulations in these or other areas may increase our acquisition cost of new rental equipment, limit the use of or make obsolete some of our existing equipment, or increase our costs of rental operations.
Building codes are generally reviewed every three years. All aspects of a given code are subject to change including, but not limited to, such items as structural specifications for earthquake safety, energy efficiency and environmental standards, fire and life safety, transportation, lighting and noise limits.
Compliance with building codes and regulations entails a certain amount of risk as state and local government authorities do not necessarily interpret building codes and regulations in a consistent manner, particularly where applicable regulations may be unclear and subject to interpretation. These regulations often provide broad discretion to governmental authorities that oversee these matters, which can result in unanticipated delays or increases in the cost of compliance in particular markets. The construction and modular industries have developed many “best practices” which are constantly evolving. Some of our peers and competitors may adopt practices that are more or less stringent than the Company’s. When, and if, regulatory standards are clarified, the effect of the clarification may be to impose rules on our business and practices retroactively, at which time, we may not be in compliance with such regulations and we may be required to incur costly remediation. If we are unable to pass these increased costs on to our customers, our profitability, operating cash flows and financial condition could be negatively impacted.
36
Expansions of our modular operations into new markets may negatively affect our operating results.
In the past we have expanded our modular operations into new geographies and states. There are risks inherent in the undertaking of such expansion, including the risk of revenue from the business in any new markets not meeting our expectations, higher than expected costs in entering these new markets, risk associated with compliance with applicable state and local laws and regulations, response by competitors and unanticipated consequences of expansion. In addition, expansion into new markets may be affected by local economic and market conditions. Expansion of our operations into new markets will require a significant amount of attention from our management, a commitment of financial resources and will require us to add qualified management in these markets, which may negatively impact our operating results.
We are subject to laws and regulations governing government contracts. These laws and regulations make these government contracts more favorable to government entities than other third parties and any changes in these laws and regulations, or our failure to comply with these laws and regulations could harm our business.
We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts such as clauses that allow government entities not to perform on contractual obligations in the case of a lack of fiscal funding. Also, in the educational markets we serve, we are able to utilize “piggyback” contracts in marketing our products and services and ultimately to book business. The term “piggyback” contract refers to contracts for portable classrooms or other products entered into by public school districts following a formal bid process that allows for the use of the same contract terms and conditions with the successful vendor by other public school districts. As a result, “piggyback” contracts allow us to more readily book orders from our government customers, primarily public school districts, and to reduce the administrative expense associated with booking these orders. The governmental statutes and regulations that allow for use of “piggyback” contracts are subject to change or elimination in their entirety. A change in the manner of use or the elimination of “piggyback” contracts would likely negatively impact our ability to book new business from these government customers and could cause our administrative expenses related to processing these orders to increase significantly. In addition, any failure to comply with these laws and regulations might result in administrative penalties or even in the suspension of these contracts and as a result, the loss of the related revenues which would harm our business and results from operations.
Seasonality of our educational business may have adverse consequences for our business.
A significant portion of the modular sale and rental revenues is derived from the educational market. Typically, during each calendar year, our highest numbers of classrooms are shipped for rental and sale orders during the second and third quarters for delivery and installation prior to the start of the upcoming school year. The majority of classrooms shipped in the second and third quarters have rental start dates during the third quarter, thereby making the fourth quarter the first full quarter of rental revenues recognized for these transactions. Although this is the historical seasonality of our business, it is subject to change or may not meet our expectations, which may have adverse consequences for our business.
We face strong competition in our modular building markets and we may not be able to effectively compete.
The modular building leasing industry is highly competitive in our states of operation and we expect it to remain so. The competitive market in which we operate may prevent us from raising rental fees or sales prices to pass any increased costs on to our customers. We compete on the basis of a number of factors, including equipment availability, quality, price, service, reliability, appearance, functionality and delivery terms. We may experience pricing pressures in our areas of operation in the future as some of our competitors seek to obtain market share by reducing prices.
Some of our competitors in the modular building leasing industry, notably WillScot Corporation, have a greater range of products and services, greater financial and marketing resources, larger customer bases, and greater name recognition than we have. WillScot Corporation completed the acquisition of Modspace in August, 2018 and Mobile Mini in July, 2020. These combined competitors may be better able to respond to changes in the relocatable modular building market, to finance acquisitions, to fund internal growth and to compete for market share, any of which could harm our business.
We may not be able to quickly redeploy modular units returning from leases, which could negatively affect our financial performance and our ability to expand, or utilize, our rental fleet.
As of March 31, 2022, 64% of our modular portfolio had equipment on rent for periods exceeding the original committed term. Generally, when a customer continues to rent the modular units beyond the contractual term, the equipment rents on a month-to-month basis. If a significant number of our rented modular units were returned during a short period of time, particularly those units that are rented on a month-to-month basis, a large supply of units would need to be remarketed. Our failure to effectively remarket a large influx
37
of units returning from leases could negatively affect our financial performance and our ability to continue expanding our rental fleet. In addition, if returned units stay off rent for an extended period of time, we may incur additional costs to securely store and maintain them.
Significant increases in raw material and labor costs could increase our acquisition cost of new modular rental units and repair and maintenance costs of our fleet, which would increase our operating costs and harm our profitability.
We incur labor costs and purchase raw materials, including lumber, siding and roofing and other products to perform periodic repairs, modifications and refurbishments to maintain physical conditions of our modular units. The volume, timing and mix of maintenance and repair work on our rental equipment may vary quarter-to-quarter and year-to-year. Generally, increases in labor and raw material costs will also increase the acquisition cost of new modular units and increase the repair and maintenance costs of our fleet. We also maintain a fleet of service trucks and use subcontractor companies for the delivery, set-up, return delivery and dismantle of modulars for our customers. We rely on our subcontractor service companies to meet customer demands for timely shipment and return, and the loss or inadequate number of subcontractor service companies may cause prices to increase, while negatively impacting our reputation and operating performance. During periods of rising prices for labor, raw materials or fuel, and in particular, when the prices increase rapidly or to levels significantly higher than normal, we may incur significant increases in our acquisition costs for new modular units and incur higher operating costs that we may not be able to recoup from our customers, which would reduce our profitability.
Failure by third parties to manufacture our products timely or properly may harm our reputation and financial condition.
We are dependent on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. Mobile Modular purchases new modulars from various manufacturers who build to Mobile Modular’s design specifications. With the exception of Enviroplex, none of the principal suppliers are affiliated with the Company. During 2021, Mobile Modular purchased 41% of its modular product from one manufacturer. The Company believes that the loss of any of its primary manufacturers of modulars could have an adverse effect on its operations since Mobile Modular could experience higher prices and longer delivery lead times for modular product until other manufacturers were able to increase their production capacity.
Failure to properly design, manufacture, repair and maintain the modular product may result in impairment charges, potential litigation and reduction of our operating results and cash flows.
We estimate the useful life of the modular product to be 18 years with a residual value of 50%. However, proper design, manufacture, repairs and maintenance of the modular product during our ownership is required for the product to reach the estimated useful life of 18 years with a residual value of 50%. If we do not appropriately manage the design, manufacture, repair and maintenance of our modular product, or otherwise delay or defer such repair or maintenance, we may be required to incur impairment charges for equipment that is beyond economic repair costs or incur significant capital expenditures to acquire new modular product to serve demand. In addition, such failures may result in personal injury or property damage claims, including claims based on presence of mold, and termination of leases or contracts by customers. Costs of contract performance, potential litigation, and profits lost from termination could accordingly reduce our future operating results and cash flows.
Our warranty costs may increase and warranty claims could damage our reputation and negatively impact our revenues and operating income.
Sales of new relocatable modular buildings not manufactured by us are typically covered by warranties provided by the manufacturer of the products sold. We provide ninety-day warranties on certain modular sales of used rental units and one-year warranties on equipment manufactured by our Enviroplex subsidiary. Historically, our warranty costs have not been significant, and we monitor the quality of our products closely. If a defect were to arise in the installation of our equipment at the customer’s facilities or in the equipment acquired from our suppliers or by our Enviroplex subsidiary, we may experience increased warranty claims. Such claims could disrupt our sales operations, damage our reputation and require costly repairs or other remedies, negatively impacting revenues and operating income.
SPECIFIC RISKS RELATED TO OUR ELECTRONIC TEST EQUIPMENT BUSINESS SEGMENT:
Market risk and cyclical downturns in the industries using test equipment may result in periods of low demand for our product resulting in excess inventory, impairment charges and reduction of our operating results and cash flows.
TRS-RenTelco’s revenues 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, in the aerospace, defense, communications, manufacturing and semiconductor industries. Electronic test equipment rental and sales revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance. Historically, these industries have been cyclical and have experienced periodic downturns, which can have a material
38
adverse impact on the industry’s demand for equipment, including our rental electronic test equipment. In addition, the severity and length of any downturn in an industry may also affect overall access to capital, which could adversely affect our customers and result in excess inventory and impairment charges. During periods of reduced and declining demand for test equipment, we are exposed to additional receivable risk from non-payment and may need to rapidly align our cost structure with prevailing market conditions, which may negatively impact our operating results and cash flows.
Seasonality of our electronic test equipment business may impact quarterly results.
Generally, rental activity declines in the fourth quarter month of December and the first quarter months of January and February. These months may have lower rental activity due to holiday closures, particularly by larger companies, inclement weather and its impact on various field related communications equipment rentals, and companies’ operational recovery from holiday closures which may impact the start-up of new projects coming online in the first quarter. These seasonal factors historically have impacted quarterly results in each year’s first and fourth quarter, but we are unable to predict how such factors may impact future periods.
Our rental test equipment may become obsolete or may no longer be supported by a manufacturer, which could result in an impairment charge.
Electronic test equipment is characterized by changing technology and evolving industry standards that may render our existing equipment obsolete through new product introductions, or enhancements, before the end of its anticipated useful life, causing us to incur impairment charges. We must anticipate and keep pace with the introduction of new hardware, software and networking technologies and acquire equipment that will be marketable to our current and prospective customers.
Additionally, some manufacturers of our equipment may be acquired or cease to exist, resulting in a future lack of support for equipment purchased from those manufacturers. This could result in the remaining useful life becoming shorter, causing us to incur an impairment charge. We monitor our manufacturers’ capacity to support their products and the introduction of new technologies, and we acquire equipment that will be marketable to our current and prospective customers. However, any prolonged economic downturn could result in unexpected bankruptcies or reduced support from our manufacturers. Failure to properly select, manage and respond to the technological needs of our customers and changes to our products through their technology life cycle may cause certain electronic test equipment to become obsolete, resulting in impairment charges, which may negatively impact operating results and cash flows.
If we do not effectively compete in the rental equipment market, our operating results will be materially and adversely affected.
The electronic test equipment rental business is characterized by intense competition from several competitors, including Electro Rent Corporation, Continental Resources and TestEquity, some of which may have access to greater financial and other resources than we do. Although no single competitor holds a dominant market share, we face competition from these established entities and new entrants in the market. We believe that we anticipate and keep pace with the introduction of new products and acquire equipment that will be marketable to our current and prospective customers. We compete on the basis of a number of factors, including product availability, price, service and reliability. Some of our competitors may offer similar equipment for lease, rental or sale at lower prices and may offer more extensive servicing, or financing options. Failure to adequately forecast the adoption of, and demand for, new or existing products may cause us not to meet our customers’ equipment requirements and may materially and adversely affect our operating results.
If we are not able to obtain equipment at favorable rates, there could be a material adverse effect on our operating results and reputation.
The majority of our rental equipment portfolio is comprised of general purpose test and measurement instruments purchased from leading manufacturers such as Keysight Technologies, Rhode & Schwarz and Tektronix, a division of Fortive Corporation. We depend on purchasing equipment from these manufacturers and suppliers for use as our rental equipment. If, in the future, we are not able to purchase necessary equipment from one or more of these suppliers on favorable terms, we may not be able to meet our customers’ demands in a timely manner or for a rental rate that generates a profit. If this should occur, we may not be able to secure necessary equipment from an alternative source on acceptable terms and our business and reputation may be materially and adversely affected.
39
If we are not able to anticipate and mitigate the risks associated with operating internationally, there could be a material adverse effect on our operating results.
Currently, total foreign country customers and operations account for less than 10% of the Company’s revenues. In recent years some of our customers have expanded their international operations faster than domestic operations, and this trend may continue. Over time, the amount of our international business may increase if we focus on international market opportunities. Operating in foreign countries subjects the Company to additional risks, any of which may adversely impact our future operating results, including:
|
|
• |
international political, economic and legal conditions including tariffs and trade barriers; |
|
|
• |
our ability to comply with customs, anti-corruption, import/export and other trade compliance regulations, together with any unexpected changes in such regulations; |
|
|
• |
greater difficulty in our ability to recover rental equipment and obtain payment of the related trade receivables; |
|
|
• |
additional costs to establish and maintain international subsidiaries and related operations; |
|
|
• |
difficulties in attracting and retaining staff and business partners to operate internationally; |
|
|
• |
language and cultural barriers; |
|
|
• |
seasonal reductions in business activities in the countries where our international customers are located; |
|
|
• |
difficulty with the integration of foreign operations; |
|
|
• |
longer payment cycles; |
|
|
• |
currency fluctuations; and |
|
|
• |
potential adverse tax consequences. |
Unfavorable currency exchange rates may negatively impact our financial results in U.S. dollar terms.
We receive revenues in Canadian dollars from our business activities in Canada. Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates. If the currency exchange rates change unfavorably, the value of net receivables we receive in foreign currencies and later convert to U.S. dollars after the unfavorable change would be diminished. This could have a negative impact on our reported operating results. We currently do not engage in hedging strategies to mitigate this risk.
SPECIFIC RISKS RELATED TO OUR LIQUID AND SOLID CONTAINMENT TANKS AND BOXES BUSINESS SEGMENT:
We may be brought into tort or environmental litigation or held responsible for cleanup of spills if the customer fails to perform, or an accident occurs in the use of our rental products, which could materially adversely affect our business, future operating results or financial position.
Our rental tanks and boxes are used by our customers to store non-hazardous and certain hazardous liquids and solids on the customer’s site. Our customers are generally responsible for proper operation of our tank and box rental equipment while on rent and returning a cleaned and undamaged container upon completion of use, but exceptions may be granted and we cannot always assure that these responsibilities are fully met in all cases. Although we require the customer to carry commercial general liability insurance in a minimum amount of $5,000,000, such policies often contain pollution exclusions and other exceptions. Furthermore, we cannot be certain our liability insurance will always be sufficient. In addition, if an accident were to occur involving our rental equipment or a spill of substances were to occur when the tank or box was in transport or on rent with our customer, a claim could be made against us as owner of the rental equipment.
In the event of a spill or accident, we may be brought into a lawsuit or enforcement action by either our customer or a third party on numerous potential grounds, including an allegation that an inherent flaw in a tank or box contributed to an accident or that the tank had suffered some undiscovered harm from a previous customer’s prior use. In the event of a spill caused by our customers, we may be held responsible for cleanup under environmental laws and regulations concerning obligations of suppliers of rental products to effect remediation. In addition, applicable environmental laws and regulations may impose liability on us for the conduct of third parties, or for actions that complied with applicable regulations when taken, regardless of negligence or fault. Substantial damage awards have also been made in certain jurisdictions against lessors of industrial equipment based upon claims of personal injury, property damage, and resource damage caused by the use of various products. While we take what we believe are reasonable precautions that our rental equipment is in good and safe condition prior to rental and carry insurance to protect against certain risks of loss or accidents, such liability could adversely impact our profitability.
40
The liquid and solid containment rental industry is highly competitive, and competitive pressures could lead to a decrease in our market share or in rental rates and our ability to rent, or sell, equipment at favorable prices, which could adversely affect our operating results.
The liquid and solid containment rental industry is highly competitive. We compete against national, regional and local companies, including United Rentals, Rain For Rent and WillScot Corporation, all of which may be larger than we are, may offer a wider range of products and services and may have greater financial and marketing resources than we have. Some of our competitors also have longer operating histories, lower cost basis of rental equipment and lower cost structures than we have. In addition, certain of our competitors are more geographically diverse than we are and have greater name recognition among customers than we do. As a result, our competitors that have these advantages may be better able to attract customers and provide their products and services at lower rental rates. Some competitors offer different approaches to liquid storage, such as large-volume modular tanks that may have better economics and compete with conventional frac tanks in certain oil and gas field applications. We may in the future encounter increased competition in the markets that we serve from existing competitors or from new market entrants. In July 2020, Willscot Corporation acquired Mobile Mini and in July 2018, United Rentals, Inc. completed the acquisition of BakerCorp. Industry consolidation may create additional competition for customers and provide the combined entity access to greater financial resources than we have.
We believe that equipment quality, service levels, rental rates and fleet size are key competitive factors in the liquid and solid containment rental industry. From time to time, we or our competitors may attempt to compete aggressively by lowering rental rates or prices. Competitive pressures could adversely affect our revenues and operating results by decreasing our market share or depressing rental rates. To the extent we lower rental rates or increase our fleet in order to retain or increase market share, our operating margins would be adversely impacted. In addition, we may not be able to match a larger competitor’s price reductions or fleet investment because of its greater financial resources, all of which could adversely impact our operating results through a combination of a decrease in our market share, revenues and operating income.
Market risk, commodity price volatility, regulatory changes or interruptions and cyclical downturns in the industries using tanks and boxes may result in periods of low demand for our products resulting in excess inventory, impairment charges and reduction of our operating results and cash flows.
Adler Tanks’ revenues are derived from the rental of tanks and boxes to companies involved in oil and gas exploration, extraction and refinement, environmental remediation and wastewater/groundwater treatment, infrastructure and building construction and various industrial services, among others. We expect tank and box rental revenues will primarily be affected by the business activity within these industries. Historically, these industries have been cyclical and have experienced periodic downturns, which have a material adverse impact on the industry’s demand for equipment, including the tanks and boxes rented by us. Lower oil or gas prices may have an adverse effect on our liquid and solid containment tanks and boxes business. Any steep decline in both domestic and international oil and gas prices driven by materially higher supply levels and weak demand could have a significant negative impact on the industry’s demand for equipment, especially if such market conditions continue for an extended period of time. If the price reduction causes customers to limit or stop exploration, extraction or refinement activities, resulting in lower demand and pricing for renting Adler Tank’s products, our financial results could be adversely impacted. Also, a weak U.S. economy may negatively impact infrastructure construction and industrial activity. Any of these factors may result in excess inventory or impairment charges and reduce our operating results and cash flows.
Changes in regulatory, or governmental, oversight of hydraulic fracturing could materially adversely affect the demand for our rental products and reduce our operating results and cash flows.
We believe that demand related to hydraulic fracturing has impacted the total rental revenues and market size in recent years. Oil and gas exploration and extraction (including use of tanks for hydraulic fracturing to obtain shale oil and shale gas) are subject to numerous local, state and federal regulations. In the three months ended March 31, 2022, oil and gas exploration and production accounted for approximately 6% of Adler Tanks’ rental revenues, and approximately 1% of the Company’s total revenues. The hydraulic fracturing method of extraction has come under scrutiny in several states and by the Federal government due to the potential adverse effects that hydraulic fracturing, and the liquids and chemicals used, may have on water quality and public health. In addition, the disposal of wastewater from the hydraulic fracturing process into injection wells may increase the rate of seismic activity near drill sites and could result in regulatory changes, delays or interruption of future activity. Changes in these regulations could limit, interrupt, or stop exploration and extraction activities, which would negatively impact the demand for our rental products. Finally, it is possible that changes in the technology utilized in hydraulic fracturing could make it less dependent on liquids and therefore lower the related requirements for the use of our rental products, which would reduce our operating results and cash flows.
41
Seasonality of the liquid and solid containment rental industry may impact quarterly results.
Rental activity may decline in the fourth quarter month of December and the first quarter months of January and February. These months may have lower rental activity in parts of the country where inclement weather may delay, or suspend, a company’s project. The impact of these delays may be to decrease the number of tanks, or boxes, on rent until companies are able to resume their projects when weather improves. These seasonal factors historically have impacted quarterly results in each year’s first and fourth quarter, but we are unable to predict how such factors may impact future periods.
Significant increases in raw material, fuel and labor costs could increase our acquisition and operating costs of rental equipment, which would increase operating costs and decrease profitability.
Increases in raw material costs such as steel and labor to manufacture liquid and solid containment tanks and boxes would increase the cost of acquiring new equipment. These price increases could materially and adversely impact our financial condition and results of operations if we are not able to recoup these increases through higher rental revenues. In addition, a significant amount of revenues are generated from the transport of rental equipment to and from customers. We own delivery trucks, employ drivers and utilize subcontractors to provide these services. The price of fuel can be unpredictable and beyond our control. During periods of rising fuel and labor costs, and in particular when prices increase rapidly, we may not be able recoup these costs from our customers, which would reduce our profitability.
We derive a meaningful amount of our revenue in our liquid and solid containment tank and boxes business from a limited number of customers, the loss of one or more of which could have an adverse effect on our business.
Periodically, a meaningful portion of our revenue in our liquid and solid containment tank and boxes business may be generated from a few major customers. Although we have some long-term relationships with our major customers, we cannot be assured that our customers will continue to use our products or services or that they will continue to do so at historical levels. The loss of any meaningful customer, the failure to collect a material receivable from a meaningful customer, any material reduction in orders by a meaningful customer or the cancellation of a meaningful customer order could significantly reduce our revenues and consequently harm our financial condition and our ability to fund our operations.
We may not be able to quickly redeploy equipment returning from leases at equivalent prices.
Many of our rental transactions are short-term in nature with pricing established on a daily basis. The length of time that a customer needs equipment can often be difficult to determine and can be impacted by a number of factors such as weather, customer funding and project delays. In addition, our equipment is primarily used in the oil and gas, industrial plant services, environmental remediation and infrastructure and building construction industries. Changes in the economic conditions facing any of those industries could result in a significant number of units returning off rent, both for us and our competitors.
If the supply of rental equipment available on the market significantly increases due to units coming off rent, demand for and pricing of our rental products could be adversely impacted. We may experience delays in remarketing our off-rent units to new customers and incur cost to move the units to other regions where demand is stronger. Actions in these circumstances by our competitors may also depress the market price for rental units. These delays and price pressures would adversely affect equipment utilization levels and total revenues, which would reduce our profitability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
42
Item 6. Exhibits
|
10.4 |
|
|
|
|
|
10.6 |
McGrath RentCorp Involuntary Termination Severance Eligibility Policy |
|
|
|
|
10.7 |
|
|
|
|
|
10.8.1 |
Form of 2016 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement – Corporate |
|
|
|
|
10.8.2 |
|
|
|
|
|
10.8.3 |
Form of 2016 Stock Incentive Plan Performance-Based Restricted Stock Unit Agreement – Enviroplex |
|
|
|
|
15.1 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101 |
The following materials from McGrath RentCorp’s Quarterly report on Form 10-Q for the quarter ended March 31, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income, (ii) the Condensed Consolidated Balance Sheet, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
|
|
|
|
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
43
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Date: April 28, 2022 |
McGrath RentCorp |
|
|
|
|
|
|
|
By: |
/s/ Keith E. Pratt |
|
|
|
Keith E. Pratt |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
By: |
/s/ David M. Whitney |
|
|
|
David M. Whitney |
|
|
|
Vice President, Controller and Principal Accounting Officer |
44