UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission file number 0-13292
McGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
California
(State or other jurisdiction
of incorporation or organization)
94-2579843
(I.R.S. Employer
Identification No.)
5700 Las Positas Road, Livermore, CA 94551-7800
(Address of principal executive offices)
Registrant’s telephone number: (925) 606-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. (cid:134) Yes (cid:95) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:134) Yes (cid:95) No
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. (cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). (cid:95) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95) Yes (cid:134) No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one).
Large accelerated filer
Non-accelerated filer
(cid:95)
(cid:134)
Accelerated filer
Smaller reporting company
(cid:134)
(cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:134) Yes (cid:95) No
Aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2015 (based upon the closing
sale price of the registrant’s common stock as reported on the NASDAQ Global Select Market on June 30, 2015): $774,364,686.
As of February 24, 2016, 23,852,351 shares of Registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
McGrath RentCorp’s definitive proxy statement with respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016 which
will be filed with the Securities and Exchange Commission within 120 days after the end of its fiscal year ended December 31, 2015, is incorporated
by reference into Part III (Items 10, 11, 12, and 13).
Exhibit index appears on page 86
FORWARD LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (“this Form 10-K”) which are not historical facts are forward-
looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, regarding McGrath RentCorp’s business strategy, future operations, financial position, estimated
revenues or losses, projected costs, prospects, plans and objectives are forward-looking statements. These forward-looking
statements appear in a number of places and can be identified by the use of forward-looking terminology such as “may,” “will,”
“should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “hopes,” or “certain” or the
negative of these terms or other variations or comparable terminology.
Management cautions that forward-looking statements are not guarantees of future performance and are subject to risks and
uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. Further,
our future business, financial condition and results of operations could differ materially from those anticipated by such forward-
looking statements and are subject to risks and uncertainties as set forth under “Risk Factors” in this Form 10-K. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.
Forward-looking statements are made only as of the date of this Form 10-K 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-K to conform such statements to actual results or
to changes in our expectations.
ITEM 1.
BUSINESS.
General Overview
PART I
McGrath RentCorp (the “Company”) is a California corporation organized in 1979 with corporate offices located in Livermore,
California. The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “MGRC”. References
in this report to the “Company”, “we”, “us”, and “ours” refer to McGrath RentCorp and its subsidiaries, unless the context requires
otherwise.
The Company is a diversified business to business rental company with four rental divisions: relocatable modular buildings,
portable storage containers, electronic test equipment, and liquid and solid containment tanks and boxes. Although the Company’s
primary emphasis is on equipment rentals, sales of equipment occur in the normal course of business. The Company reports its
divisions in four business segments: (1) modular building and portable storage segment (“Mobile Modular”); (2) electronic test
equipment segment (“TRS-RenTelco”); (3) a wholly-owned subsidiary providing containment solutions for the storage of hazardous
and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) a wholly-owned subsidiary classroom manufacturing business
selling modular buildings used primarily as classrooms in California (“Enviroplex”). The Mobile Modular business segment includes
the Mobile Modular Portable Storage division, which represented approximately 6% of the Company’s 2015 total revenues.
No single customer accounted for more than 10% of total revenues during 2015, 2014 and 2013. Revenue from foreign country
customers accounted for 5%, 5% and 7% of the Company’s revenues for the same periods, respectively.
Business Model
The Company invests capital in rental products and generally has recovered its original investment through rents less cash
operating expenses in a relatively short period of time compared to the product’s rental life. When the Company’s rental products are
sold, the proceeds generally have covered a high percentage of the original investment. With these characteristics, a significant base of
rental assets on rent generates a considerable amount of operating cash flows to support continued rental asset growth. The Company’s
rental products have the following characteristics:
(cid:120)
(cid:120)
The product required by the customer tends to be expensive compared to the Company’s monthly rental charge, with the
interim rental solution typically evaluated as a less costly alternative.
Generally, we believe the Company’s customers have a short-term need for our rental products. The customer’s rental
requirement may be driven by a number of factors including time, budget or capital constraints, future uncertainty
impacting their ongoing requirements, equipment availability, specific project requirements, peak periods of demand or
the customer may want to eliminate the burdens and risks of ownership.
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(cid:120)
All of the Company’s rental products have long useful lives relative to the typical rental term. Modular buildings
(“modulars”) have an estimated life of eighteen years compared to the typical rental term of twelve to twenty-four months,
electronic test equipment has an estimated life range of one to eight years (depending on the type of product) compared to
a typical rental term of one to six months, and liquid and solid containment tanks and boxes have an estimated life of
twenty years compared to typical rental terms of one to six months.
(cid:120) We believe short-term rental rates typically recover the Company’s original investment quickly based on the respective
product’s annual yield, or annual rental revenues divided by the average cost of rental inventory. For modulars the original
investment is recovered in approximately six years, in approximately three years for electronic test equipment and in
approximately four years for liquid and solid containment tanks and boxes.
(cid:120) When a product is sold from our rental inventory, a significant portion of the original investment is usually recovered.
Effective asset management is a critical element to each of the rental businesses and the residuals realized when product is
sold from inventory. Modular asset management requires designing and building the product for a long life, coupled with
ongoing repair and maintenance investments, to ensure its long useful rental life and generally higher residuals upon sale.
Electronic test equipment asset management requires understanding, selecting and investing in equipment technologies
that support market demand and, once invested, proactively managing the equipment at the model level for optimum
utilization through its technology life cycle to maximize the rental revenues and residuals realized. Liquid and solid
containment tanks and boxes asset management requires selecting and purchasing quality product and making ongoing
repair and maintenance investments to ensure its long rental life.
The Company believes that rental revenue growth from an increasing base of rental assets and improved gross profits on rents
are the best measures of the health of each of our rental businesses. Additionally, we believe our business model and results are
enhanced by operational leverage that is created from large regional sales and inventory centers for modulars, a single U.S. based
sales, inventory and operations facility for electronic test equipment, as well as shared senior management and back office functions
for financing, human resources, insurance, and operating and accounting systems.
Employees
As of December 31, 2015, the Company had 1,016 employees, of whom 82 were primarily administrative and executive personnel,
with 554, 188, 141 and 51 in the operations of Mobile Modular, Adler Tanks, TRS-RenTelco and Enviroplex, respectively. None of our
employees are covered by a collective bargaining agreement, and management believes its relationship with our employees is good.
Available Information
We make the Company’s Securities and Exchange Commission (“SEC”) filings available, free of charge, at our website
www.mgrc.com. These filings include our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Act of 1934, which are
available as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the
SEC. Information included on our website is not incorporated by reference to this Form 10-K. Furthermore, all reports the Company
files with the SEC are available, free of charge, through the SEC’s website at www.sec.gov. In addition, the public may read and copy
materials filed by the Company at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The
public may also obtain additional information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We also have a Code of Business Conduct and Ethics which applies to all directors, officers and employees. Copies of this code
can be obtained free of charge at our website www.mgrc.com.
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RELOCATABLE MODULAR BUILDINGS
Description
Modulars are designed for use as classrooms, temporary offices adjacent to existing facilities, sales offices, construction field
offices, restroom buildings, health care clinics, child care facilities, office space, and for a variety of other purposes and may be moved
from one location to another. Modulars vary from simple single-unit construction site offices to multi-floor modular complexes. The
Company’s modular rental fleet includes a full range of styles and sizes. The Company considers its modulars to be among the most
attractive and well-designed available. The units are constructed with wood or metal siding, sturdily built and physically capable of a
long useful life. Modulars are generally provided with installed heat, air conditioning, lighting, electrical outlets and floor covering,
and may have customized interiors including partitioning, cabinetry and plumbing facilities.
Mobile Modular purchases new modulars from various manufacturers who build to Mobile Modular’s design specifications.
With the exception of Enviroplex, none of our principal suppliers are affiliated with the Company. During 2015, Mobile Modular
purchased 43% of its modular units from one manufacturer. The Company believes that the loss of any of its primary modular
manufacturers could have an adverse effect on its operations since Mobile Modular could experience higher prices and longer lead
times for delivery of modular units until other manufacturers were able to increase their production capacity.
The Company’s modulars are manufactured to comply with state building codes, have a low risk of obsolescence, and can be
modified or reconfigured to accommodate a wide variety of customer needs. Historically, as state building codes have changed over
the years, Mobile Modular has been able to continue to use existing modulars, with minimal, if any, required upgrades. The Company
has no assurance that it will continue to be able to use existing modular equipment with minimal upgrades as building codes change in
the future.
Mobile Modular currently operates from regional sales and inventory centers in California, Texas, and Florida, serving large
geographic areas in these states, and sales offices serving North Carolina, Georgia, Maryland, Virginia and Washington, D.C. The
California, Texas and Florida regional sales and inventory centers have in-house infrastructure and operational capabilities to support
quick and efficient repair, modification, and refurbishment of equipment for the next rental opportunity. The Company believes
operating from large regional sales and inventory centers results in better operating margins as operating costs can be spread over a
large installed customer base. Mobile Modular actively maintains and repairs its rental equipment, and management believes this
ensures the continued use of the modular product over its long life and, when sold, has resulted in higher sale proceeds relative to its
capitalized cost. When rental equipment returns from a customer, the necessary repairs and preventative maintenance are performed
prior to its next rental. By making these expenditures for repair and maintenance throughout the equipment’s life we believe that older
equipment can generally rent for rates similar to those of newer equipment. Management believes the condition of the equipment is a
more significant factor in determining the rental rate and sale price than its age. Over the last three years, used equipment sold each
year represented less than 2% of rental equipment, and has been, on average, 14 years old with sale proceeds above its net book value.
Competitive Strengths
Market Leadership – The Company believes Mobile Modular is the largest supplier in California, and a significant supplier in
Florida and Texas, of modular educational facilities for rental to both public and private schools. Management is knowledgeable
about the needs of its educational customers and the related regulatory requirements in the states where Mobile Modular operates,
which enables Mobile Modular to meet its customers’ specific project requirements.
Expertise – The Company believes that over the more than 30 years during which Mobile Modular has competed in the modular
rental industry, it has developed expertise that differentiates it from its competitors. Mobile Modular has dedicated its attention to
continuously developing and improving the quality of its modular units. Mobile Modular has expertise in the licensing and regulatory
requirements that govern modulars in the states where it operates, and its management, sales and operational staffs are knowledgeable
and committed to providing exemplary customer service. Mobile Modular has expertise in project management and complex
applications.
Operating Structure – Part of the Company’s strategy for Mobile Modular is to create facilities and infrastructure capabilities
that its competitors cannot easily duplicate. Mobile Modular achieves this by building regional sales and inventory centers designed
to serve a broad geographic area and a large installed customer base under a single overhead structure, thereby reducing its cost per
transaction. The Company’s regional facilities and related infrastructure enable Mobile Modular to maximize its modular inventory
utilization through efficient and cost effective in-house repair, maintenance and refurbishment for quick redeployment of equipment to
meet its customers’ needs.
Asset Management – The Company believes Mobile Modular markets high quality, well-constructed and attractive modulars.
Mobile Modular requires manufacturers to build to its specifications, which enables Mobile Modular to maintain a standardized
quality fleet. In addition, through its ongoing repair, refurbishment and maintenance programs, the Company believes Mobile
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Modular’s buildings are the best maintained in the industry. The Company depreciates its modular buildings over an 18 year
estimated useful life to a 50% residual value. Older buildings continue to be productive primarily because of Mobile Modular’s focus
on ongoing fleet maintenance. Also, as a result of Mobile Modular’s maintenance programs, when a modular unit is sold, a high
percentage of the equipment’s capitalized cost is recovered. In addition, the fleet’s utilization is regionally optimized by managing
inventory through estimates of market demand, fulfillment of current rental and sale order activity, modular returns and capital
purchases.
Customer Service - The Company believes the modular rental industry to be service intensive and locally based. The Company
strives to provide excellent service by meeting its commitments to its customers, being proactive in resolving project issues and
seeking to continuously improve the customers’ experience. Mobile Modular is committed to offering quick response to requests for
information, providing experienced assistance, on time delivery and preventative maintenance of its units. Mobile Modular’s goal is
to continuously improve its procedures, processes and computer systems to enhance internal operational efficiency. The Company
believes this dedication to customer service results in high levels of customer loyalty and repeat business.
Market
Management estimates relocatable modular building rental is an industry that today has equipment on rent or available for rent
in the U.S. with an aggregate original cost of over $5.0 billion. Mobile Modular’s largest market segment is for temporary classroom
and other educational space needs of public and private schools, colleges and universities in California and Florida, and to a lesser
extent in Texas, North Carolina, Georgia, Maryland, Virginia and Washington, D.C. Management believes the demand for rental
classrooms is caused by shifting and fluctuating school populations, the limited state funds for new construction, the need for
temporary classroom space during reconstruction of older schools, class size reduction and the phasing out of portable classrooms
compliant with older building codes (see “Classroom Rentals and Sales to Public Schools (K-12)” below). Other customer
applications include sales offices, construction field offices, health care facilities, church sanctuaries and child care facilities.
Industrial, manufacturing, entertainment and utility companies, as well as governmental agencies commonly use large multi-modular
complexes to serve their interim administrative and operational space needs. Modulars offer customers quick, cost-effective space
solutions while conserving their capital. The Company’s corporate offices, and California, Texas and Florida regional sales and
inventory center offices are housed in various sizes of modular units.
Since most of Mobile Modular’s customer requirements are to fill temporary space needs, Mobile Modular’s marketing
emphasis is on rentals rather than sales. Mobile Modular attracts customers through its website at www.mobilemodular.com, internet
advertising and direct marketing. Customers are encouraged to visit a regional sales and inventory center to view different models on
display and to see a regional office, which is a working example of a modular application.
Because service is a major competitive factor in the rental of modulars, Mobile Modular offers quick response to requests for
information, assistance in the choice of a suitable size and floor plan, in-house customization services, rapid delivery, timely
installation and field service of its units. On Mobile Modular’s website, customers are able to view and select inventory for quotation
and request in-field service.
Rentals
Rental periods range from one month to several years with a typical initial contract term between twelve and twenty-four
months. In general, monthly rental rates are determined by a number of factors including length of term, market demand, product
availability and product type. Upon expiration of the initial term, or any extensions, rental rates are reviewed, and when appropriate,
are adjusted based on current market conditions. Most rental agreements are operating leases that provide no purchase options, and
when a rental agreement does provide the customer with a purchase option, it is generally on terms management believes to be
attractive to Mobile Modular.
The customer is responsible for obtaining the necessary use permits and for the costs of insuring the unit, and is financially
responsible for transporting the unit to the site, preparation of the site, installation of the unit, dismantle and return delivery of the unit
to Mobile Modular, and certain costs for customization. Mobile Modular maintains the units in good working condition while on rent.
Upon return, the units are inspected for damage and customers are billed for items considered beyond normal wear and tear.
Generally, the units are then repaired for subsequent use. Repair and maintenance costs are expensed as incurred and can include
floor repairs, roof maintenance, cleaning, painting and other cosmetic repairs. The costs of major refurbishment of equipment are
capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment.
At December 31, 2015, Mobile Modular owned 47,995 new or previously rented modulars and portable storage containers with
an aggregate cost of $736.9 million including accessories, or an average cost per unit of $15,353. Utilization is calculated at the end
of each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment
inventory and accessory equipment. At December 31, 2015, fleet utilization was 76.9% and average fleet utilization during 2015 was
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75.8%. The Mobile Modular segment includes the results of operations of Mobile Modular Portable Storage, which represented
approximately 6% of the Company’s 2015 total revenues.
Sales
In addition to operating its rental fleet, Mobile Modular sells modulars to customers. These sales typically arise out of its
marketing efforts for the rental fleet and from existing equipment already on rent. Such sales can be of either new or used units from
the rental fleet, which permits some turnover of older units. During 2015 Mobile Modular’s largest sale represented approximately
6% of Mobile Modular’s sales, 2% of the Company’s consolidated sales and less than 1% of the Company’s consolidated revenues.
Mobile Modular typically provides limited 90-day warranties on used modulars and passes through the manufacturers’ one-year
warranty on new units to its customers. Warranty costs have not been significant to Mobile Modular’s operations to date, and the
Company attributes this to its commitment to high quality standards and regular maintenance programs. However, there can be no
assurance that warranty costs will continue to be insignificant to Mobile Modular’s operations in the future.
Enviroplex manufactures portable classrooms built to the requirements of the California Division of the State Architect (“DSA”)
and sells directly to California public school districts and other educational institutions.
Seasonality
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.
Competition
Competition in the rental and sale of relocatable modular buildings is intense. Two major national firms, Williams Scotsman
International, Inc. and Modspace, Inc., are engaged in the rental of modulars, have many offices throughout the country and we
believe may have greater financial and other resources than Mobile Modular. In addition, a number of other smaller companies
operate regionally throughout the country. Mobile Modular operates primarily in California, Texas, Florida, North Carolina, Georgia,
Virginia, Maryland and Washington, D.C. Significant competitive factors in the rental business include availability, price, service,
reliability, appearance and functionality of the product. Mobile Modular markets high quality, well-constructed and attractive
modulars. Part of the Company’s strategy for modulars is to create facilities and infrastructure capabilities that its competitors cannot
easily duplicate. The Company's facilities and related infrastructure enable it to modify modulars efficiently and cost effectively to
meet its customers’ needs. Management's goal is to be more responsive at less expense. Management believes this strategy, together
with its emphasis on prompt and efficient customer service, gives Mobile Modular a competitive advantage. Mobile Modular is
determined to respond quickly to requests for information, and provide experienced assistance for the first-time user, rapid delivery
and timely repair of its modular units. Mobile Modular’s already high level of efficiency and responsiveness continues to improve as
the Company upgrades procedures, processes and computer systems that control its internal operations. The Company anticipates
intense competition to continue and believes it must continue to improve its products and services to remain competitive in the market
for modulars.
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Classroom Rentals and Sales to Public Schools (K-12)
Mobile Modular and Enviroplex provide classroom and specialty space needs serving public and private schools, colleges and
universities. Within the educational market, the rental (by Mobile Modular) and sale (by Enviroplex and Mobile Modular) of
modulars to public school districts for use as portable classrooms, restroom buildings and administrative offices for kindergarten
through grade twelve (K-12) are a significant portion of the Company’s revenues. Mobile Modular rents and sells classrooms in
California, Florida, Texas, North Carolina, Georgia, Maryland, Virginia and Washington, D.C. Enviroplex sells classrooms in the
California market. California is Mobile Modular’s largest educational market. Historically, demand in this market has been fueled by
shifting and fluctuating student populations, insufficient funding for new school construction, class size reduction programs,
modernization of aging school facilities and the phasing out of portable classrooms no longer compliant with current building codes.
The following table shows the approximate percentages of the Company’s modular rental and sales revenues, and of its consolidated
rental and sales revenues for the past five years, that rentals and sales to these schools constitute:
Rentals and Sales to Public Schools (K-12) as a Percentage of Total Rental and Sales Revenues
Percentage of:
Modular Rental Revenues (Mobile Modular) (cid:3)
Modular Sales Revenues (Mobile Modular & Enviroplex)
Modular Rental and Sales Revenues (Mobile Modular & Enviroplex)
Consolidated Rental and Sales Revenues 1(cid:3)
1.
2015
33%
43%
35%
16%
2014
32%
49%
37%
16%
2013
37%
36%
36%
14%
2012
40%
52%
44%
16%
2011
44%
33%
40%
16%
Consolidated Rental and Sales Revenue percentage is calculated by dividing Modular rental and sales revenues to public schools (K-12) by the Company’s
consolidated rental and sales revenues.
School Facility Funding
Funding for public school facilities is derived from a variety of sources including the passage of both statewide and local facility
bond measures, operating budgets, developer fees, various taxes including parcel and sales taxes levied to support school operating
budgets, and lottery funds. Since 2008, the Company has experienced interruption in the passage of facility bonds, contraction or
elimination of class size reduction programs, a lack of fiscal funding, and a significant reduction of funding from other sources to
public schools that has had a material adverse effect on both rental and sales revenues of the Company.
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ELECTRONIC TEST EQUIPMENT
Description
TRS-RenTelco rents and sells electronic test equipment nationally and internationally from three facilities located in Grapevine,
Texas (the “Dallas facility”), Dollard-des-Ormeaux, Canada (the “Montreal facility”) and Bangalore, Karnataka, India (the “Bangalore
facility”). 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 revenues are primarily affected by the business activity within
these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance.
The Dallas facility, TRS-RenTelco’s primary operating location, houses the electronic test equipment inventory, sales engineers,
calibration laboratories, and operations staff for U.S. and international business. The Montreal facility houses sales engineers and
operations staff to serve the Canadian market. The Bangalore facility houses sales engineers and operations staff to serve the Indian
market. As of December 31, 2015, the original cost of electronic test equipment inventory was comprised of 61% general purpose
electronic test equipment and 39% communications electronic test equipment.
Engineers, technicians and scientists utilize general purpose electronic test equipment in developing products, controlling
manufacturing processes, completing field service applications and evaluating the performance of their own electrical and electronic
equipment. These instruments are rented primarily to aerospace, defense, electronics, industrial, research and semiconductor industries. To
date, Keysight Technologies (formerly Agilent Technologies) and Tektronix, a division of Danaher Corporation, have manufactured the
majority of TRS-RenTelco’s general purpose electronic test equipment with the remainder acquired from over 60 other manufacturers.
Communications test equipment, including fiber optic test equipment, is utilized by technicians, engineers and installation
contractors to evaluate voice, data and multimedia communications networks, to install fiber optic cabling, and in the development
and manufacturing of transmission, network and wireless products. These instruments are rented primarily to manufacturers of
communications equipment and products, electrical and communications installation contractors, field technicians, and service
providers. To date, Anritsu and Viavi Solutions (formerly JDS Uniphase Corporation) have manufactured a significant portion of
TRS-RenTelco’s communications test equipment, with the remainder acquired from over 40 other manufacturers.
TRS-RenTelco’s general purpose test equipment rental inventory includes oscilloscopes, amplifiers, analyzers (spectrum,
network and logic), signal source and power source test equipment. The communications test equipment rental inventory includes
network and transmission test equipment for various fiber, copper and wireless networks. TRS-RenTelco occasionally rents electronic
test equipment from other rental companies and re-rents the equipment to customers.
Competitive Strengths
Market Leadership - The Company believes that TRS-RenTelco is one of the largest electronic test equipment rental and leasing
companies offering a broad and deep selection of general purpose and communications test equipment for rent in North America.
Expertise - The Company believes that its knowledge of products, technology and applications expertise provides it with a
competitive advantage over others in the industry. Customer requirements are supported by application engineers and technicians that
are knowledgeable about the equipment’s uses to ensure the right equipment is selected to meet the customer’s needs. This
knowledge can be attributed to the experience of TRS-RenTelco’s management, sales and operational teams.
Operating Structure - TRS-RenTelco is supported by a centralized distribution and inventory center on the grounds of the
Dallas-Fort Worth Airport in Texas. The Company believes that the centralization of servicing all customers in North America and
internationally by TRS-RenTelco’s experienced logistics teams provides a competitive advantage by minimizing transaction costs and
enabling TRS-RenTelco to ensure customer requirements are met.
Asset Management - TRS-RenTelco’s rental equipment inventory is serviced by an ISO 9001-2008 registered and compliant
calibration laboratory that repairs and calibrates equipment ensuring that off rent equipment is ready to ship immediately to meet
customers’ needs. TRS-RenTelco’s team of technicians, product managers and sales personnel are continuously monitoring and
analyzing the utilization of existing products, new technologies, general economic conditions and estimates of customer demand to
ensure the right equipment is purchased and sold, at the right point in the equipment’s technology life cycle. The Company believes
this enables it to maximize utilization of equipment and the cash flow generated by the rental and sales revenue of each model of
equipment. TRS-RenTelco strives to maintain strong relationships with equipment manufacturers, which enables it to leverage those
relationships to gain rental opportunities.
Customer Service - The Company believes that its focus on providing excellent service to its customers provides a competitive
advantage. TRS-RenTelco strives to provide exemplary service to fulfill its commitments to its customers. TRS-RenTelco prides
itself in providing solutions to meet customers’ needs by having equipment available and responding quickly and thoroughly to their
requests. TRS-RenTelco’s sophisticated in-house laboratory ensures the equipment is fully functional and meets its customers’
delivery requirements. Service needs of TRS-RenTelco’s customers are supported 24 hours a day, 7 days a week by its customer care
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specialists. TRS-RenTelco’s goal is to provide service beyond its customers’ expectations, which, the Company believes, results in
customer loyalty and repeat business.
Market
Electronic test equipment rental is a market which we estimate has equipment on rent worldwide or available for rent with an
aggregate original cost in excess of $1 billion. There is a broad customer base for the rental of such instruments, including aerospace,
communications, defense, electrical contractor, electronics, industrial, installer contractor, network systems and research companies.
TRS-RenTelco markets its electronic test equipment throughout the United States, Canada, India, and, to a limited extent, other
countries. TRS-RenTelco attracts customers through its outside sales force, website at www.TRS-RenTelco.com, telemarketing program,
trade show participation, paid internet search and electronic mail campaigns. A key part of the sales process is TRS-RenTelco’s
knowledgeable inside sales engineering team that effectively matches test equipment solutions to meet specific customer’s requirements.
The Company believes that customers rent electronic test equipment for many reasons. Customers frequently need equipment
for short-term projects, to evaluate new products, and for backup to avoid costly downtime. Delivery times for the purchase of such
equipment can be lengthy; thus, renting allows the customer to obtain the equipment expeditiously. The Company also believes that
the relative certainty of rental costs can facilitate cost control and be useful in the bidding of and pass-through of contract costs.
Finally, renting rather than purchasing may better satisfy the customer’s budgetary constraints.
Rentals
TRS-RenTelco rents electronic test equipment typically for rental periods of one to six months, although in some instances,
rental terms can be up to a year or longer. Monthly rental rates typically are between 2% and 10% of the current manufacturers’ list
price. TRS-RenTelco depreciates its equipment over 1 to 8 years with no residual value.
At December 31, 2015, TRS-RenTelco had an electronic test equipment rental inventory including accessories with an aggregate
cost of $262.9 million. Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of rental
equipment, excluding accessory equipment. Utilization was 58.7% as of December 31, 2015 and averaged 60.5% during the year.
Sales
Profit from equipment sales is a material component of TRS-RenTelco’s overall annual earnings. Gross profit from sales of both
used and new equipment over the last five years generally has ranged from approximately 17% to 21% of total annual gross profit for
our electronics division. For 2015, gross profit on equipment sales was approximately 21% of total division gross profit. Equipment
sales are driven by the turnover of older technology rental equipment, to maintain target utilization at a model number level, and new
equipment sales opportunities. In 2015, approximately 18% of the electronic test equipment revenues were derived from sales. The
largest electronic test equipment sale during 2015 represented approximately 3% of electronic test equipment sales, 1% of the
Company’s consolidated sales and less than 1% of consolidated revenues. There is intense competition in the sales of electronic test
equipment from a world-wide network of test equipment brokers and resellers, legacy rental companies, and equipment
manufacturers. We believe the annual world-wide sale of electronic test equipment is in excess of $8.0 billion per year.
Seasonality
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 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 factors may impact the quarterly results of each
year’s first and fourth quarter.
Competition
The electronic test equipment rental business is characterized by intense competition from several competitors, including Electro
Rent Corporation, Continental Resources, Microlease and TestEquity, some of which may have access to greater financial and other
resources than we do. TRS-RenTelco competes with these and other test equipment rental companies on the basis of product
availability, price, service and reliability. Although no single competitor holds a dominant market share, we face intense competition
from these established entities and new entrants in the market. Some of our competitors may offer similar equipment for lease, rental
or sales at lower prices and may offer more extensive servicing, or financing options.
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LIQUID AND SOLID CONTAINMENT TANKS AND BOXES
Description
Adler Tanks’ rental inventory is comprised of tanks and boxes used for various containment solutions to store hazardous and
non-hazardous liquids and solids in applications such as: 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. The tanks
and boxes are comprised of the following products:
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fixed axle steel tanks (“tanks”) for the storage of groundwater, wastewater, volatile organic liquids, sewage, slurry and bio
sludge, oil and water mixtures and chemicals, which are available in a variety of sizes including 21,000 gallon, 16,000
gallon and 8,000 gallon sizes;
vacuum containers (“boxes”), which provide secure containment of sludge and solid materials and may be used for
additional on-site storage or for transporting materials off-site enabling vacuum trucks to remain in operation;
dewatering boxes for the separation of water contained in sludge and slurry; and
roll-off and trash boxes for the temporary storage and transport of solid waste.
Adler Tanks purchases tanks and boxes from various manufacturers located throughout the country.
Competitive Strengths
Market Leadership - The Company believes that Adler Tanks is one of the largest participants in the liquid and solid
containment tanks and boxes rental business in North America. Adler Tanks has national reach from branches serving the Northeast,
Mid-Atlantic, Midwest, Southeast, Southwest and West.
Expertise and Customer Service – The Company believes that Adler Tanks has highly experienced operating management and
branch employees. Adler Tanks employees are knowledgeable about the operation of its rental equipment and customer applications.
The Company believes that Adler Tanks provides a superior level of customer service due to its strong relationship building skills and
the quality of its responsiveness.
Asset Management – The Company believes that Adler Tanks markets a high quality, well-constructed and well-maintained
rental product. The Company depreciates its tanks and boxes over a 20 year estimated useful life to 0% residual value. We believe
that if maintained, older tanks and boxes will continue to produce similar rental rates as newer equipment. The fleet’s utilization is
regionally optimized by understanding key vertical market customer demand, seasonality factors, competitor’s product availability,
expected equipment returns and manufacturer’s production capacity.
Market
Liquid and solid containment equipment rental is a market in the U.S with a large and diverse number of market segments
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, electrical grid
transformer maintenance, tank terminals services, wastewater treatment, and waste management and landfill services.
The tank and box rental products that Adler Tanks builds may be utilized throughout the U.S. and are not subject to any local or
regional construction code or approval standards.
Rentals
Adler Tanks rents tanks and boxes typically for rental periods of one to six months, although in some instances, rental terms can
be up to a year or longer. Monthly rental rates typically are between 2% and 10% of the equipment’s original acquisition cost.
Utilization is calculated each month by dividing the cost of the rental equipment on rent by the total cost of rental equipment,
excluding accessory equipment. Utilization was 49.7% at December 31, 2015 and averaged 58.3% during the year.
Seasonality
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 due to inclement weather in certain regions of the country impacting the industries that
we serve.
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Competition
The liquid and solid containment rental industry is highly competitive including national, regional and local companies. Some
of our national competitors, notably BakerCorp and Rain For Rent, are larger than we are and may have greater financial and other
resources than we have. Some of our competitors also have longer operating histories, lower cost basis of rental equipment, lower
cost structures and more established relationships with equipment manufacturers 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 and retain customers and provide their products and services at
lower rental rates. Adler Tanks competes with these companies based upon product availability, product quality, price, service and
reliability. We may encounter increased competition in the markets that we serve from existing competitors or from new market
entrants in the future.
REPORTABLE SEGMENTS
For segment information regarding the Company’s four reportable business segments: Mobile Modular, TRS-RenTelco, Adler
Tanks and Enviroplex, see “Note 10. Segment Reporting” to the audited consolidated financial statements of the Company included in
“Item 8. Financial Statements and Supplementary Data.”
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PRODUCT HIGHLIGHTS
The following table shows the revenue components, percentage of rental and total revenues, rental equipment (at cost), rental
equipment (net book value), number of relocatable modular units, year-end and average utilization, average rental equipment (at cost),
annual yield on average rental equipment (at cost) and gross margin on rental revenues and sales by product line for the past five
years.
Product Highlights
(dollar amounts in thousands)
Relocatable Modular Buildings (operating under Mobile
Modular and Enviroplex)
Revenues
Rental
Rental related services
Total Modular rental operations
Sales — Mobile Modular
Sales — Enviroplex
Total Modular sales
Other
Total Modular revenues
Percentage of rental revenues
Percentage of total revenues
Rental equipment, at cost (year-end)
Rental equipment, net book value (year-end)
Number of units (year-end)
Utilization (year-end) 1(cid:3)
Average utilization 1(cid:3)
Average rental equipment, at cost 2(cid:3)
Annual yield on average rental equipment, at cost 4(cid:3)
Gross margin on rental revenues
Gross margin on sales
Electronic Test Equipment (operating under TRS-
RenTelco)(cid:3)
Revenues
Rental
Rental related services
Total Electronics rental operations
Sales
Other
Total Electronics revenues
Percentage of rental revenues
Percentage of total revenues
Rental equipment, at cost (year-end)
Rental equipment, net book value (year-end)
Utilization (year-end) 1(cid:3)
Average utilization 1(cid:3)
Average rental equipment, at cost 3(cid:3)
Annual yield on average rental equipment, at cost 4(cid:3)
Gross margin on rental revenues
Gross margin on sales
2015
Year Ended December 31,
2013
2014
2012
2011
$ 115,986
45,616
161,602
22,248
10,612
32,860
434
$ 194,896
$
96,457 $
35,263
131,720
29,394
17,457
46,851
461
82,503
28,891
111,394
20,831
17,855
38,686
436
$ 179,032 $ 150,516
42.4%
48.2%
35.8%
43.9%
32.2 %
39.7 %
$ 736,875
$ 529,483
47,995
$ 664,340 $ 592,391
$ 473,960 $ 415,366
39,577
43,792
76.9%
75.8%
75.0%
72.3%
70.7 %
68.3 %
$ 667,953
$ 597,904 $ 546,540
17.4%
51.3%
26.5%
16.1%
47.2%
27.1%
15.1 %
44.7 %
23.8 %
$
79,518 $
25,775
105,293
14,026
23,823
37,849
448
79,969
24,063
104,032
20,152
20,788
40,940
425
$ 143,590 $ 145,397
34.0%
42.4%
$ 551,101 $ 539,147
$ 384,813 $ 383,621
35,639
67.3%
67.1%
$ 524,084 $ 504,276
15.9%
55.3%
19.9%
15.2%
52.6%
17.1%
66.7%
66.4%
32.0%
39.4%
36,961
$
89,208
3,055
92,263
21,137
1,617
$ 115,017
$
99,020 $ 102,101
3,095
3,331
105,196
102,351
28,277
24,323
1,580
1,628
$ 128,302 $ 135,053
32.6%
28.4%
36.7%
31.4%
40.0 %
35.6 %
$ 262,945
$ 102,191
$ 261,995 $ 267,772
$ 105,729 $ 109,988
58.7%
60.5%
59.8%
60.4%
58.2 %
62.7 %
$ 265,832
$ 262,968 $ 266,444
38.3 %
48.2 %
43.6 %
33.6%
39.9%
48.6%
37.7%
46.4%
49.7%
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$ 101,645 $
40.9%
36.6%
3,673
105,318
26,192
1,628
95,694
3,133
98,827
25,164
1,387
$ 133,138 $ 125,378
40.7%
36.6%
$ 266,934 $ 258,586
$ 107,999 $ 105,565
67.1%
66.0%
$ 266,912 $ 258,995
36.9%
46.4%
44.0%
38.1%
48.9%
40.3%
64.1%
65.8%
(dollar amounts in thousands)
Liquid and Solid Containment Tanks and Boxes(cid:3)
(operating under Adler Tanks)
Revenues
Rental
Rental related services
Total Tanks and Boxes rental operations
Sales
Other
Total Tanks and Boxes revenues
Percentage of rental revenues
Percentage of total revenues
Rental equipment, at cost (year-end)
Rental equipment, net book value (year-end)
Utilization (year-end) 1(cid:3)
Average utilization 1(cid:3)
Average rental equipment, at cost 2(cid:3)
Annual yield on average rental equipment, at cost 4(cid:3)
Gross margin on rental revenues
Gross margin on sales
2015
Year Ended December 31,
2013
2014
2012
2011
$
$
68,502
24,643
93,145
1,388
98
94,631
25.0%
23.4%
$
74,098 $
25,538
99,636
1,074
78
$ 100,788 $
27.5%
24.7%
71,162
21,162
92,324
1,480
136
93,940
$
27.8 %
24.7 %
$ 310,263
$ 237,927
$ 303,303 $ 284,005
$ 246,061 $ 241,656
49.7%
58.3%
63.9%
62.9%
57.7 %
64.2 %
$ 304,001
$ 289,928 $ 264,189
22.5%
61.9%
(25.1)%
25.6%
65.4%
2.0%
26.9 %
65.3 %
(11.7 )%
$
67,281 $
17,472
84,753
2,403
155
87,311 $
27.1%
24.0%
59,243
12,290
71,533
278
147
71,958
25.2%
21.0%
$ 254,810 $ 201,456
$ 226,041 $ 183,960
79.8%
86.2%
$ 223,673 $ 157,917
37.5%
78.0%
(13.4)%
30.1%
70.7%
10.2%
67.5%
71.5%
$ 404,544
$ 408,122 $ 379,509
$ 364,039 $ 342,733
Total revenues
1
Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment. Average utilization is calculated
using the average cost of equipment for the year.
Average rental equipment, at cost for modulars and tanks and boxes excludes new equipment inventory and accessory equipment.
Average rental equipment, at cost, for electronics excludes accessory equipment.
Annual yield on average rental equipment, at cost is calculated by dividing the total annual rental revenues by the average rental equipment, at cost.
2
3
4
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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 effects of a recession and tightened credit markets in the U.S. and other countries may adversely impact our business and
financial condition and may negatively impact our ability to access financing.
Demand for our rental products depends on continued industrial and business activity and state government funding. The
effects of the recent credit crisis and economic recession in the U.S. and general global economic downturn had an adverse effect on
our customers, including local school districts that are subject to budgetary constraints, which resulted in decreased demand for the
products we rent. The U.S. economy continues to experience some weakness following a severe credit crisis and recession. While the
U.S. economy has emerged from the recession, if the economy experiences another recession, reduced demand for our rental products
and deflation could increase price competition and could have a material adverse effect on our revenue and profitability.
Instability in the global financial system may also have an impact on our business and our financial condition. In recent years,
general economic conditions and the tightening credit markets have significantly affected the ability of many companies to raise new
capital or refinance existing indebtedness. While we intend to finance expansion with cash flow from operations and borrowing under
our unsecured revolving line of credit under our Amended Credit Facility (as defined and more fully described under the heading
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources –
Unsecured Revolving Lines of Credit”), we may require additional financing to support our continued growth. Constriction in the
capital markets, should we need to access the market for additional funds or to refinance our existing indebtedness, could limit our
ability to obtain such additional funds on terms acceptable to the Company or at all. All of these factors could impact our business,
resulting in lower revenues and lower levels of earnings in future periods. At the current time we are uncertain as to the magnitude, or
duration, of such changes in our business.
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:
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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. More recently, the global credit crisis adversely affected the
prices of most publicly traded stocks as many stockholders have become 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.
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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:
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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;
our equipment mix, availability, utilization and pricing;
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.
Our ability to retain our executive management and to recruit, retain and motivate key 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, Dennis Kakures, 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.
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.
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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. Any 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 potential failure to adequately protect critical corporate,
client and employee data, which, if released, could adversely impact our client 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.
We have engaged in acquisitions and may engage in future acquisitions that could negatively impact our results of operations,
financial condition and business.
In 2004, we acquired TRS, an electronic test equipment rental business and in 2008 we acquired Adler Tanks, a liquid and solid
containment rental business. 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:
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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 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
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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 Amended 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 December 31, 2015, we had $37.3 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.
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:
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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 (such as weakness in upstream oil and gas customer demand at Adler Tanks)
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 result 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,
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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.
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
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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, 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.
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 A, Series B and Series C 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 Amended 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 $2.2 million per
year for each 1% increase in the average interest rate we pay based on the $221.4 million balance of variable rate debt outstanding at
December 31, 2015. 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.
Our effective tax rate may change and become less predictable as our business expands, making our future earnings less
predictable.
We continue to consider expansion opportunities domestically and internationally for our rental businesses, such as the organic
expansion of our modular business in North Carolina, Georgia, Maryland, Virginia and Washington, D.C., expansion into the portable
storage business and our expansion in 2008 into the liquid and solid containment business. Since the Company’s effective tax rate
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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. In
addition, 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.
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.
Failure to comply with internal control attestation requirements could lead to loss of public confidence in our financial
statements and negatively impact our stock price.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404, and the
related rules and regulations of the SEC, including expanded disclosures and accelerated reporting requirements. Compliance with
Section 404 and other related requirements has increased our costs and will continue to require additional management resources. We
may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy new reporting
requirements. While our management concluded that our internal control over financial reporting as of December 31, 2015 was
effective, there is no assurance that future assessments of the adequacy of our internal controls over financial reporting will be
favorable. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting,
investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock
price.
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.
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 economic recession, many states and local governments have 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.
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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.
In California a law was enacted in 1996 to provide funding for school districts for the reduction of class sizes for kindergarten
through third grade. In Florida, a state constitutional amendment was passed in 2002 to limit the number of students that may be
grouped in a single classroom for pre-kindergarten through grade twelve. 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. Further, 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 recent economic recession has caused state and local budget shortfalls, which have reduced
school districts’ funding and their ability to comply with state class size reduction requirements in California and Florida. 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, 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. On occasion, state agencies have undertaken studies of indoor air quality and noise
levels with a focus on permanent and modular classrooms. These results could impact our existing modular equipment and affect the
future construction of our modular product.
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.
Expansions of our modular operations into new markets may negatively affect our operating results.
Over the past several years, we have expanded our modular operations in Texas, North Carolina, Georgia, Maryland, Virginia
and Washington, D.C. 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.
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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 larger national competitors in the modular building leasing industry, notably Williams Scotsman International, Inc.
and Modspace, have a greater range of products and services, greater financial and marketing resources, larger customer bases, and
greater name recognition than we have. These larger 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 December 31, 2015, 53% 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 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
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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 2015,
Mobile Modular purchased 43% 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 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.
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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, Microlease, 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 (formerly Agilent Technologies) and Tektronix, a division of Danaher
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.
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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.
Additionally, in 2013 TRS-RenTelco established an in-country operation in India. Over time, we anticipate the amount of our
international business may increase if our focus on international market opportunities continues. Operating in foreign countries
subjects the Company to additional risks, any of which may adversely impact our future operating results, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 and Indian Rupees from our business activities
in India. 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
-24-
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.
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 BakerCorp and Rain For Rent, both of which are significantly larger than we are and both of which 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, lower cost structures and more established relationships with equipment manufacturers 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.
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. In the quarter and year ended December 31, 2015, oil and gas exploration and
production accounted for approximately 11% and 16% of Adler Tanks’ revenues, respectively, and approximately 2% and 4% of the
Company’s total revenues, respectively. 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. The recent steep decline in both domestic
and international oil 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 increased the total rental revenues and market size in recent years. In
2015, hydraulic fracturing projects accounted for approximately 10% of Adler Tanks’ total revenues and approximately 2% of the
Company’s total revenues. 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. 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.
-25-
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.
Failure by third parties to manufacture our products timely or properly may harm our ability to meet customer demand and
harm our financial condition.
We are dependent on a variety of third party companies to manufacture equipment to be used in our rental fleet. In some cases,
we may not be able to procure equipment on a timely basis to the extent that manufacturers for the quantities of equipment we need
are not able to produce sufficient inventory on schedules that meet our delivery requirements. If demand for new equipment increases
significantly, especially during a seasonal manufacturing slowdown, manufacturers may not be able to meet customer orders on a
timely basis. As a result, we at times may experience long lead-times for certain types of new equipment and we cannot assure that
we will be able to acquire the types or sufficient numbers of the equipment we need to grow our rental fleet as quickly as we would
like and this could harm our ability to meet customer demand and harm our financial condition.
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 1B. UNRESOLVED STAFF COMMENTS
None.
-26-
ITEM 2.
PROPERTIES.
The Company’s four reportable business segments currently conduct operations from the following locations:
Mobile Modular – Four inventory centers, at which relocatable modular buildings and storage containers are displayed,
refurbished and stored are located in Livermore, California (San Francisco Bay Area), Mira Loma, California (Los Angeles Area),
Pasadena, Texas (Houston Area) and in Auburndale, Florida (Orlando Area). The inventory centers conduct rental and sales
operations from modular buildings, serving as working models of the Company’s modular product. The Company also has a modular
sales office in Charlotte, North Carolina from which the states of North Carolina, Georgia, Virginia and Maryland are served.
TRS-RenTelco – Electronic test equipment rental and sales operations are conducted from a facility in Grapevine, Texas (Dallas
Area), a sales office in Dollard-des-Ormeaux, Quebec (Montreal, Canada Area) and a rental and sales office in Bangalore, Karnataka,
India.
Adler Tanks – Adler Tanks operates from branch offices serving the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest
and West. A number of our branch offices are leased and have remaining lease terms of one to three years, or are leased on a month to
month basis. We believe satisfactory alternative properties can be found in all of our markets if we do not renew our existing leased
properties.
Enviroplex – The Company’s wholly owned subsidiary, Enviroplex, manufactures modular buildings used primarily as
classrooms in California from its facility in Stockton, California (San Francisco Bay Area).
The following table sets forth the total acres, square footage of office space, square footage of warehouse space and total square
footage of our significant properties at December 31, 2015.
Total Acres
Office
Square Footage
Warehouse
Total
Corporate Offices
Livermore, California 1(cid:3)
Mobile Modular
Livermore, California 1, 2, 5(cid:3)
Mira Loma, California 5(cid:3)
Pasadena, Texas
Auburndale, Florida 5(cid:3)
Charlotte, North Carolina 6(cid:3)
Lexington, North Carolina 7(cid:3)
Perris, California 3(cid:3)
Riverside, California 3
San Diego, California 4(cid:3)
Grand Prairie, Texas 5(cid:3)
San Antonio, Texas 5(cid:3)
Round Rock, Texas
TRS-RenTelco
Grapevine, Texas 8(cid:3)
Dollard-des-Ormeaux, Quebec 7(cid:3)
Bangalore, Karnataka 9(cid:3)
Adler Tanks
South Plainfield, New Jersey
Deer Park, Texas
Beaumont, Texas
Mokena, Illinois
Wayland, Michigan
Ellsworth, Wisconsin
Enviroplex
Stockton, California
—
26,160
—
137.2
78.5
50.0
122.5
—
5.0
9.6
16.6
2.5
29.0
35.0
5.0
7,680
7,920
3,868
8,400
2,640
—
—
—
—
—
3,600
53,440
45,440
24,000
95,902
—
—
—
—
—
—
—
—
—
—
45,000
12,500
3,895
71,895
—
—
3.5
10.2
5.4
21.3
10.0
11.3
1,685
3,448
850
13,800
3,000
—
11,832
5,353
—
—
12,912
11,230
8.9
561.5
2,091
146,537
105,985
437,989
26,160
—
61,120
53,360
27,868
104,302
2,640
—
—
—
—
—
3,600
—
116,895
12,500
3,895
—
13,517
8,801
850
13,800
15,912
11,230
—
108,076
584,526
1
2
3
The modular building complex in Livermore, California is 33,840 square feet and includes the corporate offices, modulars and Adler Tanks
branch operations.
Of the 137.2 acres, 2.2 acres with an 8,000 square foot warehouse facility is leased to a third party through June 2016.
This facility is leased on a month to month basis.
-27-
4
5
6
7
8
9
This facility is leased through August 2018.
Adler Tanks also operates out of this facility.
This facility is leased through November 2016.
This facility is leased through January 2017.
This facility is leased through November 2018.
This facility is leased through May 15, 2018, with lock-in period expiring on May 15, 2016.
ITEM 3.
LEGAL PROCEEDINGS.
The Company is involved in various lawsuits and routine claims arising out of the normal course of its business. The Company
maintains insurance coverage for its operations and employees with appropriate aggregate, per occurrence and deductible limits as the
Company reasonably determines necessary or prudent with current operations and historical experience. The major policies include
coverage for property, general liability, auto, directors and officers, health, and workers’ compensation insurances. In the opinion of
management, the ultimate amount of liability not covered by insurance, if any, under any pending litigation and claims, individually or
in the aggregate, will not have a material adverse effect on the financial position or operating results of the Company.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable
-28-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock is traded in the NASDAQ Global Select Market under the symbol “MGRC”.
The market prices (as quoted by NASDAQ) and cash dividends declared, per share of the Company’s common stock, by
calendar quarter for the past two years were as follows:
Stock Activity
High
Low
Close
Dividends Declared
2015
2014
4Q
3Q
2Q
1Q
4Q
3Q
2Q
1Q
$ 31.57 $ 30.66 $ 35.00 $ 36.18 $ 38.79 $ 38.40 $ 37.32 $ 39.96
$ 25.12 $ 23.48 $ 30.10 $ 29.98 $ 33.33 $ 33.72 $ 29.02 $ 30.63
$ 25.19 $ 26.69 $ 30.43 $ 32.91 $ 35.86 $ 34.20 $ 36.75 $ 34.96
$ 0.250 $ 0.250 $ 0.250 $ 0.250 $ 0.245 $ 0.245 $ 0.245 $ 0.245
As of February 24, 2016, the Company's common stock was held by approximately 50 shareholders of record, which does not
include shareholders whose shares are held in street or nominee name. The Company believes that when holders in street or nominee
name are added, the number of holders of the Company's common stock exceeds 500.
Dividends
The Company has declared a quarterly dividend on its common stock every quarter since 1990. The total amount of cash
dividends paid by the Company in 2014 and 2015 is discussed under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations (cid:650) Liquidity and Capital Resources.” Subject to its continued profitability and favorable cash
flow, the Company intends to continue the payment of quarterly dividends.
Stock Repurchase Plan
In May 2008, the Company’s Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the
Company's outstanding common stock. The Company has in the past made purchases of shares of its common stock from time to time
in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share
repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of
Directors authorized the Company to repurchase an additional 2,000,000 shares of the Company's outstanding common stock. The
amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other
factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of
authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the
repurchase program may be modified, extended or terminated by the board of directors at any time. During the twelve months ended
December 31, 2015, the Company repurchased 2,407,974 shares of common stock for an aggregate repurchase price of $64.0 million,
or an average price of $26.56 per share. There were no repurchases of common stock during the twelve months ended December 31,
2014. As of December 31 2015, 1,592,026 shares remain authorized for repurchase.
-29-
ITEM 6.
SELECTED FINANCIAL DATA.
The following table summarizes the Company’s selected financial data for the five years ended December 31, 2015 and should
be read in conjunction with the detailed audited consolidated financial statements and related notes included in “Item 8. Financial
Statements and Supplementary Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Result of
Operations”.
Selected Consolidated Financial Data
(in thousands, except per share data)
Operations Data
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
Gain on sale of property, plant and equipment
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 calculations:
Basic
Diluted
Balance Sheet Data (at period end)
Rental equipment, at cost
Rental equipment, net
Total assets
Notes payable
Shareholders' equity
Shares issued and outstanding
Book value per share
Total liabilities to equity
Debt (notes payable) to equity
Return on average equity
Cash dividends declared per common share
2015
Year Ended December 31,
2013
2014
2012
2011
$ 273,696 $ 269,575 $ 255,766 $ 248,444 $ 234,906
39,486
274,392
66,382
1,959
342,733
46,920
308,914 295,364
66,444
2,231
379,509 364,039
73,314
347,010
55,385
2,149
404,544
64,132
333,707
72,248
2,167
408,122
68,443
2,152
53,148
75,213
54,719
60,936
190,868
36,769
227,637
176,907
99,950
76,957
72,678
48,849
56,946
178,473
47,430
225,903
182,219
96,859
85,360
68,208
40,189
55,017
63,819
37,207
45,581
163,414 146,607
49,173
210,494 195,780
169,015 168,259
86,278
81,981
88,765
80,250
47,080
60,187
30,692
39,859
130,738
45,141
175,879
166,854
78,127
88,727
(10,092)
—
(488)
66,377
25,907
40,470 $
(9,280)
812
(331)
76,561
30,852
45,709 $
(8,687 )
—
(189 )
71,374
27,977
43,397 $
(9,149)
—
35
72,867
28,090
44,777 $
(7,606)
—
(63)
81,058
31,456
49,602
1.60 $
1.59 $
1.77 $
1.75 $
1.71 $
1.67 $
1.80 $
1.78 $
2.04
2.00
25,369
25,457
25,914
26,175
25,433
25,926
24,759
25,156
24,349
24,760
$
$
$
$1,310,083 $1,229,638 $1,144,168 $ 1,072,845 $ 999,189
$ 869,601 $ 825,750 $ 767,010 $ 718,853 $ 673,146
$1,152,709 $1,116,407 $1,027,611 $ 972,446 $ 918,929
$ 381,441 $ 322,478 $ 290,003 $ 302,000 $ 296,500
$ 379,687 $ 424,531 $ 401,030 $ 364,738 $ 333,142
24,576
13.56
1.76
0.89
16.0%
0.92
25,757
15.57 $
1.56
0.72
11.3 %
0.96 $
26,051
16.30 $
1.63
0.76
11.1%
0.98 $
24,931
14.63 $
1.67
0.83
12.7%
0.94 $
23,851
15.92 $
2.04
1.00
9.8%
1.00 $
$
$
-30-
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(cid:237)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)
Net income
Provision for income taxes
Interest expense
Depreciation and amortization
EBITDA
Share-based compensation
Adjusted EBITDA 1(cid:3)
Adjusted EBITDA margin 2(cid:3)
$
Year Ended December 31,
2013
43,397
27,977
8,687
76,849
156,910
3,680
$ 164,148 $ 170,820 $ 160,590
2015
40,470 $
25,907
10,092
84,280
160,749
3,399
2014
45,709 $
30,852
9,280
81,125
166,966
3,854
$
2012
44,777 $
28,090
9,149
72,476
154,492
3,840
2011
49,602
31,456
7,606
67,395
156,059
5,221
$ 158,332 $ 161,280
47%
43%
42 %
41%
42%
-31-
Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities
$
(dollar amounts in thousands)
Adjusted EBITDA 1(cid:3)
Interest paid
Net income taxes (paid) refunds received
Gain on sale of used rental equipment
Gain on sale of property, plant and equipment
Foreign currency exchange (gain) loss
Change in certain assets and liabilities:
Accounts receivable, net
Income taxes receivable
Prepaid expenses and other assets
Accounts payable and other liabilities
Deferred income
Net cash provided by operating activities
$
2015
164,148
$
(10,041)
(2,498)
(11,902)
—
488
6,031
(11,000)
12,708
(10,531)
7,149
144,552
$
Year Ended December 31,
2013
160,590 $ 158,332
2012
(8,813 )
(11,074 )
(13,091 )
—
189
$
(9,107)
(5,842)
(12,389)
—
(35)
2014
170,820
$
(9,074)
(22,275)
(15,368)
(812)
331
(13,644)
—
(13,652)
21,524
5,136
122,986
$
4,606
—
(8,265 )
12,422
(2,921 )
(415)
—
(2,337)
(3,683)
1,857
133,643 $ 126,381
$
2011
161,280
(6,877)
1,480
(12,444)
—
63
(16,183)
—
(3,226)
3,941
1,277
129,311
1
2
Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation, amortization, and share-based compensation.
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 Amended Credit Facility,
and Series A Senior Notes, Series B Senior Notes and Series C Senior Notes (both 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”). These instruments contain financial covenants requiring the Company to not:
(cid:120)
(cid:120)
Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility and the Note Purchase
Agreement (as defined and more fully described under the heading “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation - Liquidity and Capital Resources”)) of Adjusted EBITDA (as defined in the
Amended 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 December 31, 2015, the actual ratio was 3.85 to 1.
Permit the Consolidated Leverage Ratio of funded debt (as defined in the Amended 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 December 31, 2015, the actual ratio was 2.32 to 1.
At December 31, 2015, the Company was in compliance with each of these aforementioned covenants. There are no anticipated
trends that the Company is aware of that would indicate non-compliance with these covenants, though, significant deterioration in our
financial performance could impact the Company's ability to comply with these covenants.
-32-
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-
looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those set forth in this section as well as those discussed
under Part I, “Item 1A. Risk Factors” and elsewhere in this document. This discussion should be read together with the financial
statements and the related notes thereto set forth in “Item 8. Financial Statements and Supplementary Data.”
Results of Operations
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 rental 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”). In 2015, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 41%, 33%, 26% and 0%,
respectively, of the Company’s income before provision for taxes (the equivalent of “pretax income”), compared to 22%, 45%, 31%
and 2%, respectively, for 2014. Although managed as a separate business segment, Enviroplex’s revenues, pretax income contribution
and total assets are not significant relative to the Company’s consolidated financial position.
The Company generates its revenues primarily from the rental of its equipment on operating leases with 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 revenue and certain other service revenues negotiated as part of the
lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the lease. Sales revenue
and related costs are recognized upon delivery and installation of the equipment to the customers. Sales revenues are less predictable
and can fluctuate from period to period 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 rental operations include rental and rental related services revenues which comprised approximately 86% of the
Company’s total revenues in 2015 and 83% for the three years ended December 31, 2015. Over the past three years, modulars,
electronic test equipment and tanks and boxes comprised approximately 41%, 30% and 29%, respectively, of the cumulative rental
operations revenues. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service
costs, impairment of rental equipment, and other direct costs of rental operations (which include direct labor, supplies, repairs,
insurance, property taxes, license fees and amortization of certain lease costs).
The Company sells modular, electronic test equipment and liquid and solid containment tanks and boxes that are new, or
previously rented. The Company’s Enviroplex subsidiary manufactures and sells modular classrooms. The renting and selling of some
modular equipment requires a dealer’s license, which the Company has obtained from the appropriate governmental agencies. Sales
and other revenues of modulars, electronic test equipment and tanks and boxes have comprised approximately 14% of the Company’s
consolidated revenues in 2015 and 17% for the three years ended December 31, 2015. Over the past three years, modulars, electronic
test equipment and tanks and boxes comprised approximately 59%, 39% and 2% of sales and other revenues, respectively. The
Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold
such as delivery, installation, modifications and related site work.
The rental and sale of modulars to public school districts comprised 16%, 16% and 14% of the Company’s consolidated rental
and sales revenues for 2015, 2014 and 2013, respectively. (For more information, see “Item 1. Business – Relocatable Modular
Buildings – Classroom Rentals and Sales to Public Schools (K-12)” above.)
Selling and administrative expenses primarily include personnel and benefit costs, which includes share-based compensation,
depreciation and amortization of property, plant and equipment and intangible assets, bad debt expense, advertising costs, and
professional service fees. The Company believes that sharing of common facilities, financing, senior management, and operating and
accounting systems by all of the Company’s operations, results in an efficient use of overhead. Historically, the Company’s operating
margins have been impacted favorably to the extent its costs and expenses are leveraged over a large installed customer base.
However, there can be no assurance as to the Company’s ability to maintain a large installed customer base or ability to sustain its
historical operating margins.
-33-
Related Party Transactions
The Company acquired liquid and solid containment tanks totaling $13.6 million, during the year ended December 31, 2013
from Sabre Manufacturing, LLC (“Sabre”), which was controlled by the former President of Adler Tanks until August 16, 2013 when
Sabre was sold to an unrelated party. Amounts due to Sabre at December 31, 2013 were zero. There were no related party
transactions in the years ended December 31, 2015 and 2014.
Recent Developments
In February 2016, the Company announced that its board of directors declared a cash dividend of $0.255 per common share for
the quarter ending March 31, 2016, an increase of 2% over the prior year’s comparable quarter.
Percentage of Revenue Table
The following table sets forth for the periods indicated the results of operations as a percentage of the Company’s total revenues
and the percentage of changes in the amount of such of items as compared to the amount in the indicated prior period:
Percent of Total Revenues
Percent Change
Three Years
2015–2013
Year Ended December 31,
2014
2013
2015
2015 over
2014
2014 over
2013
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
Cost of sales
Total costs
Gross profit
Selling and administrative expenses
Income from operations
Other income (expense):
Interest expense
Gain on sale of property, plant and Equipment
Foreign currency exchange gain (loss)
Income before provision for income taxes
Provision for income taxes
Net income
nm = not meaningful
2%
14
4
(23)
(1)
(1)
3
12
7
7
(22)
1
(3)
3
(10)
18
11
14
43
12
55
45
24
21
(2 )
—
—
19
8
11 %
9
nm
nm
(13)
(15)
(12)%
5%
21
8
6
1
8
7
22
4
9
1
7
8
9
6
7
nm
nm
7
10
7%
67%
16
83
16
1
100
68%
18
86
14
—
100
66%
16
82
18
—
100
67 %
14
81
18
1
100
18
12
15
45
11
56
44
24
20
2
—
—
18
7
11%
19
14
14
47
9
56
44
25
19
3
—
—
16
6
10%
18
12
14
44
11
55
45
24
21
(2)
—
—
19
8
11%
-34-
Twelve Months Ended December 31, 2015 Compared to
Twelve Months Ended December 31, 2014
Overview
Consolidated revenues in 2015 decreased 1%, to $404.5 million from $408.1 million in 2014. Consolidated net income in 2015
decreased 12%, to $40.5 million, or $1.59 per diluted share, from $45.7 million, or $1.75 per diluted share, in 2014. The Company’s
year over year total revenue decrease was primarily due to lower sales revenues, partly offset by higher rental and rental related
services revenues as more fully described below.
For 2015 compared to 2014, on a consolidated basis,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Gross profit decreased $5.3 million, or 3%, to $176.9 million. TRS-RenTelco’s gross profit decreased $12.4 million, or
21%, due to lower gross profit on rental, sales and rental related services revenues. Adler Tanks’ gross profit decreased
$6.1 million, or 11%, due to lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental
related services revenues. Enviroplex’s gross profit decreased $2.2 million primarily due to lower sales revenues. Mobile
Modular’s gross profit increased $15.3 million, or 24%, due to higher gross profit on rental and rental related services
revenues, partly offset by lower gross profit on sales revenues.
Selling and administrative expenses increased $3.1 million, or 3%, to $100.0 million, primarily due to increased employee
headcount, salaries and employee benefit costs and marketing and administrative expenses.
Interest expense increased $0.8 million, or 9%, to $10.1 million, primarily due to 14% higher average debt levels of the
Company, partly offset by 5% lower net average interest rate.
In 2014, other non-operating income included the Company’s sale of an excess property in June 2014 for net proceeds of
$2.5 million resulting in a gain on sale of $0.8 million, which was allocated to Mobile Modular, TRS-RenTelco and Adler
Tanks based on their pro-rata share of direct revenues. This property was previously used as one of the Company’s
branch sales and inventory centers prior to the TRS acquisition in 2004. Since 2004, the property had not been used in
support of rental operations.
Pretax income contribution was 41%, 33% and 26% by Mobile Modular, TRS-RenTelco and Adler Tanks, respectively, in
2015, compared to 22%, 45% and 31%, respectively, in 2014. These results are discussed on a segment basis below. Pre-
tax income contribution by Enviroplex was 0% and 2% in 2015 and 2014, respectively.
Provision for income taxes resulted in an effective tax rate of 39.0% in 2015, compared with 40.3% in 2014. The
decreased effective tax rate in 2015 was primarily as a result of lower business levels in states with higher tax rates, and
the resulting re-pricing of deferred tax liabilities.
Adjusted EBITDA decreased $6.7 million, or 4%, to $164.1 million compared to $170.8 million in 2014. Adjusted
EBITDA is a non-GAAP financial measure and is defined as net income before interest expense, provision for income
taxes, depreciation, amortization and share-based compensation. A reconciliation of Adjusted EBITDA to net cash
provided by operating activities and net income to Adjusted EBITDA can be found in “Item 6. Selected Financial Data.”
on page 32.
-35-
Mobile Modular
For 2015, Mobile Modular’s total revenues increased $22.7 million, or 14%, to $184.3 million compared to 2014, primarily due
to higher rental and rental related services revenues, partly offset by lower sales revenues. The revenue increase together with higher
gross margin on rental revenues, partly offset by higher selling and administrative expenses and higher interest expense, resulted in an
increase in pre-tax income of $10.0 million, or 59%, to $26.9 million in 2015.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax
income, and other selected information.
Mobile Modular – 2015 compared to 2014
(dollar amounts in thousands)
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
Rental
Rental related services
Rental operations
Sales
Other
Year Ended
December 31,
2015
2014
Increase (Decrease)
%
$
$
$
$
115,986
45,616
161,602
22,248
434
184,284
96,457
35,263
131,720
29,394
461
161,575
19,246
32,576
37,233
89,055
16,458
105,513
59,507
13,040
72,547
5,790
434
78,771
46,496
32,275
(5,363)
—
26,912
$
16,536
25,486
34,352
76,374
21,746
98,120
45,569
9,777
55,346
7,648
461
63,455
42,069
21,386
(4,768)
341
16,959
$
19,529
10,353
29,882
(7,146 )
(27 )
22,709
2,710
7,090
2,881
12,681
(5,288 )
7,393
13,938
3,263
17,201
(1,858 )
(27 )
15,316
4,427
10,889
595
(341 )
9,953
20%
29%
23%
(24)%
(6)%
14%
16%
28%
8%
17%
(24)%
8%
31%
33%
31%
(24)%
(6)%
24%
11%
51%
12%
(100)%
59%
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sale of property, plant and equipment
Pre-tax income
$
$
$
667,953
506,062
Other Selected Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
12%
17%
8%
5%
3%
11%
3%
Average and Period end rental equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the
rental equipment.
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.
$
$
1.34%
72.3%
1.86%
$
75.0%
$
$
1.45%
75.8%
1.91%
$
76.9%
597,904
432,021
70,049
74,041
635,420
706,155
70,735
$
4
-36-
Mobile Modular’s gross profit for 2015 increased 24% to $78.8 million from $63.5 million in 2014. For the year ended
December 31, 2015 compared to the year ended December 31, 2014:
(cid:120)
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues increased $19.5 million, or 20%, compared to 2014, due to 17%
higher average rental equipment on rent and 3% higher average monthly rental rates. As a percentage of rental revenues,
depreciation was 17% in 2015 and 2014 and other direct costs were 32% in 2015 and 36% in 2014, which resulted in
gross margin percentage of 51% in 2015 compared to 47% in 2014. The higher rental revenues, together with higher
rental margins, resulted in gross profit on rental revenues increasing 31%, to $59.5 million from $45.6 million in 2014.
Gross Profit on Rental Related Services – Rental related services revenues increased $10.4 million, or 29%, compared
to 2014. Most of these service revenues are negotiated with the initial 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 delivery and return delivery and dismantle revenues, increased services performed
during the lease and higher delivery and return delivery at Mobile Modular Portable Storage. The higher revenues and
higher gross margin percentage of 29% in 2015 compared to 28% in 2014 resulted in rental related services gross profit
increasing 33%, to $13.0 million from $9.8 million in 2014.
Gross Profit on Sales – Sales revenues decreased $7.1 million, or 24%, compared to 2014. Gross profit on sales
decreased $1.9 million, or 24%, due to lower new and used equipment sales revenues and flat gross margins of 26% in
2015 compared to 2014. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales
can fluctuate from period to period depending on customer requirements, equipment availability and funding.
For 2015, Mobile Modular’s selling and administrative expenses increased $4.4 million, or 11%, to $46.5 million from $42.1
million in 2014, primarily due to increased employee headcount, salaries and benefit costs and higher corporate allocated expenses.
-37-
TRS-RenTelco
For 2015, TRS-RenTelco’s total revenues decreased $13.3 million, or 10%, to $115.0 million compared to 2014, primarily due
to lower rental and sales revenues. Pre-tax income decreased $12.2 million, or 35%, to $22.2 million for 2015, primarily due to lower
gross profit on rental and sales revenues, partly offset by lower selling and administrative expenses.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax
income, and other selected information.
TRS-RenTelco – 2015 compared to 2014
(dollar amounts in thousands)
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
Rental
Rental related services
Rental operations
Sales
Other
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sales of property, plant and equipment
Foreign currency exchange loss
Pre-tax income
Other Selected Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
Year Ended
December 31,
2015
2014
Increase (Decrease)
%
$
$
$
$
89,208
3,055
92,263
21,137
1,617
115,017
99,020
3,331
102,351
24,323
1,628
128,302
(9,812 )
(276 )
(10,088 )
(3,186 )
(11 )
(13,285 )
39,974
2,722
13,619
56,315
10,866
67,181
35,615
333
35,948
10,271
1,617
47,836
22,930
24,906
(2,194)
—
(488)
22,224
$
40,935
2,742
12,139
55,816
12,237
68,053
45,946
589
46,535
12,086
1,628
60,249
23,736
36,513
(2,075)
276
(331)
34,383
$
265,832
160,833
$
$
2.80%
60.5%
4.62%
$
58.7%
262,968
158,800
$
$
3.14%
60.4%
5.20%
$
59.8%
261,996
260,715
(961 )
(20 )
1,480
499
(1,371 )
(872 )
(10,331 )
(256 )
(10,587 )
(1,815 )
(11 )
(12,413 )
(806 )
(11,607 )
119
(276 )
157
(12,159 )
2,864
2,033
1,281
$
$
$
$
(10)%
(8)%
(10)%
(13)%
(1)%
(10)%
(2)%
(1)%
12%
1%
(11)%
(1)%
(22)%
(43)%
(23)%
(15)%
(1)%
(21)%
(3)%
(32)%
6%
(100)%
47%
(35)%
1%
1%
(11)%
0%
(11)%
0%
(2)%
Average and Period end rental equipment represents the cost of rental equipment excluding accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the rental equipment.
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.
4
-38-
TRS-RenTelco’s gross profit for 2015 decreased 21% to $47.8 million from $60.2 million in 2014. For the year ended
December 31, 2015 compared to the year ended December 31, 2014:
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues decreased $9.8 million, or 10%, to $89.2 million with depreciation
expense decreasing $1.0 million, or 2%, and other direct costs increasing $1.5 million, or 12%, resulting in a decrease in
gross profit on rental revenues of $10.3 million, or 22%, to $35.6 million in 2015. As a percentage of rental revenues,
depreciation was 45% in 2015 compared to 41% in 2014 and other direct costs was 15% in 2015 compared to 12% in
2014, which resulted in gross margin percentage of 40% in 2015 compared to 46% in 2014. The rental revenues decrease
was due to 11% lower average monthly rental rates, partly offset by 1% higher average rental equipment on rent.
Gross Profit on Sales – Sales revenues decreased $3.2 million, or 13%, compared to 2014. The sales revenue decrease
together with lower gross margin percentage of 49% in 2015, compared to 50% in 2014, primarily due to lower gross
margin on used equipment sales, resulted in gross profit on sales decreasing 15%, to $10.3 million from $12.1 million in
2014. Sales occur routinely as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross
margins can fluctuate from period to period depending on customer requirements, equipment availability and funding.
For 2015, TRS-RenTelco’s selling and administrative expenses decreased $0.8 million, or 3%, to $22.9 million from $23.7
million in 2014, primarily due to lower allocated corporate expenses.
-39-
Adler Tanks
For 2015, Adler Tanks’ total revenues decreased $6.2 million, or 6%, to $94.6 million compared to 2014, primarily due to lower
rental and rental related services revenues, partly offset by higher sales revenues during 2015. The revenue decrease together with
lower gross margin on rental and sales revenues, higher selling and administrative expenses and higher interest expense, partly offset
by higher gross margin on rental related services revenues resulted in a pre-tax income decrease of $6.4 million, or 27%, to $17.2
million for the year ended December 31, 2015.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax
income and other selected information.
Adler Tanks – 2015 compared to 2014
(dollar amounts in thousands)
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 (Loss)
Rental
Rental related services
Rental operations
Sales
Other
Year Ended
December 31,
2015
2014
Increase (Decrease)
%
$
$
$
$
68,502
24,643
93,145
1,388
98
94,631
74,098
25,538
99,636
1,074
78
100,788
15,993
19,421
10,084
45,498
1,736
47,234
42,425
5,222
47,647
(348)
98
47,397
27,494
19,903
(2,729)
—
17,174
$
15,207
20,621
10,455
46,283
1,053
47,336
48,436
4,917
53,353
21
78
53,452
27,424
26,028
(2,618)
195
23,605
$
(5,596 )
(895 )
(6,491 )
314
20
(6,157 )
786
(1,200 )
(371 )
(785 )
683
(102 )
(6,011 )
305
(5,706 )
(369 )
20
(6,055 )
70
(6,125 )
111
(195 )
(6,431 )
(8)%
(4)%
(7)%
29%
26%
(6)%
5%
(6)%
(4)%
(2)%
65%
0%
(12)%
6%
(11)%
nm
26%
(11)%
0%
(24)%
4%
(100)%
(27)%
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sale of property, plant and equipment
Pre-tax income
$
$
$
304,001
177,117
Other Selected Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
5%
(3)%
(12)%
(7)%
(5)%
3%
(22)%
Average and Period end rental equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the
rental equipment.
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.
$
$
2.13%
62.9%
3.39%
$
63.9%
$
$
1.88%
58.3%
3.22%
$
49.7%
289,928
182,242
14,073
(5,125 )
299,485
307,614
8,129
$
4
nm = not meaningful
-40-
Adler Tanks’ gross profit for 2015 decreased $6.1 million to $47.4 million from $53.5 million for the same period in 2014. For
the year ended December 31, 2015 compared to year ended December 31, 2014:
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues decreased $5.6 million, or 8%, due to 3% lower average rental
equipment on rent and 5% lower average rental rates in 2015 as compared to 2014. As a percentage of rental revenues,
depreciation was 23% and 21% in 2015 and 2014, respectively, and other direct costs were 15% in 2015 and 14% in 2014,
which resulted in gross margin percentages of 62% in 2015 compared to 65% in 2014. The lower rental revenues,
together with lower rental margins resulted in gross profit on rental revenues decreasing $6.0 million, or 12%, to $42.4
million in 2015.
Gross Profit on Rental Related Services – Rental related services revenues decreased $0.9 million, or 4%, compared to
2014. The higher gross margin percentage of 21% in 2015 compared to 19% in 2014, partly offset by lower revenues,
resulted in rental related services gross profit increasing $0.3 million, or 6%, to $5.2 million from $4.9 million in 2014.
For 2015, Adler Tanks’ selling and administrative expenses increased $0.1 million, to $27.5 million from $27.4 million in the
same period in 2014, primarily due to increased employee headcount, salaries and benefit costs.
-41-
Twelve Months Ended December 31, 2014 Compared to
Twelve Months Ended December 31, 2013
Overview
Consolidated revenues in 2014 increased 8%, to $408.1 million from $379.5 million in 2013. Consolidated net income in 2014
increased 7%, to $46.5 million, or $1.75 per diluted share, from $43.4 million, or $1.67 per diluted share, in 2013. The Company’s
year over year total revenue increase was primarily due to higher rental, rental related services and sales revenues as more fully
described below.
For 2014 compared to 2013, on a consolidated basis,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Gross profit increased $13.2 million, or 8%, to $182.2 million. Mobile Modular’s gross profit increased $13.0 million, or
26%, due to higher gross profit on rental revenues, sales and rental related services revenues. Adler Tanks’ gross profit
increased $2.4 million, or 5%, due to higher gross profit on rental, rental related services and sales revenues. Enviroplex’s
gross profit increased $1.1 million primarily due to higher sales revenues. TRS-RenTelco’s gross profit decreased $3.3
million, or 5%, due to lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental related
services revenues.
Selling and administrative expenses increased $8.1 million, or 9%, to $96.9 million, primarily due to increased employee
headcount, salaries and employee benefit costs.
Interest expense increased $0.6 million, or 7%, to $9.3 million, primarily due to 7% higher average debt levels of the
Company.
In 2014, other non-operating income included the Company’s sale of an excess property in June 2014 for net proceeds of
$2.5 million resulting in a gain on sale of $0.8 million, which was allocated to Mobile Modular, TRS-RenTelco and Adler
Tanks based on their pro-rata share of direct revenues. This property was previously used as one of the Company’s
branch sales and inventory centers prior to the TRS acquisition in 2004. Since 2004, the property had not been used in
support of rental operations.
Pretax income contribution was 45%, 31% and 22% by TRS-RenTelco, Adler Tanks and Mobile Modular, respectively, in
2014, compared to 51%, 34% and 13%, respectively, in 2013. These results are discussed on a segment basis below. Pre-
tax income contribution by Enviroplex was 2% in 2014 and 2013.
Provision for income taxes resulted in an effective tax rate of 40.3% in 2014, compared with 39.2% in 2013. The
increased effective tax rate in 2014 was primarily as a result of higher business levels in states with higher tax rates, and
the resulting re-pricing of deferred tax liabilities.
Adjusted EBITDA increased $10.2 million, or 6%, to $170.8 million compared to $160.6 million in 2013. Adjusted
EBITDA is a non-GAAP financial measure and is defined as net income before interest expense, provision for income
taxes, depreciation, amortization and share-based compensation. A reconciliation of Adjusted EBITDA to net cash
provided by operating activities and net income to Adjusted EBITDA can be found in “Item 6. Selected Financial Data.”
on page 32.
-42-
Mobile Modular
For 2014, Mobile Modular’s total revenues increased $28.9 million, or 22%, to $161.6 million compared to 2013, primarily due
to higher rental, sales and rental related services revenues. The revenue increase together with higher gross margin on rental revenues,
partly offset by higher selling and administrative expenses and higher interest expense, resulted in an increase in pre-tax income of
$7.4 million, or 76%, to $17.0 million in 2014.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax
income, and other selected information.
Mobile Modular – 2014 compared to 2013
(dollar amounts in thousands)
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
Rental
Rental related services
Rental operations
Sales
Other
Year Ended
December 31,
2014
2013
Increase (Decrease)
%
$
$
$
$
96,457
35,263
131,720
29,394
461
161,575
82,503
28,891
111,394
20,831
436
132,661
16,536
25,486
34,352
76,374
21,746
98,120
45,569
9,777
55,346
7,648
461
63,455
42,069
21,386
(4,768)
341
16,959
$
14,459
20,980
31,167
66,606
15,632
82,238
36,877
7,911
44,788
5,199
436
50,423
36,488
13,935
(4,318)
—
9,617
$
13,954
6,372
20,326
8,563
25
28,914
2,077
4,506
3,185
9,768
6,114
15,882
8,692
1,866
10,558
2,449
25
13,032
5,581
7,451
450
341
7,342
17%
22%
18%
41%
6%
22%
14%
21%
10%
15%
39%
19%
24%
24%
24%
47%
6%
26%
15%
53%
10%
nm
76%
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sale of property, plant and equipment
Pre-tax income
$
$
$
597,904
432,021
Other Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
9%
16%
6%
6%
1%
12%
6%
Average and Period end rental equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the
rental equipment.
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.
$
$
1.26%
68.3%
1.84%
$
70.7%
$
$
1.34%
72.3%
1.86%
$
75.0%
51,364
58,905
546,540
373,116
70,511
635,420
564,909
$
4
nm = not meaningful
-43-
Mobile Modular’s gross profit for 2014 increased 26% to $63.5 million from $50.4 million in 2013. For the year ended
December 31, 2014 compared to the year ended December 31, 2013:
(cid:120)
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues increased $14.0 million, or 17%, compared to 2013, due to 16%
higher average rental equipment on rent and 1% higher average monthly rental rates. As a percentage of rental revenues,
depreciation was 17% in 2014 and 2013 and other direct costs were 36% in 2014 and 38% in 2013, which resulted in
gross margin percentage of 47% in 2014 compared to 45% in 2013. The higher rental revenues, together with higher
rental margins, resulted in gross profit on rental revenues increasing 24%, to $45.6 million from $36.9 million in 2013.
Gross Profit on Rental Related Services – Rental related services revenues increased $6.4 million, or 22%, compared to
2013. Most of these service revenues are negotiated with the initial 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 delivery and return delivery and dismantle revenues, and higher delivery and return
delivery at Mobile Modular Portable Storage. The higher revenues and higher gross margin percentage of 28% in 2014
compared to 27% in 2013 resulted in rental related services gross profit increasing 24%, to $9.8 million from $7.9 million
in 2013.
Gross Profit on Sales – Sales revenues increased $8.6 million, or 41%, compared to 2013. Gross profit on sales increased
$2.5 million, or 47%, primarily due to higher new and used equipment sales revenues and higher gross margins on sales of
used equipment in 2014. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales
can fluctuate from period to period depending on customer requirements, equipment availability and funding.
For 2014, Mobile Modular’s selling and administrative expenses increased $5.6 million, or 15%, to $42.1 million from $36.5
million in 2013, primarily due increased employee headcount, salaries and benefit costs.
-44-
TRS-RenTelco
For 2014, TRS-RenTelco’s total revenues decreased $6.8 million, or 5%, to $128.3 million compared to 2013, primarily due to
lower sales and rental revenues. Pre-tax income decreased $2.3 million, or 6%, to $34.4 million for 2014, primarily due to lower gross
profit on rental and sales revenues, partly offset by lower selling and administrative expenses.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pretax
income, and other selected information.
TRS-RenTelco – 2014 compared to 2013
(dollar amounts in thousands)
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
Rental
Rental related services
Rental operations
Sales
Other
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sales of property, plant and equipment
Foreign currency exchange loss
Pre-tax income
Other Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
Year Ended
December 31,
2014
2013
Increase (Decrease)
%
$
$
$
$
99,020
3,331
102,351
24,323
1,628
128,302
102,101
3,095
105,196
28,277
1,580
135,053
40,935
2,742
12,139
55,816
12,237
68,053
45,946
589
46,535
12,086
1,628
60,249
23,736
36,513
(2,075)
276
(331)
34,383
$
39,953
2,681
12,963
55,597
15,936
71,533
49,185
414
49,599
12,341
1,580
63,520
24,542
38,978
(2,156)
—
(189)
36,633
$
262,968
158,800
$
$
3.14%
60.4%
5.20%
$
59.8%
266,444
167,035
$
$
3.19%
62.7%
5.09%
$
58.2%
260,715
267,206
$
$
$
$
(3,081 )
236
(2,845 )
(3,954 )
48
(6,751 )
982
61
(824 )
219
(3,699 )
(3,480 )
(3,239 )
175
(3,064 )
(255 )
48
(3,271 )
(806 )
(2,465 )
(81 )
276
142
(2,250 )
(3,476 )
(8,235 )
(6,491 )
(3)%
8%
(3)%
(14)%
3%
(5)%
2%
2%
(6)%
0%
(23)%
(5)%
(7)%
42%
(6)%
(2)%
3%
(5)%
(3)%
(6)%
(4)%
nm
75%
(6)%
(1)%
(5)%
(2)%
(4)%
2%
(2)%
3%
Average and Period end rental equipment represents the cost of rental equipment excluding accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the rental equipment.
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.
4
nm = not meaningful
-45-
TRS-RenTelco’s gross profit for 2014 decreased 5% to $60.2 million from $63.5 million in 2013. For the year ended December
31, 2014 compared to the year ended December 31, 2013:
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues decreased $3.1 million, or 3%, to $99.0 million with depreciation
expense increasing $1.0 million, or 2%, and other direct costs decreasing $0.8 million, or 6%, resulting in a decrease in
gross profit on rental revenues of $3.2 million, or 7%, to $45.9 million in 2014. As a percentage of rental revenues,
depreciation was 41% in 2014 compared to 39% in 2013 and other direct costs was 12% in 2014 compared to 13% in
2013, which resulted in gross margin percentage of 46% in 2014 compared to 48% in 2013. The rental revenues decrease
was due to 5% lower average rental equipment on rent, partly offset by 2% higher average monthly rental rates.
Gross Profit on Sales – Sales revenues decreased $4.0 million, or 14%, compared to 2013. The sales revenue decrease
was partly offset by higher gross margins percentage of 50% in 2014, compared to 44% in 2013, primarily due to higher
gross margin on used equipment sales, which resulted in gross profit on sales decreasing 2%, to $12.1 million from $12.3
million in 2013. Sales occur routinely as a normal part of TRS-RenTelco’s rental business; however, these sales and
related gross margins can fluctuate from period to period depending on customer requirements, equipment availability and
funding.
For 2014, TRS-RenTelco’s selling and administrative expenses decreased $0.8 million, or 3%, to $23.7 million from $24.5
million in 2013, primarily due to decreased marketing and administrative costs.
-46-
Adler Tanks
For 2014, Adler Tanks’ total revenues increased $6.8 million, or 7%, to $100.8 million compared to 2013, primarily due to
higher rental and rental related services revenues during 2014. The revenue increase and higher gross margin on sales revenues, offset
by higher selling and administrative expenses, higher interest expense and lower gross margin on rental related services revenues
resulted in a pre-tax income decrease of $0.4 million, or 2%, to $23.6 million for the year ended December 31, 2014.
The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax
income and other selected information.
Adler Tanks – 2014 compared to 2013
(dollar amounts in thousands)
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 (Loss)
Rental
Rental related services
Rental operations
Sales
Other
Year Ended
December 31,
2014
2013
Increase (Decrease)
%
$
$
$
74,098
25,538
99,636
1,074
78
100,788
15,207
20,621
10,455
46,283
1,053
47,336
48,436
4,917
53,353
21
78
53,452
27,424
26,028
(2,618)
195
23,605
$
71,162
21,162
92,324
1,480
136
93,940
13,796
16,528
10,887
41,211
1,653
42,864
46,479
4,634
51,113
(173)
136
51,076
24,644
26,432
(2,419)
—
24,013
$
$
2,936
4,376
7,312
(406 )
(58 )
6,848
1,411
4,093
(432 )
5,072
(600 )
4,472
1,957
283
2,240
194
(58 )
2,376
2,780
(404 )
199
195
(408 )
4%
21%
8%
(27)%
(43)%
7%
10%
25%
(4)%
12%
(36)%
10%
4%
6%
4%
112%
(43)%
5%
11%
(2)%
8%
nm
(2)%
Total gross profit
Selling and administrative expenses
Income from operations
Interest expense allocation
Gain on sale of property, plant and equipment
Pre-tax income
$
$
$
289,928
182,242
Other Information
Average rental equipment 1(cid:3)
Average rental equipment on rent 1(cid:3)
Average monthly total yield 2(cid:3)
Average utilization 3(cid:3)
Average monthly rental rate 4(cid:3)
Period end rental equipment 1(cid:3)
Period end utilization 3(cid:3)
1
2
3
10%
7%
(5)%
(2)%
(3)%
7%
11%
Average and Period end rental equipment represents the cost of rental equipment excluding new equipment inventory and accessory equipment.
Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment for the period.
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 the
rental equipment.
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.
$
$
2.24%
64.2%
3.50%
$
57.7%
$
$
2.13%
62.9%
3.39%
$
63.9%
264,189
169,661
25,739
12,581
299,485
278,618
20,867
$
4
nm = not meaningful
-47-
Adler Tanks’ gross profit for 2014 increased $2.4 million to $53.5 million from $51.1 million for the same period in 2013. For
the year ended December 31, 2014 compared to year ended December 31, 2013:
(cid:120)
(cid:120)
Gross Profit on Rental Revenues – Rental revenues increased $2.9 million, or 4%, due to 7% higher average rental
equipment on rent, partly offset by 3% lower average rental rates in 2014 as compared to 2013. As a percentage of rental
revenues, depreciation was 21% and 20% in 2014 and 2013, respectively, and other direct costs were 14% in 2014 and
15% in 2013, which resulted in gross margin percentages of 65% in 2014 and 2013. The higher rental revenues, together
with flat rental margins resulted in gross profit on rental revenues increasing $2.0 million, or 4%, to $48.4 million in 2014.
Gross Profit on Rental Related Services – Rental related services revenues increased $4.4 million, or 21%, compared to
2013. The higher revenues, partly offset by lower gross margin percentage of 19% in 2014 compared to 22% in 2013
resulted in rental related services gross profit increasing $0.3 million, or 6%, to $4.9 million from $4.6 million in 2013.
For 2014, Adler Tanks’ selling and administrative expenses increased $2.8 million, or 11%, to $27.4 million from $24.6 million
in the same period in 2013, primarily due to increased employee headcount, salaries and benefit costs.
-48-
Liquidity and Capital Resources
This section contains statements that constitute “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. See the statements at the beginning of this Item for cautionary information with respect to such
forward-looking statements.
The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company in 2015
as compared to 2014 are summarized as follows:
Cash Flows from Operating Activities: The Company’s operations provided net cash flow of $144.6 million for 2015 as
compared to $123.0 million in 2014. The 18% increase in net cash provided by operating activities was primarily attributable to
decreased prepaid expenses and other assets, partly offset by lower income from operations and other balance sheet changes.
Cash Flows from Investing Activities: Net cash used in investing activities was $114.1 million for 2015 as compared to
$129.9 million in 2014. The 12% decrease in net cash used in investing activities was primarily due to $21.2 million lower purchases
of rental equipment of $131.0 million in 2015, compared to $152.2 million in 2014, partly offset by lower proceeds from sale of used
rental equipment.
Cash Flows from Financing Activities: Net cash used in financing activities was $30.5 million in 2015 as compared to net
cash provided by financing activities of $6.5 million in 2014. The $37.0 million change in net cash flow from financing activities was
primarily due to $64.0 million repurchase of the Company’s common stock, partly offset by $20.0 million increased net borrowings
under the Company’s Senior Notes and $6.5 million increased net borrowings under the Company’s 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 bank borrowings and notes offerings. Sales occur routinely as a normal part of the Company’s
rental businesses. However, these 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, offer
additional notes 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.
As the following table indicates, cash flow provided by operating activities and proceeds from sales of used rental equipment
have been greater than rental equipment purchases over the past three years.
Funding of Rental Asset Growth
(amounts in thousands)
Cash provided by operating activities
Proceeds from the sale of used rental equipment
Cash available for purchase of rental equipment
Purchases of rental equipment
Cash available for other uses
$
$
Three Year
2013
Year Ended December 31,
2014
122,986 $ 133,643 $
33,380
167,023
(132,611 )
34,412 $
32,556
155,542
(152,197)
3,345 $
2015
144,552 $
26,214
170,766
(131,037)
39,729 $
Totals
401,181
92,150
493,331
(415,845)
77,486
In addition to increasing its rental assets, the Company had other capital expenditures for property, plant and equipment of $9.3
million in 2015, $12.7 million in 2014 and $12.0 million in 2013, and has used cash to provide returns to its shareholders in the form
of cash dividends. The Company paid cash dividends of $25.8 million, $25.6 million and $24.4 million in the years ended December
31, 2015, 2014 and 2013, respectively.
The Company has in the past made repurchases of shares of its common stock from time to time in the over-the-counter market
(NASDAQ) and/or through privately negotiated, block transactions under an authorization from the Board of Directors. Shares
repurchased by the Company are canceled and returned to the status of authorized but unissued stock. During the twelve months ended
December 31, 2015, the Company repurchased 2,407,974 shares of common stock for an aggregate repurchase price of $64.0 million,
or an average price of $26.56 per share. There were no repurchases of common stock during the twelve months ended December 31,
2014 and 2013. As of February 25 2016, 1,592,026 shares remain authorized for repurchase.
-49-
Unsecured Revolving Lines of Credit
As the Company’s assets have grown, it has been able to negotiate increases in the borrowing limit under its general bank lines
of credit. In June 2012, the Company entered into an amended and restated credit agreement with a syndicate of banks (the “Amended
Credit Facility”). The five-year facility matures on June 15, 2017 and replaced the Company’s prior $350.0 million unsecured
revolving credit facility. The Amended Credit Facility provides for a $420.0 million unsecured revolving credit facility (which may be
increased to $450.0 million with $30.0 million of additional 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.
In June 2012, the Company entered into a Credit Facility Letter Agreement and a Credit Line Note in favor of MUFG Union
Bank, N.A., extending its line of credit facility related to its cash management services (“Sweep Service Facility”) and increasing the
facility size from $5.0 million to $10.0 million. The Sweep Service Facility matures on the earlier of June 15, 2017, or the date the
Company ceases to utilize MUFG Union Bank, N.A. for its cash management services.
At December 31, 2015, under the Amended Credit Facility and Sweep Service Facility, the Company had unsecured lines of
credit that permit it to borrow up to $430.0 million of which $221.4 million was outstanding, and had capacity to borrow up to an
additional $208.6 million. The Amended 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 Amended Credit Facility):
(cid:120)
(cid:120)
(cid:120)
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 December 31, 2015, the actual ratio was 3.85 to 1.
Permit the Consolidated Leverage Ratio of funded debt to EBITDA at any time during any period of four consecutive
fiscal quarters to be greater than 2.75 to 1. At December 31, 2015, the actual ratio was 2.32 to 1.
Permit Tangible Net Worth as of the end of any fiscal quarter of the Company to be less than the sum of (i) $246.1 million
plus (ii) 25% of the Company’s Consolidated Net Income (as defined in the Amended Credit Facility) (but only if a
positive number) for each fiscal quarter ended subsequent to December 31, 2011 plus (iii) 90% of the net cash proceeds
from the issuance of the Company’s capital stock after December 31, 2011. At December 31, 2015, such sum was $304.9
million and the actual Tangible Net Worth of the Company was $342.4 million.
At December 31, 2015, 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.
4.03% Senior Notes Due in 2018
On April 21, 2011, the Company entered into a Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”)
with Prudential Investment Management, Inc. (“PIM”), The Prudential Insurance Company of America and Prudential Retirement
Insurance and Annuity Company (collectively, the “Purchaser”), pursuant to which the Company agreed to sell an aggregate principal
amount of $100.0 million of its 4.03% Series A Senior Notes (the “Series A Senior Notes”) to the Purchaser. The Series A Senior
Notes are an unsecured obligation of the Company, due on April 21, 2018. Interest on these notes is due semi-annually in arrears and
the principal is due in five equal annual installments, with the first payment made on April 21, 2014. At December 31, 2015, the
principal balance outstanding under the Series A Senior Notes was $60.0 million.
On March 17, 2014, the Company entered into an Amendment to the Note Purchase Agreement (“2014 Amendment”) with the
Purchaser. The 2014 Amendment amended certain terms of the Note Purchase Agreement. Pursuant to the Amendment, among other
things, the issuance period for additional senior notes (“Shelf Notes”) to be issued and sold pursuant to the Note Purchase Agreement
is extended until the earlier of March 17, 2017 or the termination of the issuance and sale of the Shelf Notes upon the 30 days’ prior
notice of either PIM or the Company.
3.68% Senior Notes Due in 2021
On March 17, 2014, the Company issued and sold to the Purchasers a $40.0 million aggregate principal amount of its 3.68%
Series B Senior Notes (the “Series B Senior Notes”) pursuant to the terms of the Note Purchase Agreement, as amended. The Series B
Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 3.68% per annum and mature on March 17,
2021. Interest on the Series B Senior Notes is payable semi-annually beginning on September 17, 2014 and continuing thereafter on
March 17 and September 17 of each year until maturity. The principal balance is due when the notes mature in 2021. The full net
proceeds from the Series B Senior Notes were used for working capital and other general corporate purposes. At December 31, 2015,
the principal balance outstanding under the Series B Senior Notes was $40.0 million.
-50-
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 Note Purchase Agreement, as amended. 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 in 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 December 31,
2015, the principal balance outstanding under the Series C Senior Notes was $60.0 million.
Among other restrictions, the Note Purchase Agreement, under which the Series A Senior Notes, Series B Senior Notes and
Series C 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):
(cid:120)
(cid:120)
(cid:120)
Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA (as defined in the Note Purchase Agreement) to fixed
charges as of the end of any fiscal quarter to be less than 2.50 to 1. At December 31, 2015, the actual ratio was 3.85 to 1.
Permit the Consolidated Leverage Ratio of funded debt to EBITDA (as defined in the Note Purchase Agreement) at any
time during any period of four consecutive quarters to be greater than 2.75 to 1. At December 31, 2015, the actual ratio
was 2.32 to 1.
Permit tangible net worth, calculated as of the last day of each fiscal quarter, to be less than the sum of (i) $229.0 million,
plus (ii) 25% of net income for such fiscal quarter subsequent to December 31, 2010, plus (iii) 90% of the net cash
proceeds from the issuance of the Company’s capital stock after December 31, 2010. At December 31, 2015, such sum
was $304.9 million and the actual tangible net worth of the Company was $342.4 million.
At December 31, 2015, 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.
Contractual Obligations and Commitments
At December 31, 2015, the Company’s material contractual obligations and commitments consisted of outstanding borrowings
under our credit facilities expiring in 2017, outstanding amounts under our 4.03%, 3.68% and 3.84% senior notes due in 2018, 2021
and 2022, respectively, and operating leases for facilities. The operating lease amounts exclude property taxes and insurance. The
table below provides a summary of the Company’s contractual obligations and reflects expected payments due as of December 31,
2015 and does not reflect changes that could arise after that date.
Payments Due by Period
(dollar amounts in thousands)
Revolving lines of credit
4.03% Series A senior notes due in 2018
3.68% Series B senior notes due in 2021
3.84% Series C senior notes due in 2022
Operating leases for facilities
Total contractual obligations
Total
$ 221,441 $
63,627
48,832
76,134
2,853
$ 412,887 $
Within
1 Year
Within
2 to 3 Years
Within
4 to 5 Years
More than
5 Years
— $
— $ 221,441 $
—
41,612
22,015
42,944
4,416
1,472
6,912
4,608
2,310
—
1,584
1,269
27,066 $ 273,661 $ 49,856 $
—
—
—
62,304
—
62,304
The Company believes that its needs for working capital and capital expenditures through 2016 and beyond will be adequately
met by operating cash flow, proceeds from the sale of rental equipment, and bank borrowings.
Please see the Company's Consolidated Statements of Cash Flows on page 64 for a more detailed presentation of the sources
and uses of the Company's cash.
Critical Accounting Policies
In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,”
the Company has identified the most critical accounting policies upon which its financial status depends. The Company determined
its critical accounting policies by considering those policies that involve the most complex or subjective decisions or assessments.
The Company has identified that its most critical accounting policies are those related to depreciation, maintenance, repair and
-51-
refurbishment, impairment of rental equipment and impairment of goodwill and intangible assets. Descriptions of these accounting
policies are found in both the notes to the consolidated financial statements and at relevant sections in this Management’s Discussion
and Analysis.
Depreciation - The estimated useful lives and estimated residual values used for rental equipment are based on the Company’s
experience as to the economic useful life and sale value of its products. Additionally, to the extent information is publicly available,
the Company also compares its depreciation policies to other companies with similar rental products for reasonableness.
The lives and residual values of rental equipment are subject to periodic evaluation. For modular equipment, external factors to
consider may include, but are not limited to, changes in legislation, regulations, building codes, local permitting, and supply or
demand. Internal factors for modulars may include, but are not limited to, change in equipment specifications, condition of
equipment, or maintenance policies. For electronic test equipment, external factors to consider may include, but are not limited to,
technological advances, changes in manufacturers’ selling prices, and supply or demand. Internal factors for electronic test equipment
may include, but are not limited to, change in equipment specifications, condition of equipment or maintenance policies. For liquid
and solid containment tanks and boxes, external factors to consider may include, but are not limited to, changes in Federal and State
legislation, the types of materials stored and the frequency of movements and uses. Internal factors for liquid and solid containment
tanks and boxes may include, but are not limited to, change in equipment specifications and maintenance policies.
Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used
equipment. Depending on the magnitude of such changes, the impact on the financial statements could be significant.
Maintenance, Repair and Refurbishment - Maintenance and repairs are expensed as incurred. The direct material and labor
costs of value-added additions or major refurbishment of modular buildings are capitalized to the extent the refurbishment
significantly improves the quality and adds value or life to the equipment. Judgment is involved as to when these costs should be
capitalized. The Company’s policies narrowly limit the capitalization of value-added items to specific additions such as restrooms,
sidewalls and ventilation upgrades. In addition, only major refurbishment costs incurred near the end of the estimated useful life of
the rental equipment, which extend its useful life, and are subject to certain limitations, are capitalized. Changes in these policies could
impact the Company’s financial results.
Impairment of rental equipment - The carrying value of the Company’s rental equipment is its capitalized cost less
accumulated depreciation. To the extent events or circumstances indicate that the carrying value cannot be recovered, an impairment
loss is recognized to reduce the carrying value to fair value. The Company determines fair value based upon the condition of the
equipment and the projected net cash flows from its rental and sale considering current market conditions. Additionally, if the
Company decides to sell or otherwise dispose of the rental equipment, it is carried at the lower of cost or fair value less costs to sell or
dispose. Due to uncertainties inherent in the valuation process and market conditions, it is reasonably possible that actual results of
operating and disposing of rental equipment could be materially different than current expectations.
Impairment of goodwill and intangible assets - The Company assesses the carrying amount of its recorded goodwill and
intangible assets annually or in interim periods if circumstances indicate an impairment may have occurred. The impairment review is
performed by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The
two-step process requires management to make certain judgments in determining what assumptions to use in the calculation. The first
step in the evaluation consists of estimating the fair value of the reporting unit based on discounted cash flows using revenue and after
tax profit estimates. Management then compares its estimate of the fair value of the reporting unit with the reporting unit’s carrying
amount, which includes goodwill and intangible assets. If the estimated fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that unit, then goodwill and intangible assets are not impaired and no further testing is required. If the
carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then the second step is performed in order
to determine the implied fair value of the reporting unit’s goodwill and intangible assets and an impairment loss is recorded for an
amount equal to the difference between the implied fair value and the carrying value of the goodwill and intangible assets.
Impact of Inflation
Although the Company cannot precisely determine the effect of inflation, from time to time it has experienced increases in costs
of rental equipment, manufacturing costs, operating expenses and interest. Because a majority of its rentals are relatively short-term,
the Company has generally been able to pass on such increased costs through increases in rental rates and selling prices, but there can
be no assurance that the Company will be able to continue to pass on increased costs to customers in the future.
-52-
Off Balance Sheet Transactions
As of December 31, 2015, the Company did not have any “off-balance-sheet arrangements,” as defined in Item 303(a)(4)(ii) of
Regulation S-K.
Subsequent Events
On February 9, 2016, the Company entered into an amendment to the Note Purchase Agreement (“2016 Amendment”) with the
Purchaser. Pursuant to the 2016 Amendment, (i) the issuance period for the shelf notes to be issued and sold pursuant to the Note
Purchase Agreement is extended until the earlier of February 9, 2019 or the termination of the issuance and sale of the shelf notes
upon the 30 days’ prior notice of either PIM or the Company, and (ii) the definition of the “Available Facility Amount,” which is the
aggregate amount of the shelf notes that may be authorized for purchase pursuant to the Note Purchase Agreement was amended to
equal a formula based on: $250 million, minus the aggregate principal amount of the shelf notes then outstanding and purchased
pursuant to the Note Purchase Agreement, minus the shelf notes accepted by the Company for purchase, but not yet purchased, by the
Purchaser pursuant to the Note Purchase Agreement; provided, however, the aggregate amount of the shelf notes purchased by any
corporation or other entity controlling, controlled by, or under common control with, PIM shall not exceed $200 million.
-53-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its 4.03%, 3.68% and
3.84% senior notes due in 2018, 2021 and 2022, respectively, and its revolving lines of credit. Weighted average variable rates are
based on implied forward rates in the yield curve at December 31, 2015. The estimate of fair value of the Company’s fixed rate debt
is based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities. The
table below presents principal cash flows by expected annual maturities, related weighted average interest rates and estimated fair
value for the Company’s Series A, Series B and Series C Senior Notes and the Company’s revolving lines of credit under the
Amended Credit Facility and Sweep Service Facility as of December 31, 2015.
(dollar amounts in thousands)
Revolving lines of credit
Weighted average interest rate
4.03% Series A senior notes due in 2018
Weighted average interest rate
3.68% Series B senior notes due in 2021
Weighted average interest rate
3.84% Series C senior notes due in 2022
Weighted average interest rate
4.03 %
$ — $
3.68 %
$ — $
3.84 %
2017
2016
2018
$ — $221,441 $ — $ — $ — $
—
—
$ 20,000 $ 20,000 $20,000 $ — $ — $
—
4.03% —
—
2.35%
4.03%
—
2019
2020
Thereafter
Total
Estimated
Fair Value
— $ 221,441 $221,441
—
2.35%
— $ 60,000 $ 61,129
4.03%
—
— $ — $ — $ — $ 40,000 $ 40,000 $ 40,557
3.68%
3.68% 3.68% 3.68%
3.68 %
3.68%
— $ — $ — $ — $ 60,000 $ 60,000 $ 58,936
3.84%
3.84% 3.84% 3.84%
3.84 %
3.84%
The Company formed a wholly owned Canadian subsidiary, TRS-RenTelco Inc., in 2004 in conjunction with the TRS
acquisition and a wholly owned Indian subsidiary, TRS-RenTelco India Private Limited, in 2013. The Canadian and Indian
operations of the Company subject it to foreign currency risks (i.e. the possibility that the financial results could be better or worse
than planned because of changes in foreign currency exchange rates). Currently, the Company does not use derivative instruments to
hedge its economic exposure with respect to assets, liabilities and firm commitments denominated in foreign currencies. In 2015, the
Company experienced minimal impact on net income due to foreign exchange rate fluctuations. Although there can be no assurances,
given the size of the Canadian and Indian operations, the Company does not expect future foreign exchange gains and losses to be
significant.
The Company has no derivative financial instruments that expose the Company to significant market risk.
-54-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Report on Internal Control over Financial Reporting
Report on Consolidated Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Page
56
57
57
58
59
60
61
62
63
64
-55-
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for the preparation and integrity of the consolidated financial statements appearing
in our Annual Report filed on Form 10-K. The consolidated financial statements were prepared in conformity with United States
generally accepted accounting principles and include amounts based on management’s estimates and judgments. All other financial
information in this report has been presented on a basis consistent with the information included in the financial statements.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company
maintains a system of internal control that is designed to provide reasonable assurance as to the reliable preparation and presentation
of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.
The Company’s system of internal control over financial reporting is embodied in the Company’s Code of Business Conduct
and Ethics. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal control over
financial reporting is supported by formal policies and procedures, which are reviewed, modified and improved as changes occur in
business conditions and operations.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with
members of management and the independent auditors to review and discuss internal control over financial reporting, as well as
accounting and financial reporting matters. The independent auditors report to the Audit Committee and accordingly have full and free
access to the Audit Committee at any time.
The Company’s management conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2015 based on the criteria set forth in the 2013 Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management has concluded that, as of December
31, 2015, the Company’s internal control over financial reporting was effective based on those criteria.
-56-
Reports of Independent Registered Public Accounting Firm
Report on Internal Control over Financial Reporting
Board of Directors and Shareholders of McGrath RentCorp and Subsidiaries:
We have audited the internal control over financial reporting of McGrath RentCorp and Subsidiaries (the “Company”) as of
December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company as of and for the year ended December 31, 2015, and our report dated February 25,
2016 expressed an unqualified opinion on those financial statements.
/s/ Grant Thornton LLP
San Jose, California
February 25, 2016
-57-
Reports of Independent Registered Public Accounting Firm (Continued)
Report on Consolidated Financial Statements
Board of Directors and Shareholders of McGrath RentCorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of McGrath RentCorp and Subsidiaries (the “Company”) as of
December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of McGrath RentCorp and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated February 25, 2016 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
San Jose, California
February 25, 2016
-58-
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Cash
Accounts receivable, net of allowance for doubtful accounts of $2,087 in 2015 and
$2,038 in 2014
Income taxes receivable
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
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common stock, no par value — authorized 40,000 shares
Issued and outstanding — 23,851 shares as of December 31, 2015
and 26,051 shares as of December 31, 2014
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2015
2014
$
1,103
$
1,167
95,263
11,000
736,875
262,945
310,263
1,310,083
(440,482)
869,601
109,753
28,716
9,465
27,808
1,152,709
$
101,294
—
664,340
261,995
303,303
1,229,638
(403,888)
825,750
108,628
41,424
10,336
27,808
1,116,407
$
381,441
71,942
36,288
283,351
773,022
322,478
71,357
29,139
268,902
691,876
$
$
101,046
278,708
(67)
379,687
1,152,709
$
106,469
318,164
(102)
424,531
1,116,407
$
-59-
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
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
Cost of sales
Total costs of revenues
Gross profit
Selling and administrative expenses
Income from operations
Other income (expense):
Interest expense
Gain on sale of property, plant and equipment
Foreign currency exchange loss
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Shares used in per share calculations:
Basic
Diluted
Cash dividends declared per share
2015
Year Ended December 31,
2014
2013
$
$
$
$
$
273,696 $
73,314
347,010
55,385
2,149
404,544
75,213
54,719
60,936
190,868
36,769
227,637
176,907
99,950
76,957
(10,092 )
—
(488 )
66,377
25,907
40,470 $
$
269,575
64,132
333,707
72,248
2,167
408,122
72,678
48,849
56,946
178,473
47,430
225,903
182,219
96,859
85,360
(9,280)
812
(331)
76,561
30,852
45,709
$
1.60 $
1.59 $
1.77
1.75
$
$
25,369
25,457
1.00 $
25,914
26,175
0.98
$
255,766
53,148
308,914
68,443
2,152
379,509
68,208
40,189
55,017
163,414
47,080
210,494
169,015
88,765
80,250
(8,687)
—
(189)
71,374
27,977
43,397
1.71
1.67
25,433
25,926
0.96
The accompanying notes are an integral part of these consolidated financial statements.
-60-
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Tax benefit (provision)
Comprehensive income
Year Ended December 31,
2015
2014
2013
$
40,470 $
45,709
$
43,397
55
(20 )
40,505 $
(82)
11
45,638
$
(37)
6
43,366
$
The accompanying notes are an integral part of these consolidated financial statements
-61-
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Balance at December 31, 2012
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Excess tax benefit from equity awards
Taxes paid related to net share settlement of stock
awards
Dividends accrued of $0.96 per share
Other comprehensive loss
Balance at December 31, 2013
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Excess tax benefit from equity awards
Taxes paid related to net share settlement of stock
awards
Dividends accrued of $0.98 per share
Other comprehensive loss
Balance at December 31, 2014
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Common stock repurchased
Tax shortfall from equity awards
Taxes paid related to net share settlement of stock
awards
Dividends accrued of $1.00 per share
Other comprehensive gain
Balance at December 31, 2015
Common Stock
Retained
Earnings
Amount
Shares
24,931 $ 85,342 $ 279,396 $
43,397
—
—
3,680
—
—
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
— $ 364,738
43,397
—
3,680
—
826
—
15,067
1,329
—
—
—
—
15,067
1,329
—
—
—
(2,395)
—
—
—
(24,755 )
—
25,757 103,023 298,038
45,709
—
—
3,854
—
—
—
(2,395)
(24,755)
(31)
(31)
(31) 401,030
45,709
—
3,854
—
294
—
1,729
1,822
—
—
—
—
1,729
1,822
—
—
—
(3,959)
—
—
—
(25,583 )
—
26,051 106,469 318,164
40,470
—
—
3,399
—
—
—
(3,959)
(25,583)
(71)
(71)
(102) 424,531
40,470
3,399
—
—
208
(2,408)
—
2,149
(9,119)
(292)
—
(54,834 )
—
—
—
—
—
(25,092 )
—
23,851 $ 101,046 $ 278,708 $
(1,560)
—
—
—
—
2,149
(63,953)
(292)
—
(1,560)
(25,092)
35
35
(67) $ 379,687
The accompanying notes are an integral part of these consolidated financial statements.
-62-
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
2015
Year Ended December 31,
2014
2013
$
40,470 $
45,709
$
43,397
Depreciation and amortization
Provision for doubtful accounts
Share-based compensation
Gain on sale of used rental equipment
Gain on sale of property, plant and equipment
Foreign currency exchange loss
Change in:
Accounts receivable
Income taxes receivable
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred income
Deferred income taxes
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchases of rental equipment
Purchases of property, plant and equipment
Proceeds from sale of used rental equipment
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash Flows from Financing Activities:
Net borrowings (repayments) under bank lines of credit
Principal payments on Series A senior notes
Borrowings under Series B senior notes
Borrowings under Series C senior notes
Proceeds from the exercise of stock options
Excess tax benefit (shortfall) from exercise of stock options
Taxes paid related to net share settlement of stock awards
Repurchase of common stock
Payment of dividends
Net cash provided by (used in) financing activities
Effect of foreign currency exchange rate changes on cash
Net increase (decrease) 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
84,280
2,149
3,399
(11,902 )
—
488
3,882
(11,000 )
12,708
(1,520 )
7,149
14,449
144,552
81,125
1,825
3,854
(15,368)
(812)
331
(15,469)
—
(13,652)
10,662
5,136
19,645
122,986
76,849
2,144
3,680
(13,091)
—
189
2,462
—
(8,265)
6,506
(2,921)
22,693
133,643
(131,037 )
(9,321 )
26,214
—
(114,144 )
(152,197)
(12,740)
32,556
2,501
(129,880)
(132,611)
(11,973)
33,380
—
(111,204)
18,963
(20,000 )
—
60,000
2,149
(292 )
(1,560 )
(63,953 )
(25,779 )
(30,472 )
—
(64 )
1,167
1,103 $
10,041 $
2,498 $
6,019 $
7,280 $
12,475
(20,000)
40,000
—
1,729
1,822
(3,959)
—
(25,551)
6,516
(85)
(463)
1,630
1,167
$
9,074
22,275
6,526
4,942
$
$
$
$
(11,997)
—
—
—
15,067
1,329
(2,395)
—
(24,423)
(22,419)
(2)
18
1,612
1,630
8,813
11,074
6,373
8,533
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
-63-
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
McGrath RentCorp and its wholly-owned subsidiaries (the “Company”) is a California corporation organized in 1979. The
Company is a diversified business to business rental company with four rental divisions; relocatable modular buildings, portable
storage containers, electronic test equipment and liquid and solid containment tanks and boxes. Although the Company’s primary
emphasis is on equipment rentals, sales of equipment occur in the normal course of business. The Company is comprised of four
reportable business segments: modular building and portable storage segment (“Mobile Modular”), electronic test equipment segment
(“TRS-RenTelco”), containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”)
and classroom manufacturing division selling modular classrooms in California (“Enviroplex”).
Principles of Consolidation
The consolidated financial statements include the accounts of McGrath RentCorp and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental billings for periods
extending beyond period end are recorded as deferred income and are recognized when earned. Rental related services revenue is
primarily associated with relocatable modular building and liquid and solid containment tanks and boxes leases. For modular building
leases, rental related services revenue consists of billings to customers for modifications, delivery, installation, additional site-related
work, and dismantle and return delivery. For modular building leases, revenue related to delivery, installation, dismantle and return
delivery are an integral part of the negotiated lease agreement with customers and are recognized on a straight-line basis over the term
of the lease. For liquid and solid containment solutions, rental related services revenue consists of billings for delivery, removal and
cleaning of the tanks and boxes. These revenues are recognized in the period performed.
Sales revenue is recognized upon delivery and installation of the equipment to customers. Certain leases are accounted for as
sales-type 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 revenue is recognized when earned and primarily includes interest income on sales-type leases, rental income on facility
rentals and certain logistics services.
Sales taxes charged to customers are reported on a net basis and are excluded from revenues and expenses.
Depreciation of Rental Equipment
Rental equipment is depreciated on a straight-line basis for financial reporting purposes and on an accelerated basis for income
tax purposes. The costs of major refurbishment of relocatable modular buildings and portable storage containers are capitalized to the
extent the refurbishment significantly adds value to, or extends the life of the equipment. Maintenance and repairs are expensed as
incurred.
The estimated useful lives and residual values of the Company’s rental equipment used for financial reporting purposes are as
follows:
Relocatable modular buildings
Relocatable modular accessories
Portable storage containers
Electronic test equipment and accessories
Liquid and solid containment tanks and boxes and accessories
18 years, 50% residual value
3 to 18 years, no residual value
25 years, 62.5% residual value
1 to 8 years, no residual value
10 to 20 years, no residual value
-64-
Costs of Rental Related Services
Costs of rental related services are primarily associated with relocatable modular building leases and liquid and solid
containment tank and boxes. Modular building leases consist of costs for services to be provided under the negotiated lease agreement
for delivery, installation, modifications, skirting, additional site-related work, and dismantle and return delivery. Costs related to these
services are recognized on a straight-line basis over the term of the lease. Costs of rental related services associated with liquid and
solid containment solutions consists of costs of delivery, removal and cleaning of the tanks and boxes. These costs are recognized in
the period the service is performed.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment
whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key
element in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental
equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair
value. The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its
rental and sale considering current market conditions. Goodwill and identifiable indefinite lived assets are evaluated for potential
impairment annually or when circumstances indicate potential impairment may have occurred. Impairment losses, if any, are
determined based upon the excess of carrying value over the estimated fair value of the asset. There were no impairments of long-
lived assets during the years ended December 31, 2015, 2014 and 2013.
Other Direct Costs of Rental Operations
Other direct costs of rental operations include direct labor, supplies, repairs, insurance, property taxes, license fees and certain
modular lease costs charged to customers in the negotiated rental rate, which are recognized on a straight-line basis over the term of
the lease.
Cost of Sales
Cost of sales in the Consolidated Statements of Income includes the carrying value of the equipment sold and all direct costs
associated with the sale.
Warranty Reserves
Sales of new relocatable modular buildings, portable storage containers, electronic test equipment and related accessories and
liquid and solid containment tanks and boxes not manufactured by the Company are typically covered by warranties provided by the
manufacturer of the products sold. The Company typically provides limited 90-day warranties for certain sales of used rental
equipment and one-year warranties on equipment manufactured by Enviroplex. Although the Company’s policy is to provide reserves
for warranties when required for specific circumstances, the Company has not found it necessary to establish such reserves to date as
warranty costs have not been significant.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized on a straight-line
basis for financial reporting purposes, and on an accelerated basis for income tax purposes. Depreciation expenses for property, plant
and equipment is included in “Selling and administrative expenses” and “Rental related services” in the Consolidated Statements of
Income. Maintenance and repairs are expensed as incurred.
-65-
Property, plant and equipment consist of the following:
(dollar amounts in thousands)
Land
Land improvements
Buildings
Furniture, office and computer equipment
Machinery and service equipment
Less accumulated depreciation
Construction in progress
Estimated
useful life
in years
Indefinite
20 – 50
30
3 – 10
5 – 20
December 31,
2015
2014
40,378 $
42,004
25,520
34,053
28,642
170,597
(61,410 )
109,187
566
109,753 $
38,455
39,715
21,486
32,544
24,454
156,654
(53,503)
103,151
5,477
108,628
$
$
Property, plant and equipment depreciation expense was $8.2 million, $7.6 million and $7.8 million for the years ended
December 31, 2015, 2014 and 2013, respectively. Construction in progress at December 31, 2015 and 2014 consisted primarily of
costs related to acquisition of land and land improvements.
Capitalized Software Costs
The Company capitalizes certain development costs incurred in connection with its internal use software. Costs incurred in the
preliminary stages of development are expensed as incurred. Once an application has reached the development stage, direct internal
and external costs are capitalized until the software is substantially complete and ready for its intended use. These costs generally
include external direct costs of materials and services consumed in the project and internal costs, such as payroll and benefits of those
employees directly associated with the development of the software. Maintenance and training costs are expensed as incurred. The
Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in
additional functionality. Capitalized software costs are included in property, plant and equipment. The Company capitalized $0.6
million and $0.4 million in internal use software during the years ended December 31, 2015 and 2014, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expenses were $2.8 million, $2.4 million and $2.4 million for the
years ended December 31, 2015, 2014 and 2013.
Income Taxes
Income taxes are accounted for using an asset and liability approach. Deferred tax assets and liabilities are recorded for the
effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial
statements. Deferred tax assets and deferred tax liabilities are adjusted to the extent necessary to reflect tax rates expected to be in
effect when temporary differences reverse. Adjustments may be required to deferred tax assets and deferred tax liabilities due to
changes in tax laws and audit adjustments by tax authorities. To the extent adjustments are required in any given period, the
adjustments would be included within the tax provision in the Consolidated Statements of Income.
The Company has not recorded a valuation allowance for its deferred tax assets. A valuation allowance would be established if,
based on the weight of available evidence, management believes that it is more likely than not that some portion or all of a recorded
deferred tax asset would not be realized in future periods.
Goodwill and Intangible Assets
Purchase prices of acquired businesses have been allocated to the assets and liabilities acquired based on the estimated fair
values on the respective acquisition dates. Based on these values, the excess purchase prices over the fair value of the net assets
acquired were allocated to goodwill and other intangible assets. Intangible assets related to customer relationships are amortized over
eleven years. At December 31, 2015 and 2014, goodwill and trade name intangible assets which have indefinite lives totaled $33.5
million.
-66-
The Company assesses potential impairment of its goodwill and intangible assets when there is evidence that events or
circumstances have occurred that would indicate the recovery of an asset’s carrying value is unlikely. The Company also assesses
potential impairment of its goodwill and intangible assets on an annual basis regardless of whether there is evidence of impairment. If
indicators of impairment were to be present in intangible assets used in operations and future discounted cash flows were not expected
to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. The
amount of an impairment loss would be recognized as the excess of the asset’s carrying value over its fair value. Factors the Company
considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired
asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results.
The impairment review of the Company’s goodwill and indefinite lived assets is performed by first assessing qualitative factors
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. In the first step, the fair value of the reporting
unit is compared to its carrying value to determine if the goodwill and intangible assets are impaired. If the fair value of the reporting
unit exceeds the carrying value of the net assets assigned to that unit, then goodwill and intangible assets are not impaired and no
further testing is required. If the carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then the
second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and intangible assets and an
impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the
goodwill and intangible assets.
The Company conducted its annual impairment analysis in the fourth quarter of its fiscal year. The impairment analysis did not
result in an impairment charge for the fiscal years ended 2015, 2014 or 2013. Determining the fair value of a reporting unit is
judgmental and involves the use of significant estimates and assumptions. The Company based its fair value estimates on assumptions
that it believes are reasonable but are uncertain and subject to changes in market conditions.
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 effects of stock options, unvested restricted stock awards and other potentially dilutive securities. The table below presents
the weighted-average common stock used to calculate basic and diluted earnings per share:
(in thousands)
Weighted-average common stock for calculating basic
earnings per share
Effect of potentially dilutive securities from equity-based
compensation
Weighted-average common stock for calculating diluted
earnings per share
2015
Year Ended December 31,
2014
2013
25,369
25,914
25,433
88
261
493
25,457
26,175
25,926
The following securities were not included in the computation of diluted earnings per share as their effect would have been anti-
dilutive:
(in thousands)
Options to purchase common stock
Year Ended December 31,
2015
2014
2013
746
9
20
-67-
In May 2008, the Company’s Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the
Company's outstanding common stock. The Company has in the past made purchases of shares of its common stock from time to time
in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share
repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of
Directors authorized the Company to repurchase an additional 2,000,000 shares of the Company's outstanding common stock. The
amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other
factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of
authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the
repurchase program may be modified, extended or terminated by the board of directors at any time. The following table presents
share repurchase activities during the years ended December 31, 2015 and 2014:
(in thousands, except share and per share amounts)
Number of shares repurchased
Aggregate purchase price
Average price per repurchased shares
Year ended December 31
2015
2,407,974
63,953
26.56
$
$
2014
—
—
—
As of December 31, 2015, 1,592,026 shares remain authorized for repurchase.
Accounts Receivable and Concentration of Credit Risk
The Company’s accounts receivable consist of amounts due from customers for rentals, sales, financed sales and unbilled
amounts for the portion of modular building end-of-lease services earned, which were negotiated as part of the lease agreement.
Unbilled receivables related to end-of-lease services, which consists of dismantle and return delivery of buildings, were $25.0 million
at December 31, 2015 and $21.1 million at December 31, 2014. The Company sells primarily on 30-day terms, individually performs
credit evaluation procedures on its customers on each transaction and will require security deposits from its customers when a
significant credit risk is identified. The Company records an allowance for doubtful accounts in amounts equal to the estimated losses
expected to be incurred in the collection of the accounts receivable. The estimated losses are based on historical collection experience
in conjunction with an evaluation of the current status of the existing accounts. Customer accounts are written off against the
allowance for doubtful accounts when an account is determined to be uncollectable. The allowance for doubtful accounts activity was
as follows:
(in thousands)
Beginning balance, January 1
Provision for doubtful accounts
Write-offs, net of recoveries
Ending balance, December 31
2015
2014
2,038 $
2,149
(2,100 )
2,087 $
2,007
1,825
(1,794)
2,038
$
$
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts
receivable. From time to time, the Company maintains cash balances in excess of the Federal Deposit Insurance Corporation limits.
Fair Value of Financial Instruments
The Company believes that the carrying amounts for cash, accounts receivable, accounts payable and notes payable approximate
their fair values except for fixed rate debt included in notes payable which has an estimated fair value of $160.6 million and $122.9
million compared to the recorded value of $160.0 million and $120.0 million as of December 31, 2015 and 2014, respectively. The
estimates of fair value of the Company’s fixed rate debt are based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities.
Foreign Currency Transactions and Translation
The Company's Canadian subsidiary, TRS-RenTelco Inc., a British Columbia corporation (“TRS-Canada”), functions as a
branch sales office for TRS-RenTelco in Canada. The functional currency for TRS-Canada is the U.S. dollar. Foreign currency
transaction gains and losses of TRS-Canada are reported in the results of operations in the period in which they occur.
The Company’s Indian subsidiary, TRS-RenTelco India Private Limited (“TRS-India”), functions as a rental and sales office for
TRS-RenTelco in India. The functional currency for TRS-India is the Indian Rupee. All assets and liabilities of TRS-India are
-68-
translated into U.S. dollars at period-end exchange rates and all income statement amounts are translated at the average exchange rate
for each month within the year.
Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and
firm commitments as the foreign currency transactions and risks to date have not been significant.
Share-Based Compensation
The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors,
including stock options, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”), based upon estimated fair values.
The fair value of stock options and SARs is estimated on the date of grant using the Black-Scholes option pricing model and for RSUs
based upon the fair market value of the underlying shares of common stock as of the date of grant. The Company recognizes share-
based compensation cost ratably on a straight-line basis over the requisite service period, which generally equals the vesting period.
For performance-based RSUs, compensation costs are recognized when vesting conditions are met. In addition, the Company
estimates the probable number of shares of common stock that will be earned and the corresponding compensation cost until the
achievement of the performance goal is known. The Company records share-based compensation costs in “Selling and administrative
expenses” in the Consolidated Statements of Income. The Company recognizes a benefit from share-based compensation in the
Consolidated Statements of Shareholders’ Equity if an incremental tax benefit is realized. Further information regarding share-based
compensation can be found in “Note 5 –Benefit Plans”.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions in determining reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during each period presented. Actual results could differ from those estimates. The most significant estimates included in
the financial statements are the future cash flows and fair values used to determine the recoverability of the rental equipment and
identifiable definite lived intangible assets carrying value, the various assets’ useful lives and residual values, and the allowance for
doubtful accounts.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers. The objective of this guidance is to establish the principles to report useful information to
users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers. In August 2015, the
FASB issued an update to defer the effective date of this guidance by one year. The guidance in the update is effective for the interim
and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of
this accounting guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Imputation of Interest (Subtopic 835-30). The amendments in this update
require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with the presentation of debt discounts. The guidance in this update does not address
presentation or subsequent measurement of debt issuance cost related to line-of-credit arrangements. In August of 2015, the FASB
issued ASU No. 2015-15, Imputation of Interest (Subtopic 835-30), to add SEC paragraphs pursuant to the SEC Staff Announcement
that the SEC Staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing
the deferred debt issuance cost ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. The amendments are effective for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. The application of this guidance will result in a reclassification of debt financing costs from
prepaid expenses and other assets to a reduction of the specific debt liability, and will not affect the Company’s statement of
operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). The ASU No. 2015-16 requires
that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. The amendment requires that the acquirer record, in the same period’s
financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the
change to the provisional amounts, calculated as if the accounting had been completed on the acquisition date. The amendment
requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded
in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional
amounts had been recognized as of the acquisition date. The provisions of the ASU No. 2015-16 are effective for fiscal years
-69-
beginning after December 15, 2015, including interim periods within those fiscal years. The Company does not expect the adoption of
this accounting guidance to have a significant impact on its consolidated financial statements.
NOTE 2. FINANCED LEASE RECEIVABLES
The Company has entered into sales-type leases to finance certain equipment sales to customers. The lease agreements have a
bargain purchase option at the end of the lease term. The minimum lease payments receivable and the net investment included in
accounts receivable for such leases are as follows:
(in thousands)
Gross minimum lease payments receivable
Less – unearned interest
Net investment in sales type lease receivables
December 31,
2015
2014
$
$
2,745 $
(175 )
2,570 $
3,489
(188)
3,301
As of December 31, 2015, the future minimum lease payments under non-cancelable sales-type leases to be received in 2016
and thereafter are as follows:
(in thousands)
Year Ended December 31,
2016
2017
2018
2019
Total minimum future lease payments
NOTE 3. NOTES PAYABLE
Notes payable consists of the following:
(in thousands)
Unsecured revolving lines of credit
4.03% Series A senior notes due in 2018
3.68% Series B senior notes due in 2021
3.84% Series C senior notes due in 2022
$
$
1,558
1,173
14
—
2,745
December 31,
2015
2014
221,441 $
60,000
40,000
60,000
381,441 $
202,478
80,000
40,000
—
322,478
$
$
As of December 31, 2015, the future minimum payments under the unsecured revolving lines of credit, 4.03% Series A senior
notes due in 2018, 3.68% Series B senior notes due in 2021 and 3.84% Series C senior notes due in 2022 are as follows:
(in thousands)
Year Ended December 31,
2016
2017
2018
2019
2020
2021 and thereafter
$
$
20,000
241,441
20,000
—
—
100,000
381,441
Unsecured Revolving Lines of Credit
In June 2012, the Company entered into an amended and restated credit agreement with a syndicate of banks (the “Amended
Credit Facility”). The five-year facility matures on June 15, 2017 and replaced the Company’s prior $350.0 million unsecured
revolving credit facility. The Amended Credit Facility provides for a $420.0 million unsecured revolving credit facility (which may be
increased to $450.0 million with $30.0 million of additional commitments), which includes a $25.0 million sublimit for the issuance of
-70-
standby letters of credit and a $10.0 million sublimit for swingline loans. Amounts outstanding under the Amended Credit Facility at
December 31, 2015 and 2014 were $218.0 million and $200.0 million, respectively.
In June 2012, the Company entered into a Credit Facility Letter Agreement and a Credit Line Note in favor of MUFG Union
Bank, N.A., extending its line of credit facility related to its cash management services (“Sweep Service Facility”) and increasing the
facility size from $5.0 million to $10.0 million. The Sweep Service Facility matures on the earlier of June 15, 2017, or the date the
Company ceases to utilize MUFG Union Bank, N.A. for its cash management services. Amounts outstanding under the Sweep Service
Facility at December 31, 2015 and 2014 were $3.4 million and $2.5 million, respectively.
At December 31, 2015, under the Amended Credit Facility and Sweep Service Facility, the Company had unsecured lines of
credit that permit it to borrow up to $430.0 million of which $221.4 million was outstanding, and had capacity to borrow up to an
additional $208.6 million. The Amended 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 Amended Credit Facility):
(cid:120)
(cid:120)
(cid:120)
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 December 31, 2015, the actual ratio was 3.85 to 1.
Permit the Consolidated Leverage Ratio of funded debt to EBITDA at any time during any period of four consecutive
fiscal quarters to be greater than 2.75 to 1. At December 31, 2015, the actual ratio was 2.32 to 1.
Permit Tangible Net Worth as of the end of any fiscal quarter of the Company to be less than the sum of (i) $246.1 million
plus (ii) 25% of the Company’s Consolidated Net Income (as defined in the Amended Credit Facility) (but only if a
positive number) for each fiscal quarter ended subsequent to December 31, 2011 plus (iii) 90% of the net cash proceeds
from the issuance of the Company’s capital stock after December 31, 2011. At December 31, 2015, such sum was $304.9
million and the actual Tangible Net Worth of the Company was $342.4 million.
Amounts borrowed under the Amended Credit Facility bear interest at the Company’s option at either: (i) LIBOR plus a defined
margin, or (ii) the Agent bank’s prime rate (“base rate”) plus a margin. The applicable margin for each type of loan is measured based
upon the Consolidated Leverage Ratio at the end of the prior fiscal quarter and ranges from 1.00% to 1.75% for LIBOR loans and 0%
to 0.75% for base rate loans. In addition, the Company pays an unused commitment fee for the portion of the $420.0 million credit
facility that is not used. These fees are based upon the Consolidated Leverage Ratio and range from 0.15% to 0.30%. As of December
31, 2015 and 2014, the applicable margins were 1.75% and 1.50% for LIBOR based loans, respectively, 0.75% and 0.50% for base
rate loans, respectively and 0.30% and 0.25% for unused fees, respectively. Amounts borrowed under the Sweep Service Facility are
based upon the MUFG Union Bank, N.A. base rate plus an applicable margin and an unused commitment fee for the portion of the
$10.0 million facility not used. The applicable base rate margin and unused commitment fee rates for the Sweep Service Facility are
the same as for the Amended Credit Facility. The following information relates to the lines of credit for each of the following periods:
(dollar amounts in thousands)
Maximum amount outstanding
Average amount outstanding
Weighted average interest rate, during the period
Prime interest rate, end of period
4.03% Senior Notes Due in 2018
$
$
Year Ended December 31,
2015
2014
295,588
236,860
$
$
2.35 %
3.50 %
208,894
191,248
2.41%
3.25%
On April 21, 2011, the Company entered into a Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”)
with Prudential Investment Management, Inc. (“PIM”), The Prudential Insurance Company of America and Prudential Retirement
Insurance and Annuity Company (collectively, the “Purchaser”), pursuant to which the Company agreed to sell an aggregate principal
amount of $100.0 million of its 4.03% Series A Senior Notes (the “Series A Senior Notes”) to the Purchaser. The Series A Senior
Notes are an unsecured obligation of the Company, due on April 21, 2018. Interest on these notes is due semi-annually in arrears and
the principal is due in five equal annual installments, with the first payment due on April 21, 2014. At December 31, 2015 and 2014,
the principal balance outstanding under the Series A Senior Notes were $60.0 million and $80.0 million, respectively.
On March 17, 2014, the Company entered into an Amendment to the Note Purchase Agreement (“2014 Amendment”) with the
Purchaser. The 2014 Amendment amended certain terms of the Note Purchase Agreement. Pursuant to the 2014 Amendment, among
other things, the issuance period for additional senior notes (“Shelf Notes”) to be issued and sold pursuant to the Note Purchase
Agreement is extended until the earlier of March 17, 2017 or the termination of the issuance and sale of the Shelf Notes upon the 30
days’ prior notice of either PIM or the Company.
-71-
3.68% Senior Notes Due in 2021
On March 17, 2014, the Company issued and sold to the Purchasers a $40.0 million aggregate principal amount of its 3.68%
Series B Senior Notes (the “Series B Senior Notes”) pursuant to the terms of the Note Purchase Agreement, as amended. The Series B
Senior Notes are an unsecured obligation of the Company, bear interest at a rate of 3.68% per annum and mature on March 17, 2021.
Interest on the Series B Senior Notes is payable semi-annually beginning on September 17, 2014 and continuing thereafter on March
17 and September 17 of each year until maturity. The full net proceeds from the Series B Senior Notes were used for working capital
and other general corporate purposes. At December 31, 2015, the principal balance outstanding under the Series B Senior Notes was
$40.0 million.
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 Note Purchase Agreement, as amended. The Series C
Senior Notes are an unsecured obligation of the Company, 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 full net proceeds from the Series C Senior Notes were used to reduce the
outstanding balance on the Company’s revolving credit line. At December 31, 2015, the principal balance outstanding under the Series
C Senior Notes was $60.0 million.
Among other restrictions, the Note Purchase Agreement, under which the Series A Senior Notes, Series B Senior Notes and
Series C 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):
(cid:120)
(cid:120)
(cid:120)
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 December 31, 2015, the actual ratio was 3.85 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 December 31, 2015, the actual ratio was 2.32 to 1.
Permit Tangible Net Worth, calculated as of the last day of each fiscal quarter, to be less than the sum of (i) $229.0
million, plus (ii) 25% of net income for such fiscal quarter subsequent to December 31, 2010, plus (iii) 90% of the net
cash proceeds from the issuance of the Company’s capital stock after December 31, 2010. At December 31, 2015, such
sum was $304.9 million and the actual Tangible Net Worth of the Company was $342.4 million.
At December 31, 2015, 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, though, significant deterioration in the
Company’s financial performance could impact its ability to comply with these covenants.
NOTE 4. INCOME TAXES
Income before provision for income taxes consisted of the following:
(in thousands)
U.S.
Foreign
2015
Year Ended December 31,
2014
2013
$
$
66,889 $
(512)
66,377 $
76,848 $
(287 )
76,561 $
71,678
(304)
71,374
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The provision for income taxes consisted of the following:
(in thousands)
Current:
U.S. Federal
State
Foreign
Deferred:
U.S. Federal
State
Foreign
Total
2015
Year Ended December 31,
2014
2013
$
$
7,976 $
1,851
1,645
11,472
13,201
1,538
(304)
14,435
25,907 $
7,494 $
2,139
1,572
11,205
17,986
1,927
(266 )
19,647
30,852 $
1,188
1,803
2,217
5,208
21,067
1,818
(116)
22,769
27,977
The reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows:
U.S. federal statutory rate
State taxes, net of federal benefit
Other
2015
Year Ended December 31,
2014
2013
35.0%
4.2
(0.2)
39.0%
35.0 %
4.1
1.2
40.3 %
35.0%
4.1
0.1
39.2%
The following table shows the deferred income taxes related to the temporary differences between the tax bases of assets and
liabilities and the respective amounts included in “Deferred income taxes, net” on the Company’s Consolidated Balance Sheets:
(in thousands)
Deferred tax liabilities:
Accelerated depreciation
Prepaid costs currently deductible
Other
Total deferred tax liabilities
Deferred tax assets:
Accrued costs not yet deductible
Allowance for doubtful accounts
Net operating loss carry forwards and credits
Deferred revenues
Share-based compensation
Total deferred tax assets
Deferred income taxes, net
December 31,
2015
2014
286,618 $
6,997
5,034
298,649
8,638
804
577
1,945
3,334
15,298
283,351 $
272,496
6,358
4,404
283,258
7,463
788
302
1,132
4,671
14,356
268,902
$
$
In 2015 exercises of non-qualified stock options by employees resulted in a tax shortfall of $0.3 million. In 2014 and 2013
exercises of non-qualified stock options by employees resulted in an excess tax benefit of $1.8 million and $1.3 million, respectively.
The net tax benefit was recorded as common stock in conjunction with the proceeds received from the exercise of the stock options.
A deferred U.S. tax liability has not been provided on the undistributed earnings of certain foreign subsidiaries because it is the
Company’s intent to permanently reinvest such earnings. Undistributed earnings of foreign subsidiaries, which have been or are
intended to be permanently reinvested, aggregated approximately $1.9 million and $1.6 million as of December 31, 2015 and 2014,
respectively. As of December 31, 2015, the Company’s foreign net operating losses for tax purposes were $1.8 million. If not
utilized, these carry forwards will begin to expire in 2023.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon
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ultimate settlement with the relevant tax authority. The Company evaluated all of its tax positions for which the statute of limitations
remained open and determined there were no material unrecognized tax benefits as of December 31, 2015 and 2014. In addition, there
have been no material changes in unrecognized benefits during 2015, 2014 and 2013.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax
regulations within each jurisdiction are subject to interpretation of the related tax laws and regulations and require the application of
significant judgment. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2011.
Our income tax returns are subject to examination by federal, state and foreign tax authorities. There may be differing
interpretations of tax laws and regulations, and as a result, disputes may arise with these tax authorities involving the timing and
amount of deductions and allocation of income.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes for all
periods presented. Such interest and penalties were not significant for the years ended December 31, 2015, 2014 and 2013.
NOTE 5. BENEFIT PLANS
Stock Plans
The Company adopted the 2007 Stock Incentive Plan (the “2007 Plan”) effective June 6, 2007, under which 1,875,000 shares of
common stock of the Company, plus the number of shares that remained available for grants of awards under the Company’s 1998
Stock Option Plan (the “1998 Plan”) and those shares that become available as a result of forfeiture, termination, or expiration of
awards previously granted under the 1998 Plan, were reserved for the grant of awards to its employees, directors and consultants to
acquire common stock of the Company. The 2007 Plan is a shareholder approved plan with the initial 1,875,000 share authorization
increased by 815,000 shares in 2009 and 1,500,000 shares in 2012. The 2007 Plan provides for the grant of awards in the form of
stock options, stock appreciation rights, RSUs, the vesting of which may be performance-based or service-based, and other rights and
benefits. Each RSU issued reduces the number of shares of the Company’s common stock available for grant under the 2007 Plan by
two shares. Options under the 2007 Plan are granted at an exercise price of not less than 100% of the fair market value of the
Company's common stock on the date of grant. There were no modifications to the 2007 Plan and no awards classified as liabilities in
the year ended December 31, 2015.
For the years ended December 31, 2015, 2014 and 2013, the share-based compensation expense was $3.4 million, $3.9 million
and $3.7 million, respectively, before provision for income taxes. The Company recorded a tax benefit of approximately $1.3 million,
$1.5 million and $1.4 million, respectively, related to the aforementioned share-based compensation expenses. There was no
capitalized share-based compensation expense in the years ended December 31, 2015, 2014 and 2013. For the years ended December
31, 2015, 2014 and 2013, the share-based compensation expenses, net of taxes, reduced net income by $2.1 million, $2.3 million and
$2.2 million, respectively, or $0.08, $0.09 and $0.09 per diluted share for the three years ended December 31, 2015, 2014 and 2013,
respectively.
Stock Options
As of December 31, 2015, a cumulative total of 7,277,200 shares subject to options have been granted with exercise prices
ranging from $3.47 to $38.89. Of these, options have been exercised for the purchase of 4,854,518 shares, while options for 1,012,032
shares have been terminated, and options for 1,410,650 shares with exercise prices ranging from $15.62 to $38.89 remained
outstanding under the stock plans. Most of these options vest over five years and expire seven and ten years after grant. To date, no
options have been issued to any of the Company’s non-employee advisors. As of December 31, 2015, 843,024 shares remained
available for issuance of awards under the stock plans.
-74-
A summary of the Company’s option activity and related information for the three years ended December 31, 2015 is as
follows:
Balance at December 31, 2012
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2013
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2014
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2015
Exercisable at December 31, 2015
Expected to vest after December 31, 2015
Weighted-
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
(in millions)
Weighted-
average
price
24.37
29.14
24.71
25.20
24.68
32.79
21.55
30.35
27.25
31.69
19.81
29.58
29.91
27.53
31.64
3.82 $
1.89 $
5.53 $
(6.6)
(1.5)
(4.3)
Number of
options
2,838,553 $
192,800
(1,237,341)
(21,950)
1,772,062
203,600
(612,682)
(19,220)
1,343,760
456,200
(270,650)
(118,660)
1,410,650 $
662,345 $
673,475 $
The intrinsic value of stock options at any point in time is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Company’s common stock. The aggregate intrinsic value of options exercised and sold
under the Company’s stock option plans was $5.7 million, $8.4 million and $11.5 million for the years ended December 31, 2015,
2014 and 2013, respectively, determined as of the date of option exercise. As of December 31, 2015, there was approximately $4.5
million of total unrecognized compensation cost related to unvested share-based compensation option arrangements granted under the
Company’s stock plans, which is expected to be recognized over a weighted-average period of 2.7 years.
The following table indicates the options outstanding and options exercisable by exercise price with the weighted-average
remaining contractual life for the options outstanding and the weighted-average exercise price at December 31, 2015:
Exercise price
$15 – 20
20 – 25
25 – 30
30 – 35
35 – 40
$15 – 40
Options Outstanding
Weighted-
average
remaining
contractual life
(Years)
Number(cid:3)
outstanding at
December 31,
2015
Options Exercisable
Weighted-
average
grant date
value
Number
exercisable at
December 31,
2015
Weighted-
average
grant date
value
2,400
153,855
508,795
736,200
9,400
1,410,650
0.17 $
1.22
2.04
5.59
4.96
3.82 $
2,400 $
15.62
23.86 151,965
28.98 424,960
79,480
32.04
3,540
37.83
29.91 662,345 $
15.62
23.86
29.01
32.62
37.90
27.53
The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of share-based compensation at the date
of grant, which requires the use of accounting judgment and financial estimates, including estimates of the expected term option
holders will retain their vested stock options before exercising them, the estimated volatility of the Company’s stock price over the
expected term and the expected number of options that will be forfeited prior to the completion of their vesting requirements.
Application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation
amounts recognized in the Consolidated Statements of Income.
-75-
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model using the
following weighted-average assumptions:
Expected term (in years)
Expected volatility
Expected dividend yields
Risk-free interest rates
2015
Year Ended December 31,
2014
2013
5.0
31.1%
3.2%
1.6%
5.0
40.5 %
3.0 %
1.5 %
5.0
50.3%
3.3%
0.8%
The Company monitors option exercise behavior to determine the appropriate homogenous groups for estimation purposes.
Currently, the Company’s option activity is separated into two categories: directors and employees. The expected term of the options
represents the estimated period of time until exercised and is based on historical experience, giving consideration to the option terms,
vesting schedules and expectations of future behavior. Expected stock volatility is based on historical stock price volatility of the
Company and the risk-free interest rates are based on U.S. Treasury yields in effect on the date of the option grant for the estimated
period the options will be outstanding. The expected dividend yield is based upon the current dividend annualized as a percentage of
the grant exercise price.
The weighted average grant date fair value per share was $6.60, $9.17 and $9.87 during the years ended December 31, 2015,
2014 and 2013, respectively.
Restricted Stock Units
The following table summarizes the activity of the Company’s RSUs, which includes service-based and performance-based
awards, for the three years ended December 31, 2015:
Balance at December 31, 2012
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2013
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2014
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2015
Weighted-
average
grant Date
fair value
Aggregate
intrinsic
value
(in millions)
Number
of shares
262,820
150,300
(87,840)
(4,300)
320,980
118,864
(120,721)
(7,540)
311,583
79,300
(89,915)
(80,320)
$
220,648
28.22
26.89
24.98
29.24
28.47
30.85
27.30
30.34
29.78
31.86
27.97
31.35
30.70 $
5.6
Performance-based RSUs vest over five years, with 60% of the shares immediately vesting after three years when the
performance criteria has been determined to have been met and 20% of the remaining shares vesting annually at the anniversary of the
performance determination date, subject to continuous employment of the participant. There were 66,651 performance-based RSUs
expected to vest as of December 31, 2015. Service-based RSUs have been issued to the Company’s directors and generally vest over
twelve to fourteen months. There were 18,000 service-based RSUs expected to vest as of December 31, 2015. No forfeitures are
currently expected.
Share-based compensation expense for RSUs for the year ended December 31, 2015, 2014 and 2013 was $1.7 million, $2.3
million and $2.0, respectively. As of December 31, 2015, the total unrecognized compensation expense related to unvested RSUs was
$1.1 million and is expected to be recognized over a weighted-average period of 2.4 years.
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Employee Stock Ownership and 401(k) Plans
On August 1, 2012 the Company amended and restated the Employee Stock Ownership Plan, the 401(k) Plans and the
Enviroplex 401(k) Plans (“Plans”) to become the McGrath RentCorp Employee Stock Ownership and 401(k) Plan (the “KSOP”). In
conjunction with this, the Plans’ assets totaling approximately $16.4 million in cash were concurrently transferred into the KSOP. The
KSOP plan provides that each participant may annually contribute an elected percentage of his or her salary, not to exceed the
statutory limit. The Company, at its discretion, may make matching contributions. Contributions are expensed in the year approved by
the Board of Directors. Dividends on the Company’s stock held by the KSOP are treated as ordinary dividends and, in accordance
with existing tax laws, are deducted by the Company in the year paid. For the year ended December 31, 2015 dividends deducted by
the Company were $0.3 million, which resulted in a tax benefit of approximately $0.1 million in 2015.
At December 31, 2015, the KSOP held 339,640 shares, or less than 2% of the Company’s total common shares outstanding.
These shares are included in basic and diluted earnings per share calculations.
NOTE 6. SHAREHOLDERS’ EQUITY
In May 2008, the Company’s Board of Directors authorized the Company to repurchase an aggregate of 2,000,000 shares of the
Company's outstanding common stock. The Company has in the past made purchases of shares of its common stock from time to time
in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share
repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of
Directors authorized the Company to repurchase an additional 2,000,000 shares of the Company's outstanding common stock. The
amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other
factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of
authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the
repurchase program may be modified, extended or terminated by the board of directors at any time. During the twelve months ended
December 31, 2015, the Company repurchased 2,407,974 shares of common stock for an aggregate repurchase price of $64.0 million,
or an average price of $26.56 per share. There were no repurchases of common stock during the twelve months ended December 31,
2014. As of December 31, 2015, 1,592,026 shares remain authorized for repurchase under this authorization.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under various operating leases. Most of the lease agreements provide the Company with
the option of renewing its lease at the end of the lease term, at the fair rental value. In most cases, management expects that in the
normal course of business, facility leases will be renewed or replaced by other leases. Minimum payments under these leases,
exclusive of property taxes and insurance, are as follows:
(in thousands)
Year Ended December 31,
2016
2017
2018
Thereafter
$
$
1,269
874
709
—
2,852
Rent expense was $3.5 million, $3.4 million and $3.1 million in 2015, 2014 and 2013, respectively.
The Company is involved in various lawsuits and routine claims arising out of the normal course of its business. The Company
maintains insurance coverage for its operations and employees with appropriate aggregate, per occurrence and deductible limits as the
Company reasonably determines necessary or prudent with current operations and historical experience. The major policies include
coverage for property, general liability, auto, directors and officers, health, and workers’ compensation insurances. The Company
records a provision for a liability when it believes that it is both probable that a liability has been incurred and the amount can be
reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The Company reviews
these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal
counsel, and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are
beyond the Company’s control. In the opinion of management, there was not at least a reasonable possibility that the ultimate amount
of liability not covered by insurance, if any, under any pending litigation and claims, individually or in the aggregate, will have a
material adverse effect on the financial position or operating results of the Company.
-77-
NOTE 8. INTANGIBLE ASSETS
Intangible assets consist of the following:
(dollar amounts in thousands)
Trade name
Customer relationships
Less accumulated amortization
Estimated
useful life
(In years)
Indefinite
11
December 31,
2015
2014
5,700 $
9,611
15,311
(5,846 )
9,465 $
5,700
9,611
15,311
(4,975)
10,336
$
$
Intangible assets with finite useful lives are amortized over their respective useful lives. Amortization expense for the years
ended December 31, 2015, 2014 and 2013 were $0.9 million, $0.8 million and $0.8 million, respectively. Based on the carrying
values at December 31, 2015 and assuming no subsequent impairment of the underlying assets, the annual amortization is expected to
be $0.9 million in 2016 through 2019 and $0.2 million in 2020.
NOTE 9. RELATED PARTY TRANSACTIONS
The Company acquired liquid and solid containment tanks totaling $13.6 million during the year ended December 31, 2013
from Sabre Manufacturing, LLC (“Sabre”), which was controlled by the President of Adler Tanks until August 16, 2013 when Sabre
was sold to an unrelated party. Amounts due to Sabre at December 31, 2013 were zero. There were no related party transactions in the
years ended December 31, 2015 and 2014, or amounts owed to related parties at such dates.
NOTE 10. SEGMENT REPORTING
FASB guidelines establish annual and interim reporting standards for an enterprise’s operating segments and related disclosures
about its products, services, geographic areas and major customers. In accordance with these guidelines the Company’s four
reportable segments are Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex. Management focuses on several key measures
to evaluate and assess each segment’s performance including rental revenue growth, gross margin, and income before provision for
income taxes. Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are
generally allocated to Mobile Modular, TRS-RenTelco and Adler Tanks, based on their pro-rata share of direct revenues. Interest
expense is allocated amongst Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental
equipment at cost, goodwill, intangible assets, accounts receivable, deferred income and customer security deposits. The Company
does not report total assets by business segment. Summarized financial information for the years ended December 31, 2015, 2014 and
2013, for the Company’s reportable segments is shown in the following tables:
Segment Data(cid:3)
(dollar amounts in thousands)
Year Ended December 31,
2015
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 operation
Interest expense (income) allocation
Income before provision for income taxes
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(cid:3)
Average utilization 2(cid:3)
Mobile
Modular
TRS-
RenTelco
Adler
Tanks
Enviroplex 1
Consolidated
$
$ 115,986
45,616
22,682
184,284
19,246
78,771
46,496
32,275
(5,363)
26,912
79,622
53,796
736,875
529,483
$
89,208
3,055
22,754
115,017
39,974
47,836
22,930
24,906
(2,194)
22,224
44,316
21,784
262,945
102,191
68,502
24,643
1,486
94,631
15,993
47,397
27,494
19,903
(2,729 )
17,174
9,440
17,955
310,263
237,927
76.9%
75.8%
58.7%
60.5%
49.7 %
58.3 %
—
10,612
10,612
—
2,903
3,030
(127)
194
67
—
1,728
$ — $ 273,696
73,314
57,534
404,544
75,213
176,907
99,950
76,957
(10,092)
66,377
133,378
95,263
— 1,310,083
869,601
—
-78-
Segment Data (Continued)(cid:3)
(dollar amounts in thousands)
Year Ended December 31,
2014
Rental revenues
Rental related services revenues
Sales and other revenues
Total revenues
Depreciation of rental equipment
Gross profit
Selling and administrative expenses
Income from operation
Interest expense (income) allocation
Income before provision for income taxes
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(cid:3)
Average utilization 2(cid:3)
2013
Rental revenues
Rental related services revenues
Sales and other revenues
Total revenues
Depreciation of rental equipment
Gross profit
Selling and administrative expenses
Income from operation
Interest expense (income) allocation
Income before provision for income taxes
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(cid:3)
Average utilization 2(cid:3)
1
Mobile
Modular
TRS-
RenTelco
Adler
Tanks
Enviroplex 1
Consolidated
$
$
$
$
96,457
35,263
29,855
161,575
16,536
63,455
42,069
21,386
4,768
16,959
82,792
46,797
664,340
473,960
$
99,020
3,331
25,951
128,302
40,935
60,249
23,736
36,513
2,075
34,383
45,158
28,849
261,995
105,729
74,098
25,538
1,152
100,788
15,207
53,452
27,424
26,028
2,618
23,605
20,652
21,031
303,303
246,061
75.0%
72.3%
59.8%
60.4%
63.9 %
62.9 %
$
$
82,503
28,891
21,267
132,661
14,459
50,423
36,488
13,935
4,318
9,617
52,953
37,163
592,391
415,366
$ 102,101
3,095
29,857
135,053
39,953
63,520
24,542
38,978
2,156
36,633
52,625
27,328
267,772
109,988
71,162
21,162
1,616
93,940
13,796
51,076
24,644
26,432
2,419
24,013
31,023
21,915
284,005
241,656
70.7%
68.3%
58.2%
62.7%
57.7 %
64.2 %
— $ 269,575
64,132
—
74,415
17,457
408,122
17,457
72,678
—
182,219
5,063
96,859
3,630
85,360
1,433
9,280
(181)
76,561
1,614
148,602
—
101,294
4,617
— 1,229,638
825,750
—
— $ 255,766
53,148
—
70,595
17,855
379,509
17,855
68,208
—
169,015
3,996
88,765
3,091
80,250
905
8,687
(206)
71,374
1,111
136,601
—
87,650
1,244
— 1,144,168
767,010
—
Gross Enviroplex sales revenues were $11,530, $19,017 and $17,859 in 2015, 2014 and 2013, respectively, which includes inter-segment sales to Mobile
Modular of $918, $1,560 and $4, which have been eliminated in consolidation.
Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment excluding new equipment inventory
and accessory equipment. The average utilization for the period is calculated using the average costs of rental equipment.
2
No single customer accounted for more than 10% of total revenues during 2015, 2014 and 2013. Revenue from foreign country
customers accounted for 5%, 5% and 7% of the Company’s revenues for the same periods, respectively.
-79-
NOTE 11. QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarterly financial information for each of the two years ended December 31, 2015 is summarized below:
(in thousands, except per share amounts)
Operations Data
Rental revenues
Total revenues
Gross profit
Income from operations
Income before provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Dividends declared per share
Shares used in per share calculations:
Basic
Diluted
Balance Sheet Data
Rental equipment, net
Total assets
Notes payable
Shareholders’ equity
Operations Data
Rental revenues
Total revenues
Gross profit
Income from operations
Income before provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Dividends declared per share
Shares used in per share calculations:
Basic
Diluted
Balance Sheet Data
Rental equipment, net
Total assets
Notes payable
Shareholders’ equity
$
$
$
$
$
$
$
$
First
Second
65,502 $
90,188
39,087
13,875
11,316
6,846
67,305 $
96,026
40,918
16,465
14,033
8,490
2015
Third
70,195 $
Fourth
Year
113,048 105,282
46,756
21,467
18,523
11,518
50,146
25,150
22,505
13,616
70,694 $ 273,696
404,544
176,907
76,957
66,377
40,470
0.26 $
0.26 $
0.250 $
0.33 $
0.32 $
0.250 $
0.54 $
0.54 $
0.250 $
0.48 $
0.48 $
0.250 $
1.60
1.59
1.00
26,091
26,276
26,142
26,273
25,334
25,408
23,932
24,015
25,369
25,457
$ 839,078 $ 856,489 $ 864,277 $ 869,601 $ 869,601
1,112,056 1,132,750 1,149,095 1,152,709 1,152,709
381,441
379,687
382,113 381,441
389,464 379,687
337,177
426,823
320,923
425,848
First
Second
62,430 $
87,560
38,638
15,227
12,936
7,871
65,809 $
95,745
42,079
18,239
16,794
10,205
2014
Third
69,642 $
Fourth
Year
113,025 111,792
52,204
26,796
24,222
13,887
49,298
25,098
22,609
13,746
71,694 $ 269,575
408,122
182,219
85,360
76,561
45,709
0.31 $
0.30 $
0.245 $
0.39 $
0.39 $
0.245 $
0.53 $
0.53 $
0.245 $
0.54 $
0.53 $
0.245 $
1.77
1.75
0.98
25,789
26,230
25,912
26,220
25,953
26,152
25,999
26,206
25,914
26,175
$ 775,875 $ 795,532 $ 817,898 $ 825,750 $ 825,750
1,021,613 1,051,764 1,089,130 1,116,407 1,116,407
322,478
424,531
322,280 322,478
414,519 424,531
307,000
406,439
288,081
401,563
-80-
NOTE12. SUBSEQUENT EVENT
On February 9, 2016, the Company entered into an amendment to the Note Purchase Agreement (“2016 Amendment”) with the
Purchaser. Pursuant to the 2016 Amendment, (i) the issuance period for the shelf notes to be issued and sold pursuant to the Note
Purchase Agreement is extended until the earlier of February 9, 2019 or the termination of the issuance and sale of the shelf notes
upon the 30 days’ prior notice of either PIM or the Company, and (ii) the definition of the “Available Facility Amount,” which is the
aggregate amount of the shelf notes that may be authorized for purchase pursuant to the Note Purchase Agreement was amended to
equal a formula based on: $250 million, minus the aggregate principal amount of the shelf notes then outstanding and purchased
pursuant to the Note Purchase Agreement, minus the shelf notes accepted by the Company for purchase, but not yet purchased, by the
Purchaser pursuant to the Note Purchase Agreement; provided, however, the aggregate amount of the shelf notes purchased by any
corporation or other entity controlling, controlled by, or under common control with, PIM shall not exceed $200 million.
-81-
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. The Company’s management under the supervision and with the
participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) is responsible for establishing
and maintaining “disclosure controls and procedures” (as defined in rules promulgated under the Securities Exchange Act of 1934, as
amended) for the Company. Based on their evaluation the CEO and CFO have concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2015.
Changes in Internal Control over Financial Reporting. During the last quarter of the Company’s fiscal year ended December
31, 2015, there were no changes in the Company’s internal control that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the
CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.
Management’s Assessment of Internal Control. Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2015, is discussed in the Management’s Report on Internal Control Over Financial
Reporting included on page 57.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by Grant
Thornton LLP, the Company’s independent registered public accounting firm, and its report is included in this Annual Report on
Form 10-K.
ITEM 9B. OTHER INFORMATION.
None.
-82-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to McGrath RentCorp’s definitive Proxy Statement with
respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016, which will be filed with the Securities and Exchange
Commission no later than April 29, 2016.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to McGrath RentCorp’s definitive Proxy Statement with
respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016, which will be filed with the Securities and Exchange
Commission no later than April 29, 2016.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATEDSTOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference to McGrath RentCorp’s definitive Proxy Statement with
respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016, which will be filed with the Securities and Exchange
Commission no later than April 29, 2016.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to McGrath RentCorp’s definitive Proxy Statement with
respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016, which will be filed with the Securities and Exchange
Commission no later than April 29, 2016.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to McGrath RentCorp’s definitive Proxy Statement with
respect to its 2016 Annual Meeting of Shareholders to be held on June 8, 2016, which will be filed with the Securities and Exchange
Commission no later than April 29, 2016.
-83-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Index of documents filed as part of this report:
PART IV
1.
The following Consolidated Financial Statements of McGrath RentCorp are included in Item 8.
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Report on Internal Control over Financial Reporting
Report on Consolidated Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the Years Ended December 31, 2015, 2014 and
2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2015, 2014 and 2013
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2015,
2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and
2013
Notes to Consolidated Financial Statements
2.
3.
Financial Statement Schedules. None
Exhibits. See Index of Exhibits on page 86 of this report.
Page of this report
56
57
58
59
60
61
62
63
64
Schedules and exhibits required by Article 5 of Regulation S-X other than those listed are omitted because they are not required,
are not applicable, or equivalent information has been included in the consolidated financial statements, and notes thereto, or
elsewhere herein.
-84-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 25, 2016
MCGRATH RENTCORP
by: /s/ Dennis C. Kakures
DENNIS C. KAKURES
Chief Executive Officer, President and Director
(Principal Executive Officer)
by: /s/ Keith E. Pratt
KEITH E. PRATT
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
by: /s/ David M. Whitney
DAVID M. WHITNEY
Vice President and Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
in the capacities and on the dates indicated.
Name
/s/ William J. Dawson
WILLIAM J. DAWSON
/s/ Elizabeth A. Fetter
ELIZABETH A. FETTER
/s/ Robert C. Hood
ROBERT C. HOOD
/s/ Dennis C. Kakures
DENNIS C. KAKURES
/s/ M. Richard Smith
M. RICHARD SMITH
/s/ Dennis P. Stradford
DENNIS P. STRADFORD
/s/ Ronald H. Zech
RONALD H. ZECH
Title
Director
Director
Director
Date
February 25, 2016
February 25, 2016
February 25, 2016
Chief Executive Officer, President and Director
February 25, 2016
Director
Director
February 25, 2016
February 25, 2016
Chairman of the Board
February 25, 2016
-85-
Number
Description
Method of Filing
3.1
Articles of Incorporation of McGrath RentCorp.
3.1.1
Amendment to Articles of Incorporation of McGrath RentCorp.
3.1.2
Amendment to Articles of Incorporation of McGrath RentCorp.
Amended and Restated Bylaws
Filed as exhibit 19.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1988 (filed August 14, 1988), and incorporated
herein by reference.
Filed as exhibit 3.1 to the Company’s Registration Statement on Form S-1
(filed March 28, 1991 Registration No. 33-39633), and incorporated herein
by reference.
Filed as exhibit 3.1.2 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1997 (filed March 31, 1998), and
incorporated herein by reference.
Filed as exhibit 3.3 to the Company’s Current Report on Form 8-K (filed
June 17, 2014) and incorporated herein by reference.
3.2
4.1
4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
4.1.6
4.1.7
4.1.8
4.2
4.2.1
4.2.2
4.3
Note Purchase and Private Shelf Agreement between the Company and
Prudential Investment Management, Inc., as placement agent, dated June 2,
2004.
Filed as exhibit 10.12 to the Company’s Current Report on Form 8-K (filed
June 10, 2004), and incorporated herein by reference.
Amendment to Note Purchase and Private Shelf Agreement between the
Company and Prudential Investment Management, Inc., as placement
agent, effective as of July 11, 2005.
Filed as exhibit 10.19 to the Company’s Current Report on Form 8-K (filed
July 15, 2005), and incorporated herein by reference.
Amendment to Note Purchase and Private Shelf Agreement between the
Company and Prudential Investment Management, Inc., as placement
agent, effective as of October 20, 2008.
Filed as exhibit 4.1.2 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009 (filed February 26, 2010), and
incorporated herein by reference.
Multiparty Guaranty between Enviroplex,
Inc., Mobile Modular
Management Corporation, Prudential Investment Management, Inc., and
such other parties that become Guarantors thereunder, dated June 2, 2004.
Filed as exhibit 10.13 to the Company’s Current Report on Form 8-K (filed
June 10, 2004), and incorporated herein by reference.
Release from Obligations (TRS-RenTelco Inc.) related to the Note
Purchase and Private Shelf Agreement dated June 2, 2004 by and among
Investment
the Company, certain parties
Management, Inc.
thereto, and Prudential
Filed as exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q
(filed August 3, 2006) and incorporated herein by reference.
Indemnity, Contribution
and Subordination Agreement between
Enviroplex, Inc., Mobile Modular Management Corporation, the Company
and such other parties that become Guarantors thereunder, dated June 2,
2004.
Filed as exhibit 10.14 to the Company’s Current Report on Form 8-K (filed
June 10, 2004), and incorporated herein by reference.
Amendment to Note Purchase and Private Shelf Agreement between the
Company and Prudential Investment Management, Inc., as placement agent
effective August 4, 2009.
Filed as exhibit 4.1 to the Company’s Quarterly Report on form 10-Q (filed
August 6, 2009), and incorporated herein by reference.
Amendment, dated as of March 17, 2014, to the Note Purchase and Private
Shelf Agreement dated as of April 21, 2011 among the Company,
Prudential Investment Management, Inc., The Prudential Insurance
Company of America and Prudential Retirement Insurance and Annuity
Company.
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed
March 20, 2014) and incorporated herein by reference.
Amendment, dated as of February 9, 2016, to the Note Purchase and
Private Shelf Agreement dated as of April 21, 2011 among the Company,
Prudential Investment Management, Inc., The Prudential Insurance
Company of America and Prudential Retirement Insurance and Annuity
Company, as amended on March 17, 2014.
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed
February 11, 2016) and incorporated herein by reference.
Credit Agreement dated as of May 14, 2008 among the Company, Bank of
America, N.A. as Administrative Agent, Swing line Lender and L/C Issuer,
and the Other Lenders Party thereto.
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed
May 15, 2008), and incorporated herein by reference.
Guaranty dated as of May 14, 2008 among each Subsidiary of the
Company in favor of Bank of America, N.A., in its capacity as the
administrative agent for the Lenders
Filed as exhibit 10.2 to the Company’s Current Report on Form 8-K (filed
May 15, 2008), and incorporated herein by reference.
Amendment and Waiver to Credit Agreement dated March 11, 2011,
between the Company, Bank of America, N.A. as Administrative Agent,
Swing Line Lenders and L/C Issuers, and the Other Lenders Party Thereto.
Filed as exhibit 10.7 to the Company’s Quarterly Report on form 10-Q for
the quarter ended March 31, 2011 (filed May 5, 2011), and incorporated
herein by reference.
$5,000,000 Committed Credit Facility Letter Agreement between the
Company and Union Bank of California, N.A., dated as of June 26, 2008.
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed
June 27, 2008) and incorporated herein by reference.
-86-
Number
Description
Method of Filing
4.3.1
$5,000,000 Credit Line Note, dated June 26, 2008.
Filed as exhibit 10.2 to the Company’s Current Report on Form 8-K (filed
June 27, 2008), and incorporated herein by reference.
4.4
4.5
4.5.1
4.5.2
4.6
4.6.1
10.1
Note Purchase and Private Shelf Agreement between the Company and
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed
Prudential Investment Management, Inc., dated April 21, 2011.
April 21, 2011), and incorporated herein by reference.
Amended and Restated Credit Agreement dated as of June 15, 2012 among
the Company, Bank of America, N.A. as Administrative Agent, Swing Line
Lender and L/C Issuer, and The Other Lenders Party thereto. (Filed as
exhibit 10.1 to the Company’s Current Report on Form 8-K (filed June 18,
2012), and incorporated herein by reference.)
Filed as exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2012 (filed July 31, 2012) and incorporated
herein by reference.
Guaranty dated as of June 15, 2012 among each Subsidiary of the
Company in favor of Bank of America, N.A., in its capacity as the
administrative agent for the Lenders. (Filed as exhibit 10.2 to the
Company’s Current Report on Form 8-K (filed June 18, 2012), and
incorporated herein by reference.)
Filed as exhibit 4.2.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2012 (filed July 31, 2012) and incorporated
herein by reference.
First Amendment to Amended and Restated Credit Agreement dated as of
August 24, 2015 among the Company, Bank of America, N.A. as
Administrative Agent, Swing Line Lender and L/C Issuer, and The Other
Lenders Party thereto.
Filed as exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2015 (filed October 29, 2015) and
incorporated herein by reference
$10,000,000 committed Credit Facility Letter Agreement between the
Company and Union Bank, N.A., dated as of June 15, 2012. (Filed as
exhibit 10.3 to the Company’s Current Report on Form 8-K (filed June 18,
2012), and incorporated herein by reference.)
Filed as exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2012 (filed July 31, 2012) and incorporated
herein by reference.
$10,000,000 Credit Line Note, dated June 15, 2012, in favor of Union
Bank, N.A. (Filed as exhibit 10.4 to the Company’s Current Report on
Form 8-K (filed June 18, 2012), and incorporated herein by reference.
Filed as exhibit 4.3.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2012 (filed July 31, 2012) and incorporated
herein by reference.
McGrath RentCorp 1998 Stock Option Plan as amended and restated on
November 22, 2002.
Filed as exhibit 10.2 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2002 (filed March 20, 2003), and
incorporated herein by reference.
10.1.1
Exemplar Incentive Stock Option for Employees Under the 1998 Stock
Option Plan.
10.1.2
Exemplar Non-Qualified Stock Option for Directors under the 1998 Stock
Option Plan.
Filed as exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (filed November 12, 1998), and
incorporated herein by reference.
Filed as exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (filed November 12, 1998), and
incorporated herein by reference.
10.2
Exemplar Form of
the Directors, Officers and Other Agents
Indemnification Agreements.
Filed as exhibit 10.3 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2001 (filed March 18, 2002), and
incorporated herein by reference.
10.3
McGrath RentCorp Employee Stock Ownership Plan, as amended and
restated on December 31, 2008.
10.3.1
McGrath RentCorp Employee Stock Ownership Trust Agreement, as
amended and restated on December 31, 2008.
10.4
McGrath RentCorp 2007 Stock Incentive Plan.
10.4.1
Form of 2007 Stock Incentive Plan Stock Option Award and Agreement.
Form of 2007 Stock Incentive Plan Non-Qualified Stock Option Award and
Form of 2007 Stock Incentive Plan Stock Appreciation Right Award and
10.4.2
10.4.3
10.4.4
Agreement.
Agreement.
Filed as exhibit 10.3 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009 (filed February 26, 2010), and
incorporated herein by reference.
Filed as exhibit 10.3.1 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009 (filed February 26, 2010), and
incorporated herein by reference.
Filed as exhibit 10.12 to the Company's Quarterly Report on from 10-Q for
the quarter ended June 30, 2007 (filed August 2, 2007), and incorporated
herein by reference.
Filed as exhibit 10.12.1 to the Company's Quarterly Report on from 10-Q
for the quarter ended June 30, 2007 (filed August 2, 2007), and
incorporated herein by reference.
Filed as exhibit 10.12.2 to the Company's Quarterly Report on from 10-Q
for the quarter ended June 30, 2007 (filed August 2, 2007), and
incorporated herein by reference.
Filed as exhibit 10.4.3 to the Company’s Quarterly Report on form 10-Q
for the quarter ended March 31, 2010 (filed May 6, 2010), and incorporated
herein by reference.
Form of 2007 Stock Incentive Plan Restricted Stock Unit Award and
Agreement.
-87-
Filed as exhibit 10.4.4 to the Company’s Quarterly Report on form 10-Q
for the quarter ended March 31, 2010 (filed May 6, 2010), and incorporated
herein by reference.
Number
Description
Method of Filing
10.5
McGrath RentCorp Employee Stock Ownership and 401(k) Plan
Filed as exhibit 4.5 to the Company’s Registration Statement on Form S-8
(filed August 10, 2012) and incorporated herein by reference.
McGrath RentCorp Change in Control Severance Plan and Summary Plan
Filed as exhibit 10.7 to the Company's Quarterly Report on from 10-Q for
the quarter ended June 30, 2013 (filed July 31, 2013), and incorporated
herein by reference.
10.6
21.1
23
31.1
Description
List of Subsidiaries.
Written Consent of Grant Thornton LLP.
Filed herewith.
Filed herewith.
Certification of Chief Executive Officer Pursuant to Section 302 of the
Filed herewith.
Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the
Filed herewith.
Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the
Furnished herewith.
Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the
Furnished herewith.
Sarbanes-Oxley Act of 2002.
101
The following materials from McGrath RentCorp’s annual Report on Form
10-K for the year ended December 31, 2015, formatted in XBRL
(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.
-88-
Stock Transfer Agent:
Computershare Trust Company, N. A.
250 Royall Street
Canton, MA 02021
(800) 962-4284
www.computershare.com
Investor Relations:
Next Level Investor Relations, LLC
1752 Wexford Way
Vienna, VA 22182-2151
e-mail: investor@mgrc.com
Auditors:
Grant Thornton LLP
150 Almaden Blvd.
San Jose, CA 95113
General Counsel:
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
Web Sites:
Corporate: *
www.mgrc.com
Modular Buildings:
www.mobilemodular.com
Portable Storage:
www.mobilemodularcontainers.com
Electronic Test Equipment:
www.trs-rentelco.com
Enviroplex:
www.enviroplex.com
Adler Tanks:
www.adlertankrentals.com
(cid:13) Visit the Investor Relations section of
our web site for upcoming conference
call and other investor information
Corporate Information
Officers:
Offices:
Dennis C. Kakures
President and Chief Executive Officer
Joseph F. Hanna
Senior Vice President, Chief Operating Officer
Keith E. Pratt
Senior Vice President, Chief Financial Officer
Randle F. Rose
Senior Vice President, Chief Administrative
Officer and Secretary
David M. Whitney
Vice President, Controller and Principal
Accounting Officer
Kay Dashner
Vice President, Human Resources
Philip B. Hawkins
Vice President and Division Manager,
Mobile Modular
John P. Skenesky
Vice President and Division Manager,
TRS-RenTelco
Kristina Van Trease
Vice President, Mobile Modular Portable
Storage
Michael B. Buckland
Vice President, Adler Tank Rentals, LLC
Glenn S. Owens
President, Enviroplex, Inc.
Directors:
William J. Dawson
Chief Financial Officer
Adamas Pharmaceuticals, Inc.
Elizabeth A. Fetter
Former President and Chief Executive Officer
Symmetricom, Inc.
Robert C. Hood
Former Executive Vice President and Chief
Financial Officer, Excite, Inc.
Dennis C. Kakures
President and Chief Executive Officer
M. Richard Smith
Former Senior Vice President
Bechtel Group, Inc.
Dennis P. Stradford
Former Chief Executive Officer
Nomis Solutions, Inc.
Ronald H. Zech
Chairman of the Board
McGrath RentCorp
San Francisco
Corporate Offices
Modular and Adler Sales and Inventory Center
5700 Las Positas Road
Livermore, CA 94551
(925) 606-9200
Los Angeles
Modular and Adler Sales and Inventory Center
11450 Mission Boulevard
Mira Loma, CA 91752
(951) 360-6600
Houston
Modular Sales and Inventory Center
4445 East Sam Houston Parkway South
Pasadena, TX 77505
(281) 487-9222
Orlando
Modular and Adler Sales and Inventory Center
1100 State Hwy 559
Auburndale, FL 33823
(863) 965-3700
Charlotte
Modular Sales Office
4301-C Stuart Andrew Blvd.
Charlotte, NC 28217
(704) 519-4000
Atlanta
Modular Sales Office
3300 Hamilton Mill Road, #102
Burford, GA 30519
(678) 714-0744
Dallas
Electronics Sales and Inventory Center
1830 West Airfield Drive
DFW Airport, TX 75261
(972) 456-4000
Montreal
Electronics Sales Office
90 Brunswick Blvd, Dollard-des-Ormeaux
Quebec, Canada H9B 2C5
(514) 683-9400
Bangalore
Electronic Sales Office
The Millenia Tower B – 3rd Floor Unit 301
#1 & 2 Murphy Road, Ulsor
Bangalore 560008 India
91-8067644444
Enviroplex, Inc.
Classroom Manufacturing Subsidiary
4777 E. Carpenter Road
Stockton, CA 95215
(209) 466-8000
Adler Tank Rentals, LLC
Liquid and Solid Containment Sales and
Inventory Center:
2751 Aaron Street
Deer Park, TX 77536
(281) 479-5675