MCGRATH RENTCORP
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.)
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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
OnFebruary 23, 2022 , the Company announced that the Board of Directors declared a quarterly cash dividend of$0.455 per common share for the quarter endedMarch 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 inDecember 2019 , has continued to spread globally including to every state inthe United States .The Center for Disease Control ("CDC") andWorld 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 customerswho 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 endedMarch 31, 2022 as set forth in the below section discussing the results of operations for the quarter endedMarch 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
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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
• Gross profit increased
2022. Mobile Modular's gross profit increased
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
to
22% compared to 28% in 2021.
• Selling and administrative expenses increased
salaries and benefit costs totaling
addition of Design Space and Kitchens To Go employees, and
higher amortization of intangible assets primarily from the Design Space
and Kitchens To Go acquisitions.
• Interest expense increased
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 AdlerTanks 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
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
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Mobile Modular
For the three months endedMarch 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 endedMarch 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
Three Months Ended
(dollar amounts in thousands) 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
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Mobile Modular's gross profit for the three months ended
• Gross Profit on Rental Revenues - Rental revenues increased
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
• Gross Profit on Rental Related Services - Rental related services revenues
increased
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 servicesrevenues 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
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
or 51%, to
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 endedMarch 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 endedMarch 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 endedMarch 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 Ended3/31/22 compared to Three Months Ended3/31/21 (Unaudited) Three Months Ended (dollar amounts in thousands) 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
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TRS-RenTelco's gross profit for the three months ended
• Gross Profit on Rental Revenues - Rental revenues increased
or 5%, depreciation expense increased
direct costs increased
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 marginpercentage 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
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
22
--------------------------------------------------------------------------------For the three months endedMarch 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 endedMarch 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 Ended3/31/22 compared to Three Months Ended3/31/21 (Unaudited) Three Months Ended (dollar amounts in thousands) 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
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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
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
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
For the three months endedMarch 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 inthe 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 theSEC , 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
Three Months Ended Twelve Months Ended
(dollar amounts in thousands) March 31, 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
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Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities
Three Months Ended Twelve Months Ended
(dollar amounts in thousands) March 31, 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
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
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 endedMarch 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
OnMarch 31, 2020 , the Company entered into an amended and restated credit agreement withBank of America, N.A ., as Administrative Agent, SwingLine 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 dueMarch 31, 2025 , the Company's existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement withPrudential Investment Management, Inc. , dated as ofApril 21, 2011 (as amended, the "the Prior NPA"): (i) the$40.0 million aggregate outstanding principal of notes issuedMarch 17, 2014 which were repaid onMarch 17, 2021 , and (ii) the$60.0 million aggregate outstanding principal of notes issuedNovember 5, 2015 and dueNovember 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 onMarch 31, 2025 and replaced the Company's prior$420.0 million credit facility datedMarch 31, 2016 withBank 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 onMarch 31, 2020 . OnMarch 30, 2020 , the Company entered into an amended and restated Credit Facility Letter Agreement and a CreditLine Note in favor ofMUFG 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 ofMarch 31, 2025 , or the date the Company ceases to utilizeMUFG 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 ofMarch 31, 2016 . AtMarch 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
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.
AtMarch 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
OnMarch 31, 2020 , the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the "Note Purchase Agreement") withPGIM, 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 onMarch 17, 2021 , and (ii)$60.0 million aggregate principal amount of its 3.84% Series C Senior Notes dueNovember 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
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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
OnNovember 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 onNovember 5, 2022 . Interest on the Series C Senior Notes is payable semi-annually beginning onMay 5, 2016 and continuing thereafter onNovember 5 andMay 5 of each year until maturity. The principal balance is due when the notes mature onNovember 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. AtMarch 31, 2022 , the principal balance outstanding under the Series C Senior Notes was$60.0 million .
2.57% Senior Notes Due in 2028
OnMarch 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, datedMarch 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 onMarch 17, 2028 . Interest on the Series D Senior Notes is payable semi-annually beginning onSeptember 17, 2021 and continuing thereafter onMarch 17 andSeptember 17 of each year until maturity. The principal balance is due when the notes mature onMarch 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. AtMarch 31, 2022 , the principal balance outstanding under the Series D Senior Notes was$40.0 million .
2.35% Senior Notes Due in 2026
On
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 onJune 16, 2026 . Interest on the Series E Senior Notes is payable semi-annually beginning onDecember 16, 2021 and continuing thereafter onJune 16 andDecember 16 of each year until maturity. The principal balance is due when the notes mature onJune 16, 2026 . The full net proceeds from the Series E Senior Notes were used to pay down the Company's credit facility. AtMarch 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. AtMarch 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. InAugust 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 endedMarch 31, 2022 and 2021. As ofMarch 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 endedMarch 31, 2022 . Refer to our 2021 Annual Report for a discussion of our critical accounting policies and estimates.
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