UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-13292
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.)
Title of each class
Common Stock
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:
Trading Symbol(s)
MGRC
Securities registered pursuant to Section 12(g) of the Act:
None
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ 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. ☐ Yes ☒ 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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition
of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b)
of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2023 (based upon the closing sale price of the registrant’s common stock as reported on
the NASDAQ Global Select Market on June 30, 2023): $2,264,372,153.
As of February 20, 2024, 24,496,233 shares of Registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to
be filed pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Annual Report on Form 10-K, which, in either case, will
be filed no later than 120 days after December 31, 2023.
Exhibit index appears on page 95.
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 the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, regarding McGrath
RentCorp’s (the “Company’s”) expectations, strategies, prospects or targets are forward looking statements, including statements about (1) our
expectations around the effect of the proposed acquisition of us by WillScot Mobile Mini, and (2) our belief that we will continue to be able to negotiate
general bank lines of credit and issue senior notes adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from
sales of rental equipment. These forward-looking statements also can be identified by the use of forward-looking terminology such as “anticipates”,
“believes”, “continues”, “could”, “estimates”, “expects”, “intends”, “may”, “plan”, “predict”, “project”, or “will”, or the negative of these terms or
other comparable terminology.
Management cautions that forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that
could cause our actual results to differ materially from those projected in such forward-looking statements. Further, our future business, financial condition
and results of operations could differ materially from those anticipated by such forward-looking statements and are subject to risks and uncertainties as set
forth under “Risk Factors” in this Form 10-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 three rental divisions: relocatable modular buildings, portable storage
containers and electronic test equipment. Although the Company’s primary emphasis is on equipment rentals, sales of equipment occur in the normal
course of business. At December 31, 2023, the Company was comprised of four reportable business segments: (1) its modular building segment (“Mobile
Modular”); (2) its portable storage container segment (“Portable Storage”); (3) its electronic test equipment segment (“TRS-RenTelco”); and (4) its
classroom manufacturing business selling modular buildings used primarily as classrooms in California (“Enviroplex”).
On February 1, 2023, the Company completed the sale of its former liquid and solid containment segment (“Adler Tanks”), to Ironclad
Environmental Solutions, Inc., a portfolio company of Kinderhook Industries, for a cash sale price of $268.0 million. The consolidated financial statements
present the historical financial results of the former Adler Tanks segment as discontinued operations for all periods presented. On the same date, the
Company acquired Vesta Housing Solutions Holdings, Inc. (“Vesta Modular”), a portfolio company of Kinderhook Industries, that was a leading provider
of temporary and permanent modular space solutions, for a cash purchase price of $437.2 million, subject to certain adjustments. The financial results of
Vesta Modular were a part of the Mobile Modular segment since February 1, 2023.
Proposed Acquisition by WillScot Mobile Mini
On January 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WillScot Mobile Mini Holdings
Corp., a Delaware corporation (“WillScot Mobile Mini”), Brunello Merger Sub I, Inc., a California corporation and a direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub I”), and Brunello Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub II”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub I
will merge with and into the Company (the “First-Step Merger”), with the Company surviving the First-Step Merger and, immediately thereafter, the
Company will merge with and into Merger Sub II (the “Second-Step Merger” and together with the First-Step Merger, the “Transaction”), with Merger Sub
II surviving the
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Second-Step Merger as a wholly owned subsidiary of WillScot Mobile Mini. Each of the parties to the Merger Agreement intends that the Transaction will
be treated as a single integrated transaction that qualifies as a “reorganization” within the meaning of Section 368(a) of the U.S. Internal Revenue Code of
1986, as amended. Consummation of the Transaction is subject to the approval of the Company’s shareholders, the receipt of required regulatory approvals,
and satisfaction or waiver of other customary closing conditions. The First-Step Merger and the Second-Step Merger will be consummated on the same day.
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”),
each share of common stock, no par value, of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective
Time, other than shares of Company Common Stock owned by WillScot Mobile Mini or any subsidiary of WillScot Mobile Mini or the Company, and
shares held by shareholders who did not vote in favor of the Transaction (or consent thereto in writing) and who are entitled to demand and properly
demands appraisal of such shares, will be automatically converted into the right to receive either (1) $123 in cash (the “Per Share Cash Consideration”) or
(2) 2.8211 (the “Exchange Ratio”) shares of validly issued, fully paid and nonassessable shares of common stock, par value $0.0001, of WillScot Mobile
Mini (the “WillScot Mobile Mini Common Stock”) (the “Per Share Stock Consideration” together with the Per Share Cash Consideration, the “Merger
Consideration”), as determined pursuant to the election and allocation procedures set forth in the Merger Agreement. The Company’s shareholders will
have the opportunity to elect to receive either the Per Share Cash Consideration or the Per Share Stock Consideration in respect of their Company Common
Stock, provided that 60% of the Company Common Stock will be converted into the cash consideration and 40% of the Company Common Stock will be
converted into the stock consideration.
The consummation of the Transaction is subject to certain closing conditions, including (i) the approval of the Company’s shareholders, (ii) the
expiration or termination of all waiting periods applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott Rodino Antitrust
Improvements Act of 1976 (the “HSR Act,” and such expiration or termination, the “Antitrust Approval”), (iii) the absence of any order by any
governmental authorities or other legal restraint or prohibition preventing the consummation of the transactions contemplated by the Merger Agreement,
(iv) the effectiveness of the registration statement to be filed by WillScot Mobile Mini with SEC relating to the registration of shares of WillScot Mobile
Mini Common Stock to be issued to the Company’s shareholders pursuant to the Merger Agreement and (v) other customary conditions specified in the
Merger Agreement. The parties have submitted their respective filings under the HSR Act with the U.S. Department of Justice and the Federal Trade
Commission as contemplated by the Merger Agreement. The closing of the Transaction is not subject to any financing condition.
For additional information regarding the Transaction, please refer to our current report on Form 8-K and Amendment No. 1 on Form 8-K/A, each
filed with the U.S. Securities and Exchange Commission on January 29, 2024.
Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this
Form 10-K assume the continuation of the Company as a public company.
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:
•
•
•
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.
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, portable storage containers
("containers") have an estimated life of twenty-five years compared to a typical rental term of three to twelve months and 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.
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•
•
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 equipment. For modulars the original investment is recovered in
approximately four years, in approximately three years for containers and approximately three years for electronic test equipment.
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. Container asset management requires selecting and purchasing
quality products and making ongoing repair and maintenance investments. Steel containers have no technical obsolescence. 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.
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, marketing, information technology and operating
and accounting systems.
Human Capital Management
As of December 31, 2023, the Company had 1,204 employees, of whom 133 were primarily administrative and executive personnel, with 677, 180,
128 and 86 in the operations of Mobile Modular, Portable Storage, 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.
The Company believes its employees are key to its success and it is committed to all of its employees’ engagement, training and career
development, and personal and professional growth. The Board of Directors also receives regular updates from senior management on matters relating to
the Company’s strategy for the recruitment, retention and development of the Company’s employees. The Company provides training in technical,
operational and leadership skills, and places special emphasis on safety, effective communications, customer service, and employee development.
Additionally, the Company offers employees a tuition reimbursement program whereby the employee may receive reimbursement for tuition and fees for
undergraduate or graduate level academic courses at an accredited two or four year college or university that may help employees improve performance in
their current job or prepare them for advancement.
Government Regulations
We are subject to certain environmental, transportation, anti-corruption, import controls, health and safety, privacy and other laws and regulations in
locations in which we operate. Our activity in jurisdictions in which we operate is additionally subject to anti-bribery laws and regulations, such as the US
Foreign Corrupt Practices Act of 1977, which prevent companies and their officers, employees and agents from making payments to officials and public
entities of foreign countries to facilitate obtaining new contracts. We are also subject to laws and regulations that govern and impose liability for activities
that may have adverse environmental effects, including discharges into air and water, and handling and disposal of hazardous substances and waste. Our
motor vehicles and related units are subject to regulation in certain states under motor vehicle and similar registrations. While we incur costs in our
business to comply with these laws and regulations, management does not believe that the costs of compliance with these various governmental regulations
is material to our business and financial condition.
Available Information
We make the Company’s Securities and Exchange Commission (“SEC”) filings available 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 through the SEC’s website at www.sec.gov.
We have a Code of Business Conduct and Ethics which applies to all directors, officers and employees. Copies of this code can be obtained at our
website www.mgrc.com. Any waivers to the Code of Business Conduct and Ethics and any amendments to such
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code applicable to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer or persons performing similar functions, will be
posted on our web site.
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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. During 2023, Mobile
Modular purchased 30% 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 operates from regional sales and inventory centers serving large geographic areas. These 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 approximately 2% of rental equipment, and has been, on average, 14 years old
with sale proceeds above its net book value.
Competitive Strengths
Strong Industry Position – Mobile Modular has a leading modular building fleet in the United States. Rental units for temporary classroom and other
educational space needs are an important industry segment and the Company believes Mobile Modular is a leading supplier in California and Florida, and a
significant supplier in 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 40 plus years during which Mobile Modular has competed in the modular rental industry, it has
developed expertise that delivers value to customers. 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 allow it to drive
greater efficiency and pass the benefits to customers. 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 Modular’s buildings are the best maintained in the industry. The
Company depreciates its modular buildings over an 18 year estimated useful life
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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 business segment is for temporary classroom and other educational space needs of
public and private schools, colleges and universities in California, Florida, Georgia, Louisiana, Maryland, North Carolina, South Carolina, Texas, 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 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 primarily 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, 2023, Mobile Modular owned 40,382 new or previously rented modulars, with an aggregate cost of $1,291.1 million including
accessories, or an average cost per unit of $31,972. 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, 2023, fleet utilization was 79.4% and
average fleet utilization during 2023 was 79.7%.
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Sales
In addition to operating its rental fleet, Mobile Modular sells modulars to customers. These sales may arise out of its marketing efforts for the rental
fleet and from existing equipment already on rent or from specific requests for new buildings for a permanent need. The Company has a dedicated team
that focuses on these custom sale opportunities. Such sales can be of either new or used units from the rental fleet, which permits some turnover of older
units. During 2023 Mobile Modular’s largest sale represented approximately 4% of Mobile Modular’s sales, 3% 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. Some of our competitors in the modular building leasing industry,
have a greater range of products and services, greater financial and marketing resources, larger customer bases, and greater name recognition than we have.
In addition, a number of other smaller companies operate regionally throughout the country and have a stronger local presence in those places. Mobile
Modular operates primarily in California, Colorado, Florida, Georgia, Louisiana, Maryland, North Carolina, the Pacific Northwest, South Carolina, Texas,
Virginia 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.
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, Georgia, Louisiana, Maryland, North Carolina, the Pacific Northwest, South
Carolina, Texas, 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 three years, that rentals and sales to these schools constitute:
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Rentals and Sales to Public Schools (K-12) as a Percentage of Total Rental and Sales Revenues
Percentage of:
Modular Rental Revenues (Mobile Modular)
Modular Sales Revenues (Mobile Modular & Enviroplex)
Modular Rental and Sales Revenues (Mobile Modular & Enviroplex)
1
Consolidated Rental and Sales Revenues
2023
26%
30%
27%
18%
2022
30%
43%
35%
21%
2021
34%
50%
40%
24%
1.
2.
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 from continuing operations.
During the year ended December 31, 2023, the Company determined that the Portable Storage segment met the criteria for separate segment reporting and the Company divested its
Adler Tanks segment. As a result of these changes, the rental and sales to public schools as a percentage of total rental and sales revenues for 2022 and 2021, have been restated to
present the Mobile Modular and Enviroplex results from continuing operations only.
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. There is no
certainty on the timing of the bond sales and it could take additional years before projects funded by these bonds generate meaningful demand for
relocatable classrooms.
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PORTABLE STORAGE CONTAINERS
Description
Portable Storage’s rental inventory is comprised of steel containers used to provide a temporary storage solution that is delivered to the customer’s
location and addresses the need for secure, temporary storage with immediate access to the unit. The containers are comprised of the following products:
•
•
Storage containers, which consist of new and used steel shipping containers certified under International Organization for Standardization
(“ISO”) standards, that provide a flexible, low cost alternative to warehousing, while offering greater security, convenience and immediate
accessibility. Storage containers are made from weather-resistant corrugated steel and are 8 feet wide and available in lengths ranging from 8
to 53 feet, with 20-foot and 40-foot length containers being the most common.
Office containers are either modified or specifically manufactured containers that provide self-contained office space with maximum design
flexibility. Office containers are often referred to as ground level offices (“GLOs”). GLOs provide the advantage of ground level
accessibility and high security.
Competitive Strengths
Strong Industry Position - The Company believes that Portable Storage is one of the largest participants in the temporary portable storage rental
industry in North America. Portable Storage has a national reach from branches serving the West, Pacific Northwest, Northeast, Mid-Atlantic, Southeast
and Midwest.
Expertise and Customer Service – The Company believes that Portable Storage has highly experienced operating management and branch
employees. The Company believes that Portable Storage provides a superior level of customer service due to its strong relationship building skills, quality
of fleet, driver development program and the quality of its responsiveness.
Asset Management – The Company believes that Portable Storage markets high quality, well-constructed and well-maintained rental products. The
Company depreciates its containers over a 25-year estimated useful life to 62.5% residual value. We believe that if maintained, older containers 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, competitors’ product availability and expected equipment returns.
Market
The portable storage container rental market in the U.S. has a large and diverse number of market segments including construction, retail,
commercial and industrial, energy and petrochemical, manufacturing, education and healthcare.
The container rental products may be utilized throughout the U.S. and are not subject to any local or regional construction code or approval
standards.
Rentals
Portable Storage rents its storage and office containers typically for rental periods of one to twelve months, although in some instances, rental terms
can be over a year or longer. Monthly rental rates typically are between 2% and 4% of the equipment’s original acquisition cost. At December 31, 2023,
Portable Storage owned 42,210 containers with an aggregate cost of $236.1 million or an average cost per unit of $5,594. Utilization is calculated each
month by dividing the cost of the rental equipment on rent by the total cost of rental equipment, excluding new and accessory equipment. Utilization was
71.5% at December 31, 2023 and averaged 77.3% during the year.
Seasonality
Rental activity may vary depending upon the extent of retail activity that typically occurs during the fourth quarter and the impact inclement weather
may have on construction activity.
Competition
The portable storage container rental industry is highly competitive. Some of our competitors may be larger than we are, have greater financial and
other resources than we have, are more geographically diverse than we are and have greater name recognition among customers than we do. Portable
Storage also competes against local companies that may have longer operating histories and a strong local presence. 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. Portable Storage competes
with these companies based upon product
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availability, product quality, price and service. Portable Storage may encounter increased competition from existing competitors or from new entrants in
the future.
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ELECTRONIC TEST EQUIPMENT
Description
TRS-RenTelco rents and sells electronic test equipment nationally and internationally from two facilities located on the grounds of the Dallas Fort
Worth International Airport in Grapevine, Texas (the “Dallas facility”) and Dollard-des-Ormeaux, Canada (the “Montreal 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. As of December 31, 2023, the original cost of electronic test equipment inventory was comprised of
80% general purpose electronic test equipment and 20% 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, Rhode & Schwarz and
Tektronix, a division of Fortive 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, Viavi Solutions and Fluke Networks, a division of Fortive 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
Strong Industry Position - 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
International 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 9001-2015 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
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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 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, and, to a limited extent, other countries. TRS-RenTelco
attracts customers through its outside sales force, website at www.TRSRenTelco.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, 2023, TRS-RenTelco had an electronic test equipment rental inventory including accessories with an aggregate cost of $377.6
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 55.9% as of December 31, 2023 and averaged 58.9% 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 20% to 22% of total annual gross profit for our electronics division. For 2023,
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 2023, approximately 18% of the electronic
test equipment revenues were derived from sales. The largest electronic test equipment sale during 2023 represented 7% 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 sales 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, 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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For segment information regarding the Company’s four reportable business segments: Mobile Modular, Portable Storage, TRS-RenTelco and
Enviroplex, see “Note 15. Segment Reporting” to the audited Consolidated Financial Statements of the Company included in “Item 8. Financial Statements
and Supplementary Data.”
REPORTABLE SEGMENTS
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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.
RISKS RELATED TO THE PROPOSED ACQUISITION BY WILLSCOT MOBILE MINI:
There are material uncertainties and risks associated with the proposed Transaction, including the timing of the consummation of the Transaction,
which may adversely affect our business and ongoing operations, financial condition and results of operations, employees, customers,
shareholders, other parties and business prospects, and a failure to complete the Transaction on the terms reflected in the Merger Agreement, if at
all, could have a material and adverse effect on our business, financial condition, results of operations, cash flows and stock price.
•
The announcement and pendency of the proposed Transaction may adversely affect our business, financial condition and results of
operations.
•
On January 28, 2024, we entered into the Merger Agreement with WillScot Mobile Mini. Uncertainty about the effect of the
proposed Transaction on our employees, customers, shareholders and other parties may have an adverse effect on our business,
financial condition and results of operation regardless of whether the proposed Transaction is completed. The risks to our business
include the following, all of which could be exacerbated by a delay in the completion of the proposed Transaction:
•
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•
•
•
•
•
the impairment of our ability to attract, retain, and motivate our employees, including key personnel;
the diversion of significant management time and resources towards the completion of the proposed Transaction;
difficulties maintaining relationships with customers, suppliers, and other business partners;
delays or deferments of certain business decisions by our customers, suppliers, and other business partners;
the inability to pursue alternative business opportunities or make appropriate changes to our business because the Merger
Agreement requires us to use reasonable best efforts to conduct our business in the ordinary course of business and not
engage in certain kinds of transactions prior to the completion of the proposed Transaction;
litigation relating to the proposed Transaction and the costs related thereto; and
the incurrence of significant costs, expenses, and fees for professional services and other transaction costs in connection
with the proposed Transaction.
Additionally, in approving the Merger Agreement, our Board of Directors considered a number of factors and potential benefits, including the
fact that the Transaction consideration to be received by holders of our common stock represented an approximate 10% premium over the
Company’s closing stock price of $111.75 on January 26, 2024, the last full trading day prior to the announcement of the proposed Transaction. If
the Transaction is not completed, neither we nor the holders of our common stock may realize this benefit of the Transaction.
•
Failure to consummate the proposed Transaction within the expected timeframe or at all could have a material adverse impact on our
business, financial condition and results of operations.
There can be no assurance that the proposed Transaction will be consummated. The consummation of the proposed Transaction
is subject to certain regulatory approvals and customary closing conditions. The obligation of each party to consummate the
Transaction is also conditioned upon the other party’s representations and warranties being true and correct to the extent specified in
the Merger Agreement and the other party having performed in all material respects its obligations under the Merger Agreement. There
can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all. The Merger Agreement also
includes customary termination provisions for both the Company and WillScot Mobile Mini, and we may be required to pay WillScot
Mobile Mini a termination fee equal to $120 million in certain specified circumstances, including, among other circumstances, if
WillScot Mobile Mini terminates the Merger Agreement following a Company Adverse Recommendation Change prior to receipt of
Company Shareholder Approval (each as defined in the Merger Agreement) or (ii) the Company terminates the Merger Agreement to
enter into an alternative acquisition agreement in respect of a Superior Proposal (as defined in the Merger Agreement). If we are
required to make this payment, doing so may materially adversely affect our business, financial condition and results of operations.
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There can be no assurance that a remedy will be available to us in the event of a breach of the Merger Agreement by WillScot
Mobile Mini or its affiliates or that we will wholly or partially recover for any damages incurred by us in connection with the proposed
Transaction. A failed transaction may result in negative publicity and a negative impression of us among our customers or in the
investment community or business community generally. Furthermore, any disruptions to our business resulting from the
announcement and pendency of the proposed Transaction, including any adverse changes in our relationships with our customers,
partners, suppliers and employees, could continue or accelerate in the event of a failed transaction. In addition, if the proposed
Transaction is not completed, and there are no other parties willing and able to acquire the Company at a price of $123.00 per share or
higher, on terms acceptable to us, the share price of our common stock will likely decline to the extent that the current market price of
our common stock reflects an assumption that the proposed Transaction will be completed. Also, we have incurred, and will continue
to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed
Transaction, for which we will have received little or no benefit if the proposed Transaction is not completed. Many of these fees and
costs will be payable by us even if the proposed Transaction is not completed and may relate to activities that we would not have
undertaken other than to complete the proposed Transaction.
•
•
Prior to the completion of the Transaction or the termination of the Merger Agreement in accordance with its terms, we are
prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us and our
shareholders.
After the date of the Merger Agreement and prior to the Effective Time, the Merger Agreement restricts us from taking
specified actions without the consent of WillScot Mobile Mini (which consent may not be unreasonably withheld, conditioned or
delayed) and requires that our business be conducted in all material respects in the ordinary course of business. These restrictions may
prevent us from making appropriate changes to our businesses or organizational structures or from pursuing attractive business
opportunities that may arise prior to the completion of the Transaction and could have the effect of delaying or preventing other
strategic transactions. Adverse effects arising from the pendency of the Transaction could be exacerbated by any delays in
consummation of the Transaction or termination of the Merger Agreement.
The Transaction, including uncertainty regarding the Transaction, may cause customers, suppliers, distributors or strategic partners
to delay or defer decisions, which could negatively affect our business and adversely affect our ability to effectively manage our
business.
The Transaction will be consummated only if certain conditions are met. Many of the conditions are outside of our control, and
both we and WillScot Mobile Mini also have the right to terminate the Merger Agreement in certain circumstances. Accordingly, there
may be uncertainty regarding the completion of the Transaction. This uncertainty may cause customers, suppliers, distributors,
strategic partners or others that deal with us to delay or defer entering into contracts with us or making other decisions concerning us
or seek to change or cancel existing business relationships, which could negatively affect our business. Any delay or deferral of those
decisions or changes in existing agreements could have a material adverse effect on our business, regardless of whether the Transaction
is ultimately completed.
•
The Transaction may cause difficulty in attracting, motivating and retaining employees.
Our current and prospective employees may experience uncertainty about their future role with the Company until strategies
with regard to these employees are announced or executed, which may impair our ability to attract, retain and motivate key
management, operational and customer-facing employees and other personnel prior to the Transaction. If we are unable to retain and
replace personnel, we could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-
how, and unanticipated additional recruitment and training costs.
•
The Merger Agreement limits our ability to pursue alternatives to the Transaction and may discourage other companies from trying
to acquire us for greater consideration than what WillScot Mobile Mini has agreed to pay.
The Merger Agreement contains provisions that make it more difficult for us to sell our business to a company other than
WillScot Mobile Mini. These provisions include a general prohibition on us soliciting any acquisition proposal or offer for a competing
transaction. To date, no party has made an acquisition proposal following the execution of the Merger Agreement. If we terminate the
Merger Agreement in connection with our Board of Directors’ authorization for us to enter into a definitive agreement to consummate
an alternative transaction contemplated by a Superior Proposal, we will be required to pay a termination fee of $120 million. We may
also be required to pay the $120 million termination fee if we or WillScot Mobile Mini terminate the Merger Agreement under certain
other circumstances specified in the Merger Agreement. These provisions might discourage a third party that has an interest in
acquiring all or a significant part of the Company from considering or proposing an acquisition, even if the party were prepared to pay
consideration with a higher per share cash or market value than the Merger Consideration, or
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might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of
the added expense of the termination fee that may become payable in certain circumstances.
•
Stockholder litigation could result in substantial costs and may delay or prevent the Transaction from being completed.
In connection with the announcement of the Transaction, as is common in the context of mergers and acquisitions of publicly-
traded companies, we (along with our directors and officers) may attract lawsuits seeking to enjoin us from proceeding with or
consummating the Transaction, or seeking to have the Transaction rescinded after its consummation. Defending against such claims,
even those without merit, could result in substantial costs and divert management’s time and resources, which may negatively impact
our financial condition and adversely affect our business and results of operations. Such claims could prevent or delay the
consummation of the Transaction, including through an injunction, and result in additional costs to us. The ultimate resolution of any
such lawsuit cannot be predicted, and an adverse ruling in any such lawsuit may cause the Transaction to be delayed or not to be
completed, which could cause us not to realize some or all of the anticipated benefits of the Transaction.
RISKS RELATED TO OUR STRATEGY AND OPERATION:
Our future operating results may fluctuate, fail to match past performance or fail to meet expectations, which may result in a decrease in our stock
price.
Our operating results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors.
Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of a number of factors,
some of which are beyond our control including but not limited to:
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•
•
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•
•
•
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•
•
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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;
supply chain delays or disruptions;
our equipment mix, availability, utilization and pricing;
inflation in the cost of materials, labor and new rental equipment;
the mix, by state and country, of our revenues, personnel and assets;
rental equipment impairment from excess, obsolete or damaged equipment;
movements in interest rates or tax rates;
changes in, and application of, accounting rules;
changes in the regulations applicable to our business operations; and
claims and litigation matters.
As a result of these factors, our historical financial results are not necessarily indicative of our future results or stock price.
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Our stock price has fluctuated and may continue to fluctuate in the future, which may result in a decline in the value of your investment in our
common stock.
The market price of our common stock fluctuates on the NASDAQ Global Select Market and is likely to be affected by a number of factors
including but not limited to:
•
•
•
•
•
•
•
•
our operating performance and the performance of our competitors, and in particular any variations in our operating results or dividend rate
from our stated guidance or from investors’ expectations;
any changes in general conditions in the global economy, the industries in which we operate or the global financial markets;
investors’ reaction to our press releases, public announcements or filings with the SEC;
the stock price performance of our competitors or other comparable companies;
any changes in research analysts’ coverage, recommendations or earnings estimates for us or for the stocks of other companies in our
industry;
any sales of common stock by our directors, executive officers and our other large shareholders, particularly in light of the limited trading
volume of our stock;
any merger and acquisition activity that involves us or our competitors; and
other announcements or developments affecting us, our industry, customers, suppliers or competitors.
In addition, in recent years the U.S. stock market has experienced significant price and volume fluctuations. These fluctuations are often unrelated
to the operating performance of particular companies. Additionally, the most recent global credit crisis adversely affected the prices of most publicly traded
stocks as many stockholders became more willing to divest their stock holdings at lower values to increase their cash flow and reduce exposure to such
fluctuations. These broad market fluctuations and any other negative economic trends may cause declines in the market price of our common stock and
may be based upon factors that have little or nothing to do with our Company or its performance, and these fluctuations and trends could materially reduce
our stock price.
Our ability to retain our executive management and to recruit, retain and motivate key qualified employees is critical to the success of our
business.
If we cannot successfully recruit and retain qualified personnel, our operating results and stock price may suffer. We believe that our success is
directly linked to the competent people in our organization, including our executive officers, senior managers and other key personnel, and in particular, Joe
Hanna, our Chief Executive Officer. Personnel turnover can be costly and could materially and adversely impact our operating results and can potentially
jeopardize the success of our current strategic initiatives. We need to attract and retain highly qualified personnel to replace personnel when turnover
occurs, as well as add to our staff levels as growth occurs. Our business and stock price likely will suffer if we are unable to fill, or experience delays in
filling open positions, or fail to retain key personnel.
Failure by third parties to manufacture and deliver our products to our specifications or on a timely basis may harm our reputation and financial
condition.
We depend on third parties to manufacture our products even though we are able to purchase products from a variety of third-party suppliers. In the
future, we may be limited as to the number of third-party suppliers for some of our products. Although in general, we make advance purchases of some
products to help ensure an adequate supply, currently we do not have any long-term purchase contracts with any third-party supplier. We may experience
supply problems as a result of financial or operating difficulties or failure of our suppliers, or shortages and discontinuations resulting from product
obsolescence or other shortages or allocations by our suppliers. Unfavorable economic conditions may also adversely affect our suppliers or the terms on
which we purchase products. In the future, we may not be able to negotiate arrangements with third parties to secure products that we require in sufficient
quantities or on reasonable terms. If we cannot negotiate arrangements with third parties to produce our products or if the third parties fail to produce our
products to our specifications or in a timely manner, our reputation and financial condition could be harmed.
We are subject to information technology system failures, network disruptions and breaches in data security which could subject us to liability,
reputational damage or interrupt the operation of our business.
We rely upon our information technology systems and infrastructure for our business. We sustained an immaterial cybersecurity attack in 2021
involving ransomware that impacted certain of our systems but was unsuccessful in its ability to disrupt our network. Our investigation revealed that an
unauthorized third party copied some personal information relating to certain current and former employees, directors, contractor workers and their
dependents and certain other persons. Upon detection, we promptly undertook steps
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to address the incident, restored network systems and resumed normal operations. The attack did not result in any material disruption to our operations or
ability to service our customers and did not affect our financial performance.
In the future, we could experience additional breaches of our security measures resulting in the theft of confidential information or reputational
damage from industrial espionage attacks, malware or other cyber-attacks, which may compromise our system infrastructure or lead to data leakage, either
internally or at our third-party providers. Similarly, additional data privacy breaches by those who access our systems may pose a risk that sensitive data,
including intellectual property, trade secrets or personal information belonging to us, our employees, customers or other business partners, may be exposed
to unauthorized persons or to the public.
The immaterial breach of our information technology system that we suffered in 2021 and any future breaches could subject us to reputational
damage. Cyber-attacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. We expend
significant resources to minimize the risk of security breaches, including deploying additional personnel and protection technologies, training employees
annually, and engaging third-party experts and contractors. Significant and increasing investments of time and resources by management and Board have
been, and will continue to be, required to anticipate and address cybersecurity risks and incidents. However, given that the techniques used to obtain
unauthorized access or to sabotage systems change frequently, and often are not identified until they are launched against a target, we may be unable to
anticipate these techniques or implement adequate preventative measures in time to stop a cyber incident. Thus, there can be no assurance that our efforts
to protect our data and information technology systems will prevent future breaches in our systems (or that of our third-party providers). Such breaches
could adversely affect our business and result in financial and reputational harm to us, theft of trade secrets and other proprietary information, legal claims
or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties.
Disruptions in our information technology systems or failure to protect these systems against security breaches could adversely affect our business
and results of operations. Additionally, if these systems fail, become unavailable for any period of time or are not upgraded, this could limit our
ability to effectively monitor and control our operations and adversely affect our operations.
Our information technology systems facilitate our ability to transact business, monitor and control our operations and adjust to changing market
conditions. We sustained an immaterial cybersecurity attack in 2021 involving ransomware that impacted certain of our systems, but was unsuccessful in
its ability to disrupt our network. Upon detection, we promptly undertook steps to address the incident, restored network systems and resumed normal
operations. Any future cybersecurity attack causing disruption in our information technology systems or the failure of these systems to operate as expected
could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively transact business, monitor
and control our operations and adjust to changing market conditions in a timely manner.
As part of our business, we develop, receive and retain confidential data about our company and our customers. In addition, because of recent
advances in technology and well-known efforts on the part of computer hackers and cyber-terrorists to breach data security of companies, we face risks
associated with failure to adequately protect critical corporate, customer and employee data, which could adversely impact our customer relationships, our
reputation, and even violate privacy laws.
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.
During 2023, the Company acquired Vesta Modular, a portfolio company of Kinderhook Industries, that was a leading provider of temporary and
permanent modular space solutions, the assets of Brekke Storage and Inland Leasing, regional providers of portable storage solutions in the Colorado
market, and the assets of Dixie Storage, a regional provider of portable storage solutions in the South Carolina market. 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;
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timely completion of necessary financing and required amendments, if any, to existing agreements;
an inability to implement uniform standards, controls, procedures and policies;
undiscovered and unknown problems, defects, damaged assets liabilities, or other issues related to any acquisition that become known to us
only after the acquisition;
negative reactions from our customers to an acquisition;
disruptions among employees related to any acquisition which may erode employee morale;
loss of key employees, including costly litigation resulting from the termination of those employees;
an inability to realize cost efficiencies or synergies that we may anticipate when selecting acquisition candidates;
recording of goodwill and non-amortizable intangible assets that will be subject to future impairment testing and potential periodic
impairment charges;
incurring amortization expenses related to certain intangible assets; and
becoming subject to litigation.
Acquisitions are inherently risky, and no assurance can be given that our recent and future acquisitions will be successful or will not adversely affect
our business, operating results, or financial condition. The success of our acquisition strategy depends upon our ability to successfully complete
acquisitions and integrate any businesses that we acquire into our existing business. The difficulties of integration could be increased by the necessity of
coordinating geographically dispersed organizations; maintaining acceptable standards, controls, procedures and policies; integrating personnel with
disparate business backgrounds; combining different corporate cultures; and the impairment of relationships with employees and customers as a result of
any integration of new management and other personnel. In addition, if we consummate one or more significant future acquisitions in which the
consideration consists of stock or other securities, our existing shareholders’ ownership could be diluted significantly. If we were to proceed with one or
more significant future acquisitions in which the consideration included cash, we could be required to use, to the extent available, a substantial portion of
our Credit Facility. If we increase the amount borrowed against our available credit line, we would increase the risk of breaching the covenants under our
credit facilities with our lenders. In addition, it would limit our ability to make other investments, or we may be required to seek additional debt or equity
financing. Any of these items could adversely affect our results of operations.
We continually assess the strategic fit of our existing businesses and may divest or otherwise dispose of businesses that are deemed not to fit with
our strategic plan or are not achieving the desired return on investment, and we cannot be certain that our business, operating results and
financial condition will not be materially and adversely affected.
A successful divestiture depends on various factors, including reaching an agreement with potential buyers on terms we deem attractive, as well as
our ability to effectively transfer liabilities, contracts, facilities, and employees to any purchaser, identify and separate the assets to be divested from the
assets that we wish to retain, reduce fixed costs previously associated with the divested assets or business, and collect the proceeds from any divestitures.
These efforts require varying levels of management resources, which may divert our attention from other business operations. If we do not realize the
expected benefits of any divestiture transaction, our consolidated financial position, results of operations and cash flows could be negatively impacted. In
addition, divestitures of businesses involve a number of risks, including significant costs and expenses, the loss of customer relationships and a decrease in
revenues and earnings associated with the divested business. Furthermore, divestitures potentially involve significant post-closing separation activities,
which could involve the expenditure of material financial resources and significant employee resources. Any divestiture may result in a dilutive impact to
our future earnings if we are unable to offset the dilutive impact from the loss of revenue associated with the divestiture, as well as significant write-offs,
including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial
condition.
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, 2023, we had $387.8 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.
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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 credit losses relative to historical levels, which may
materially and adversely affect our operations. Business segments that experience significant market disruptions or declines may experience increased
customer credit risk and higher credit losses. Failure to manage our credit risk and receive timely payments on our customer accounts receivable may result
in write-offs and/or loss of equipment, particularly electronic test equipment. If we are not able to effectively manage credit risk issues, or if a large
number of our customers should have financial difficulties at the same time, our receivables and equipment losses could increase above historical levels. If
this should occur, our results of operations may be materially and adversely affected.
Effective management of our rental assets is vital to our business. If we are not successful in these efforts, it could have a material adverse impact
on our results of operations.
Our modular, containers and electronics 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 modulars and containers. Modular asset
management requires designing and building the product for a long life that anticipates the needs of our customers, including anticipating potential changes
in legislation, regulations, building codes and local permitting in the various markets in which the Company operates. Electronic test equipment asset
management requires understanding, selecting and investing in equipment technologies that support market demand, including anticipating technological
advances and changes in manufacturers’ selling prices. Container asset management requires obtaining high quality, well-constructed products and
repairing and maintaining the products to ensure its long life. For each of our modular, container and electronic test equipment 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, hazardous substance
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
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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. The historical operations at some of our previously or currently owned or leased and newly acquired or leased properties may
have resulted in undiscovered soil or groundwater contamination or historical non-compliance by third parties for which we could be held liable. Future
events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination or non-compliance, may
also give rise to liabilities or other claims based on these operations that may be material. In addition, compliance with future environmental or health and
safety laws and regulations may require significant capital or operational expenditures or changes to our operations.
Accordingly, in addition to potential penalties for non-compliance, we may become liable, either contractually or by operation of law, for
investigation, remediation and monitoring costs even if the contaminated property is not presently owned or operated by us, or if the contamination was
caused by third parties during or prior to our ownership or operation of the property. In addition, certain parties may be held liable for more than their
“fair” share of environmental investigation and cleanup costs. Contamination and exposure to hazardous substances or other contaminants such as mold can
also result in claims for remediation or damages, including personal injury, property damage, and natural resources damage claims. Although expenses
related to environmental compliance, health and safety issues, and related matters have not been material to date, we cannot assure that we will not have to
make significant expenditures in the future in order to comply with applicable laws and regulations. Violations of environmental or health and safety
related laws or associated liability could have a material adverse effect on our business, financial condition and results of operations.
In general, litigation in the industries in which we operate, including class actions that seek substantial damages, arises with increasing frequency.
Enforcement of environmental and health and safety requirements is also frequent. Such proceedings are invariably expensive, regardless of the merit of
the plaintiffs’ or prosecutors’ claims. We may be named as a defendant in the future, and there can be no assurance, irrespective of the merit of such future
actions, that we will not be required to make substantial settlement payments in the future. Further, a significant portion of our business is conducted in
California which is one of the most highly regulated and litigious states in the country. Therefore, our potential exposure to losses and expenses due to new
laws, regulations or litigation may be greater than companies with a less significant California presence.
The nature of our business also subjects us to property damage and product liability claims, especially in connection with our modular buildings and
tank and box rental businesses. Although we maintain liability coverage that we believe is commercially reasonable, an unusually large property damage or
product liability claim or a series of claims could exceed our insurance coverage or result in damage to our reputation.
Our routine business activities expose us to risk of litigation from employees, vendors and other third parties, which could have a material adverse
effect on our results of operations.
We may be subject to claims arising from disputes with employees, vendors and other third parties in the normal course of our business; these risks
may be difficult to assess or quantify and their existence and magnitude may remain unknown for substantial periods of time. If the plaintiffs in any suits
against us were to successfully prosecute their claims, or if we were to settle any such suits by making significant payments to the plaintiffs, our operating
results and financial condition would be harmed. Even if the outcome of a claim proves favorable to us, litigation can be time consuming and costly and
may divert management resources. In addition, our organizational documents require us to indemnify our senior executives to the maximum extent
permitted by California law. We maintain directors’ and officers’ liability insurance that we believe is commercially reasonable in connection with such
obligations, but if our senior executives were named in any lawsuit, our indemnification obligations could magnify the costs of these suits and/or exceed the
coverage of such policies.
If we suffer loss to our facilities, equipment or distribution system due to catastrophe, our insurance policies could be inadequate or depleted, our
operations could be seriously harmed, which could negatively affect our operating results.
Our facilities, rental equipment and distribution systems may be subject to catastrophic loss due to fire, flood, hurricane, earthquake, terrorism or
other natural or man-made disasters. In particular, our headquarters, three operating facilities, and certain of our rental equipment are located in areas of
California, with above average seismic activity and could be subject to catastrophic loss caused by an earthquake. Our rental equipment and facilities in
Texas, Louisiana, Florida, North Carolina and Georgia are located in areas subject to hurricanes and other tropical storms. In addition to customers’
insurance on rented equipment, we carry property insurance on our rental equipment in inventory and operating facilities as well as business interruption
insurance. We believe our insurance policies have adequate limits and deductibles to mitigate the potential loss exposure of our business. We do not
maintain financial reserves for policy deductibles and our insurance policies contain exclusions that are customary for our industry, including exclusions for
earthquakes, flood and terrorism. If any of our facilities or a significant amount of our rental equipment were to experience a catastrophic loss, it could
disrupt our operations, delay orders, shipments and revenue recognition and result in expenses to repair or
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replace the damaged rental equipment and facility not covered by insurance, which could have a material adverse effect on our results of operations.
INTEREST RATE AND INDEBTEDNESS RISKS:
Our debt instruments contain covenants that restrict or prohibit our ability to enter into a variety of transactions and may limit our ability to
finance future operations or capital needs. If we have an event of default under these instruments, our indebtedness could be accelerated, and we
may not be able to refinance such indebtedness or make the required accelerated payments.
The agreements governing our Series D, E and F Senior Notes (as defined and more fully described under the heading “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”) and our Credit Facility contain various
covenants that limit our discretion in operating our business. In particular, we are limited in our ability to merge, consolidate, reorganize or transfer
substantially all of our assets, make investments, pay dividends or distributions, redeem or repurchase stock, change the nature of our business, enter into
transactions with affiliates, incur indebtedness and create liens on our assets to secure debt. In addition, we are required to meet certain financial covenants
under these instruments. These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures,
withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that
may arise.
A failure to comply with the restrictions contained in these agreements could lead to an event of default, which could result in an acceleration of our
indebtedness. In the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any required
accelerated payments. If we default on our indebtedness, our business financial condition and results of operations could be materially and adversely
affected.
The majority of our indebtedness is subject to variable interest rates, which makes us vulnerable to increases in interest rates, which could
negatively affect our net income.
Our indebtedness exposes us to interest rate increases because the majority of our indebtedness is subject to variable rates. At present, we do not
have any derivative financial instruments such as interest rate swaps or hedges to mitigate interest rate variability. The interest rates under our credit
facilities are reset at varying periods. These interest rate adjustments could cause periodic fluctuations in our operating results and cash flows. Our annual
debt service obligations increase by approximately $5.9 million per year for each 1% increase in the average interest rate we pay based on the $588.0
million balance of variable rate debt outstanding at December 31, 2023. 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.
SPECIFIC RISKS RELATED TO OUR RELOCATABLE MODULAR BUILDINGS AND PORTABLE STORAGE BUSINESS SEGMENTS:
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.
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.
Various states that we operate enacted laws and constitutional amendments to provide funding for school districts to limit the number of students that
may be grouped in a single classroom. School districts with class sizes in excess of state limits have been and continue to be a significant source of our
demand for modular classrooms. In California, efforts to address aging infrastructure and deferred maintenance have resulted in modernization and
reconstruction projects by public school districts including seismic retrofitting, asbestos abatement and various building repairs and upgrades, which has
been another source of demand for our modular classrooms. The most recent economic recession caused state and local budget shortfalls, which reduced
school districts’ funding and their ability to comply with state class size reduction requirements. If educational priorities and policies shift away from class-
size reduction or modernization and reconstruction projects, demand and pricing for our products and services may decline, not grow as quickly as, or not
reach the levels that we anticipate. Significant equipment returns may result in lower utilization until equipment can be redeployed or sold, which may
cause rental rates to decline and negatively affect our revenues and operating income.
Failure to comply with applicable regulations could harm our business and financial condition, resulting in lower operating results and cash flows.
Similar to conventionally constructed buildings, the modular building industry, including the manufacturers and lessors of portable classrooms, are
subject to regulations by multiple governmental agencies at the federal, state and local level relating to environmental, zoning, health, safety, energy
efficiency, labor and transportation matters, among other matters. Failure to comply with these laws or regulations could impact our business or harm our
reputation and result in higher capital or operating expenditures or the imposition of penalties or restrictions on our operations.
As with conventional construction, typically new codes and regulations are not retroactively applied. Nonetheless, new governmental regulations in
these or other areas may increase our acquisition cost of new rental equipment, limit the use of or make obsolete some of our existing equipment, or
increase our costs of rental operations.
Building codes are generally reviewed every three years. All aspects of a given code are subject to change including, but not limited to, such items
as structural specifications for earthquake safety, energy efficiency and environmental standards, fire and life safety, transportation, lighting and noise
limits.
Compliance with building codes and regulations entails a certain amount of risk as state and local government authorities do not necessarily interpret
building codes and regulations in a consistent manner, particularly where applicable regulations may be unclear and subject to interpretation. These
regulations often provide broad discretion to governmental authorities that oversee these matters, which can result in unanticipated delays or increases in
the cost of compliance in particular markets. The construction and modular industries have developed many “best practices” which are constantly
evolving. Some of our peers and competitors may adopt practices that are more or less stringent than the Company’s. When, and if, regulatory standards
are clarified, the effect of the clarification may be to impose rules on our business and practices retroactively, at which time, we may not be in compliance
with such regulations and we may be required to incur costly remediation. If we are unable to pass these increased costs on to our customers, our
profitability, operating cash flows and financial condition could be negatively impacted.
Expansions of our modular and portable storage operations into new markets may negatively affect our operating results.
In the past we have expanded our modular and portable storage operations into new geographies and states. There are risks inherent in the
undertaking of such expansion, including the risk of revenue from the business in any new markets not meeting our expectations, higher than expected
costs in entering these new markets, risk associated with compliance with applicable state and local laws and regulations, response by competitors and
unanticipated consequences of expansion. In addition, expansion into new markets may be affected by local economic and market conditions. Expansion
of our operations into new markets will require a significant amount of attention from our management, a commitment of financial resources and will
require us to add qualified management in these markets, which may negatively impact our operating results.
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We are subject to laws and regulations governing government contracts. These laws and regulations expose us to business volatility and risks,
including government budgeting cycles and appropriations, potential early termination of contracts, procurement regulations, governmental
policy shifts, audits, investigations, sanctions and penalties. Furthermore, 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.
Mobile Modular and Portable Storage derive a portion of its revenues from contracts with U.S. federal government entities, government prime
contractors, state entities and local entities, including school districts. Contracts with government entities are subject to budgetary constraints, and our
continued performance under our contracts with these agencies and their prime contractors, or award of additional contracts from these agencies or their
prime contractors, could be jeopardized by spending reductions or budget cutbacks at these agencies. Such contracts are also subject to unique laws and
regulations, and the adoption of new laws or regulations relating to government contracting or changes to existing laws or regulations. New laws,
regulations or procurement requirements, or changes to current ones, can significantly increase our costs and risks and reduce our profitability. In addition,
any failure on the part of the company to comply with applicable government contract laws and regulations might result in administrative penalties or even
in the termination or suspension of these contracts and as a result, the loss of the related revenues, which would harm our business.
Furthermore, 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 and portable storage markets and we may not be able to effectively compete.
The modular building leasing industry is highly competitive in our states of operation and we expect it to remain so. The competitive market in
which we operate may prevent us from raising rental fees or sales prices to pass any increased costs on to our customers. We compete on the basis of a
number of factors, including equipment availability, quality, price, service, reliability, appearance, functionality and delivery terms. We may experience
pricing pressures in our areas of operation in the future as some of our competitors seek to obtain market share by reducing prices.
Some of our competitors in the modular building leasing industry have greater range of products and services, greater financial and marketing
resources, larger customer bases, and greater name recognition than we have. These competitors may be better able to respond to changes in the relocatable
modular building and portable storage container markets, 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 and container 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, 2023, 55% of our modular and 57% of our container portfolios had equipment on rent for periods exceeding the original
committed term. Generally, when a customer continues to rent the units beyond the contractual term, the equipment rents on a month-to-month basis. If a
significant number of our rented 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
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rental fleet. In addition, if returned units stay off rent for an extended period of time, we may incur additional costs to securely store and maintain them.
Significant increases in raw material and labor costs could increase our acquisition cost of new modular rental units and repair and maintenance
costs of our fleet, which would increase our operating costs and harm our profitability.
We incur labor costs and purchase raw materials, including lumber, siding and roofing and other products to perform periodic repairs, modifications
and refurbishments to maintain physical conditions of our modular units. The volume, timing and mix of maintenance and repair work on our rental
equipment may vary quarter-to-quarter and year-to-year. Generally, increases in labor and raw material costs will also increase the acquisition cost of new
modular units and increase the repair and maintenance costs of our fleet. We also maintain a fleet of service trucks and use subcontractor companies for the
delivery, set-up, return delivery and dismantle of modulars for our customers. We rely on our drivers and subcontractor service companies to meet customer
demands for timely shipment and return, and the loss or inadequate number of driver and 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 2023, Mobile Modular purchased 30% 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% and containers to be 25 years with a residual value of
62.5%. However, proper design, manufacture, repairs and maintenance of the products during our ownership is required for the product to reach their
useful lives and residual values. 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
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adverse impact on the industry’s demand for equipment, including our rental electronic test equipment. In addition, the severity and length of any downturn
in an industry may also affect overall access to capital, which could adversely affect our customers and result in excess inventory and impairment charges.
During periods of reduced and declining demand for test equipment, we are exposed to additional receivable risk from non-payment and may need to
rapidly align our cost structure with prevailing market conditions, which may negatively impact our operating results and cash flows.
Seasonality of our electronic test equipment business may impact quarterly results.
Generally, rental activity declines in the fourth quarter month of December and the first quarter months of January and February. These months may
have lower rental activity due to holiday closures, particularly by larger companies, inclement weather and its impact on various field related
communications equipment rentals, and companies’ operational recovery from holiday closures which may impact the start-up of new projects coming
online in the first quarter. These seasonal factors historically have impacted quarterly results in each year’s first and fourth quarter, but we are unable to
predict how such factors may impact future periods.
Our rental test equipment may become obsolete or may no longer be supported by a manufacturer, which could result in an impairment charge.
Electronic test equipment is characterized by changing technology and evolving industry standards that may render our existing equipment obsolete
through new product introductions, or enhancements, before the end of its anticipated useful life, causing us to incur impairment charges. We must
anticipate and keep pace with the introduction of new hardware, software and networking technologies and acquire equipment that will be marketable to
our current and prospective customers.
Additionally, some manufacturers of our equipment may be acquired or cease to exist, resulting in a future lack of support for equipment purchased
from those manufacturers. This could result in the remaining useful life becoming shorter, causing us to incur an impairment charge. We monitor our
manufacturers’ capacity to support their products and the introduction of new technologies, and we acquire equipment that will be marketable to our current
and prospective customers. However, any prolonged economic downturn could result in unexpected bankruptcies or reduced support from our
manufacturers. Failure to properly select, manage and respond to the technological needs of our customers and changes to our products through their
technology life cycle may cause certain electronic test equipment to become obsolete, resulting in impairment charges, which may negatively impact
operating results and cash flows.
If we do not effectively compete in the rental equipment market, our operating results will be materially and adversely affected.
The electronic test equipment rental business is characterized by intense competition from several competitors 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. 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.
If we are not able to anticipate and mitigate the risks associated with operating internationally, there could be a material adverse effect on our
operating results.
Currently, total foreign country customers and operations account for less than 10% of the Company’s revenues. In recent years some of our
customers have expanded their international operations faster than domestic operations, and this trend may continue. Over
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time, the amount of our international business may increase if we focus on international market opportunities. Operating in foreign countries subjects the
Company to additional risks, any of which may adversely impact our future operating results, including:
•
•
•
•
•
•
•
•
•
•
•
international political, economic and legal conditions including tariffs and trade barriers;
our ability to comply with customs, anti-corruption, import/export and other trade compliance regulations, together with any unexpected
changes in such regulations;
greater difficulty in our ability to recover rental equipment and obtain payment of the related trade receivables;
additional costs to establish and maintain international subsidiaries and related operations;
difficulties in attracting and retaining staff and business partners to operate internationally;
language and cultural barriers;
seasonal reductions in business activities in the countries where our international customers are located;
difficulty with the integration of foreign operations;
longer payment cycles;
currency fluctuations; and
potential adverse tax consequences.
Unfavorable currency exchange rates may negatively impact our financial results in U.S. dollar terms.
We receive revenues in Canadian dollars from our business activities in Canada. Conducting business in currencies other than U.S. dollars subjects
us to fluctuations in currency exchange rates. If the currency exchange rates change unfavorably, the value of net receivables we receive in foreign
currencies and later convert to U.S. dollars after the unfavorable change would be diminished. This could have a negative impact on our reported operating
results. We currently do not engage in hedging strategies to mitigate this risk.
GENERAL RISKS:
Our effective tax rate may change and become less predictable as our business expands, or as a result of federal and state tax law changes, making
our future earnings less predictable.
We continue to consider expansion opportunities domestically and internationally for our rental businesses. Since the Company’s effective tax rate
depends on business levels, personnel and assets located in various jurisdictions, further expansion into new markets or acquisitions may change the
effective tax rate in the future and may make it, and consequently our earnings, less predictable going forward. Further, the enactment of future tax law
changes by federal and state taxing authorities may impact the Company’s current period tax provision and its deferred tax liabilities. In addition, the
amount and timing of stock-based compensation may also impact the Company’s current tax provision.
Changes in financial accounting standards may cause lower than expected operating results and affect our reported results of operations.
Changes in accounting standards and their application may have a significant effect on our reported results on a going-forward basis and may also
affect the recording and disclosure of previously reported transactions. New accounting pronouncements and varying interpretations of accounting
pronouncements have occurred in the past and may occur in the future. Changes to existing rules or the questioning of current practices may adversely
affect our reported financial results or the way we conduct our business.
Adverse economic conditions in the United States and globally, as well as geopolitical tensions, could have a negative effect on our business, results
of operations, financial condition and liquidity.
Adverse macroeconomic conditions in the United States and globally, including inflation, slower than expected growth or recession, changes to
fiscal and monetary policy, tightening of the credit markets, higher interest rates and currency fluctuations, could negatively impact our business, financial
condition, results of operations and liquidity. These factors could negatively affect demand for our business.
Adverse economic conditions in the United States and globally have from time to time caused or exacerbated significant slowdowns in our industry
and in the markets in which we operate, which have adversely affected our business and results of operations. Macroeconomic weakness and uncertainty
also make it more difficult for us to accurately forecast revenue, gross margin and expenses, and may make it more difficult to refinance debt.
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Furthermore, sustained uncertainty about, or worsening of, geopolitical tensions, including further escalation of war between Russia and Ukraine,
further escalation of trade tensions between the U.S. and China, escalation of tensions between China and Taiwan, further escalation in the conflict between
the State of Israel and Hamas, as well as further escalation of tensions between the State of Israel and various countries in the Middle East and North
Africa, could result in a global economic slowdown and long-term changes to global trade. Any or all of these factors could negatively affect our revenue
and could materially adversely affect our business, results of operations, financial condition and growth.
Environmental, social and governance (ESG) matters may impact our business and reputation.
Governmental authorities, non-governmental organizations, customers, investors, external stakeholders and employees are increasingly sensitive to
ESG concerns. This focus on ESG concerns may lead to new requirements that could result in increased costs for our business. Our ability to compete
could also be affected by changing customer preferences and requirements, such as growing demand for more environmentally friendly products, supplier
practices, or by failure to meet such customer expectations or demand. We risk negative shareholder reaction, including from proxy advisory services, as
well as damage to our reputation, if we do not act responsibly, or if we are perceived to not be acting responsibly in key ESG areas. If we do not meet the
ESG expectations of our investors, customers and other stakeholders, we could experience reduced demand for our products, loss of customers, and other
negative impacts on our business and results of operations.
We have begun to report our prior modular building and portable storage segment in two separate segments of modular building and portable
storage container. This segment reporting structure has been in effect for a limited period of time, and there are no assurances that we will be able
to successfully operate the prior segment in two distinct segments, and the change could be confusing to investors and may not have the desired
effects.
During the quarter ended December 31, 2023, we began reporting our prior modular building and portable storage segment as two distinct segments
of modular buildings and portable storage containers. Managing these changes has required, and may continue to require, significant expenditures and
allocation of valuable management resources. We have provided disclosures about this new segment reporting structure, but there is no guarantee that
investors or the market will understand this change to our financial reporting. There is also no guarantee that this change will have the desired effect.
Failure of investors or analysts to understand our revised segment reporting structure may negatively affect their ability to understand our business and
operating results which could adversely affect our stock price. In addition, we test for goodwill impairment at the reporting segment level and consider the
difference between the fair value of a reporting segment and its’ carrying value, when determining whether any impairment exists. There can be no
assurance that the change to our segment reporting structure will not result in impairment charges in future periods.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity represents an important component of the Company’s overall approach to risk management. The Company’s cybersecurity policies,
standards and practices are integrated into the Company’s enterprise risk management (“ERM”) approach, and cybersecurity risks are one of the enterprise
risks that are subject to oversight by the Company’s Board of Directors (the “Board”). The Company’s cybersecurity policies, standards and practices
follow industry trends, which align with frameworks established by the National Institute of Standards and Technology and the International Organization
for Standardization. The Company approaches cybersecurity threats through a cross-functional approach which endeavors to: (i) identify, prevent and
mitigate cybersecurity threats to the Company; (ii) preserve the confidentiality, security and availability of the information that we collect and store to use
in our business; (iii) protect the Company’s intellectual property; (iv) maintain the confidence of our customers, clients and business partners; and (v)
provide appropriate public disclosure of cybersecurity risks and incidents when required.
Risk Management and Strategy
The Company’s cybersecurity program focuses on the following areas:
•
•
Vigilance: The Company maintains cybersecurity threat operations with the goal of identifying, preventing and mitigating cybersecurity
threats and responding to cybersecurity incidents in accordance with our established incident response and recovery plans.
Systems Safeguards: The Company deploys systems safeguards that are designed to protect the Company’s information systems from
cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which
are evaluated and improved through ongoing vulnerability assessments and cybersecurity threat intelligence.
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•
•
•
•
•
•
Collaboration: The Company utilizes collaboration mechanisms established with public and private entities, including intelligence and
enforcement agencies, industry groups and third-party service providers, to identify, assess and respond to cybersecurity risks.
Third-Party Risk Management: The Company endeavors to identify and oversee cybersecurity risks presented by third parties as well as
the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party
systems.
Training: The Company provides periodic training and testing for personnel regarding cybersecurity threats, which reinforce the Company’s
information security policies, standards and practices.
Incident Response and Recovery Planning: The Company has established and maintains incident response and recovery plans that address
the Company’s response to a cybersecurity incident and the recovery from a cybersecurity incident; such plans are tested and evaluated
periodically.
Communication, Coordination and Disclosure: The Company utilizes a cross-functional approach to address the risk from cybersecurity
threats, involving management personnel from the Company’s technology, operations, legal, risk management, and other key business
functions, as well as the members of the Board in an ongoing dialogue regarding cybersecurity threats and incidents, while also implementing
controls and procedures for the escalation of cybersecurity incidents pursuant to established thresholds so that decisions regarding the
disclosure and reporting of such incidents can be made by management in a timely manner.
Governance: The Board’s oversight of cybersecurity risk management is supported by the Company’s executive leadership team and
cybersecurity Steering Committee, which regularly interacts with the Company’s Vice President of Information Technology and other
members of the cyber team and management.
The Company manages risks from cybersecurity threats through the assessment and testing of the Company’s processes and practices focused on
evaluating the effectiveness of our cybersecurity measures. The Company engages a third-party independent cybersecurity company that provides security
testing and monitoring, including penetration testing, auditing, and security assessment, for the Company. The results of such assessments and reviews are
reported as part of the technology and cyber security update to the Company’s executive leadership team and the Board, and the Company adjusts its
cybersecurity policies, standards, processes and practices as necessary based on the information provided by the assessments, audits and reviews.
Governance
The Board oversees the management of risks from cybersecurity threats, including the policies, standards, processes and practices that the
Company’s management implements to address risks from cybersecurity threats. The Board receives reports on the Company’s technology and
cybersecurity functions, including vulnerability assessments, any third-party and independent reviews, the threat environment, and other information
security considerations. The Board also receives prompt and timely information regarding any cybersecurity incident that meets established reporting
thresholds, as well as ongoing updates regarding such incident until it has been addressed. The cyber security Steering Committee meets multiple times
throughout the year to discuss the Company’s cyber security programs and practices, risk management related to cyber security and a wide range of other
related topics including, for example, recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat
environment, technological trends and information security considerations arising with respect to the Company’s peers and third parties. At least once each
year, the Board and the Company’s executive leadership team discuss the Company’s approach to cybersecurity risk management with the Company’s VP
of Information Technology.
The Company’s VP of Information Technology is the member of the Company’s management who is principally responsible for overseeing the
Company’s cybersecurity risk management program, in partnership with other business leaders across the Company. The VP of Information Technology
works in coordination with senior leadership, which includes our Chief Executive Officer and President, Chief Financial Officer and General Counsel. The
Company’s VP of Information Technology has served in various roles in technology and is supported by a team of information technology and cyber
security professionals with decades of relevant experience. Most notably, the Company’s Enterprise Manager of Cybersecurity and Network holds a
Certified Information Systems Security Professional (CISSP) certification and has over 15 years of experience with managing risks arising from
cybersecurity threats.
The Company has established a Cybersecurity Steering Committee that includes executives and senior leadership across all divisions and corporate
services to implement and manage a program designed to protect the Company’s information systems from cybersecurity threats and to respond promptly
to any cybersecurity incidents. To facilitate the success of this program, multidisciplinary teams throughout the Company are created and deployed to
address cybersecurity threats and to respond to cybersecurity incidents in accordance with the Company’s Incident Response Plans (IRP). Through the
ongoing communications from these teams, the Steering committee monitors the effectiveness of the prevention, detection, mitigation and remediation
within the cybersecurity program. The
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Company’s General Counsel, as part of the Incident Response Team, will report any credible threats or security concerns to the Board when appropriate.
As of the date of this Annual Report on Form 10-K, we are not aware of any cybersecurity threats that have materially affected or are reasonably
likely to affect the Company, including its business strategy, results of operations, or financial condition.
ITEM 2. PROPERTIES.
The Company’s corporate and administrative offices are located in Livermore, California in approximately 26,000 square feet. At December 31,
2023, the Company’s four reportable business segments conducted operations from the following locations:
Mobile Modular and Portable Storage – Mobile Modular and Portable Storage operate from 22 owned and 60 leased locations. Our largest owned
facilities include seven inventory centers, at which relocatable modular buildings and storage containers are displayed, refurbished and stored:
Livermore, California (140 acres in the San Francisco Bay Area),
Mira Loma, California (82 acres in the Los Angeles area),
Pasadena, Texas (50 acres in the Houston area),
Grand Prairie, Texas (30 acres in the Dallas area),
Auburndale, Florida (123 acres in the Orlando area),
Arcade, Georgia (48 acres in the Atlanta area),
Fredericksburg, Virginia (68 acres in the Washington D.C. area).
The inventory centers conduct rental and sales operations from modular buildings, serving as working models of the Company’s modular product.
TRS-RenTelco – Electronic test equipment rental and sales operations are conducted from a 117,000 square foot leased facility in Grapevine, Texas
(Dallas area) and a sales office in Dollard-des-Ormeaux, Quebec (Montreal, Canada area).
Enviroplex – The Company’s wholly owned subsidiary, Enviroplex, manufactures modular buildings used primarily as classrooms in California
from its 108,000 square foot facility in Stockton, California (San Francisco Bay Area).
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, cyber, 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
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”. As of February 21, 2024, the
Company's common stock was held by approximately 45 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.
Stock Repurchase Plan
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
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repurchase 2,000,000 shares of the Company's outstanding common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are
subject to prevailing market conditions, applicable legal requirements and other factors, including management’s discretion. All shares repurchased by the
Company are canceled and returned to the status of authorized but unissued shares of common stock. There can be no assurance that any authorized shares
will be repurchased and the repurchase program may be modified, extended or terminated by the Board of Directors at any time. There were no shares of
common stock repurchased during the twelve months ended December 31, 2023 and 2022. As of December 31, 2023, 1,309,805 shares remain authorized
for repurchase under the Repurchase Plan.
ITEM 6. [Reserved]
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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, portable storage
containers, and electronic test equipment for general purpose and communications needs. The Company’s primary emphasis is on equipment rentals. At
December 31, 2023 the Company was comprised of four reportable business segments: (1) its modular building rental segment (“Mobile Modular”); (2) its
portable storage container rental segment ("Portable Storage"); (3) its electronic test equipment rental segment (“TRS-RenTelco”); and (4) its classroom
manufacturing segment selling modular buildings used primarily as classrooms in California (“Enviroplex”). In 2023, Mobile Modular, Portable Storage,
TRS-RenTelco and Enviroplex contributed 62%, 22%, 16% and 0%, respectively, of the Company’s income from continuing operations before provision
for taxes (the equivalent of “pre-tax income”), compared to 50%, 22%, 27% and 1%, respectively, for 2022.
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 shorter 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 74% of the Company’s total
revenues from continuing operations in 2023 and 76% for the three years ended December 31, 2023. Over the past three years, modulars, storage
containers and electronic test equipment comprised approximately 61%, 15% and 24%, respectively, of the cumulative rental operations revenues from
continuing operations. 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 modulars, storage containers and electronic test equipment that are new, or previously rented. The Company’s Enviroplex
subsidiary manufactures and sells new 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, containers and electronic test equipment have
comprised approximately 26% of the Company’s consolidated revenues from continuing operations in 2023 and 24% for the three years ended December
31, 2023. Over the past three years, modulars, containers and electronic test equipment comprised approximately 81%, 3% and 16% 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 18%, 21% and 24% of the Company’s consolidated rental and sales revenues
from continuing operations for 2023, 2022 and 2021, 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, credit losses, 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.
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Recent Developments
Proposed Acquisition by WillScot Mobile Mini
On January 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WillScot Mobile Mini Holdings
Corp., a Delaware corporation ("WillScot Mobile Mini”), Brunello Merger Sub I, Inc., a California corporation and a direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub I”), and Brunello Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub II”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub I
will merge with and into the Company (the “First-Step Merger”), with the Company surviving the First-Step Merger and, immediately thereafter, the
Company will merge with and into Merger Sub II (the “Second-Step Merger” and together with the First-Step Merger, the “Transaction”), with Merger Sub
II surviving the Second-Step Merger as a wholly owned subsidiary of WillScot Mobile Mini. Each of the parties to the Merger Agreement intends that the
Transaction will be treated as a single integrated transaction that qualifies as a “reorganization” within the meaning of Section 368(a) of the U.S. Internal
Revenue Code of 1986, as amended. Consummation of the Transaction is subject to the approval of the Company’s shareholders, the receipt of required
regulatory approvals, and satisfaction or waiver of other customary closing conditions. The First-Step Merger and the Second-Step Merger will be
consummated on the same day.
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”),
each share of common stock, no par value, of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective
Time, other than shares of Company Common Stock owned by WillScot Mobile Mini or any subsidiary of WillScot Mobile Mini or the Company, and
shares held by shareholders who did not vote in favor of the Transaction (or consent thereto in writing) and who are entitled to demand and properly
demands appraisal of such shares, will be automatically converted into the right to receive either (1) $123 in cash (the “Per Share Cash Consideration”) or
(2) 2.8211 (the “Exchange Ratio”) shares of validly issued, fully paid and nonassessable shares of common stock, par value $0.0001, of WillScot Mobile
Mini (the “WillScot Mobile Mini Common Stock”) (the “Per Share Stock Consideration” together with the Per Share Cash Consideration, the “Merger
Consideration”), as determined pursuant to the election and allocation procedures in the Merger Agreement. The Company’s shareholders will have the
opportunity to elect to receive either the Per Share Cash Consideration or the Per Share Stock Consideration in respect of their Company Common Stock,
provided that 60% of the Company Common Stock will be converted into the cash consideration and 40% of the Company Common Stock will be
converted into the stock consideration.
The consummation of the Transaction is subject to certain closing conditions, including (i) the approval of the Company’s shareholders, (ii) the
expiration or termination of all waiting periods applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott Rodino Antitrust
Improvements Act of 1976 (the “HSR Act,” and such expiration or termination, the “Antitrust Approval”), (iii) the absence of any order by any
governmental authorities or other legal restraint or prohibition preventing the consummation of the transactions contemplated by the Merger Agreement,
(iv) the effectiveness of the registration statement to be filed by WillScot Mobile Mini with SEC relating to the registration of shares of WillScot Mobile
Mini Common Stock to be issued to the Company’s shareholders pursuant to the Merger Agreement and (v) other customary conditions specified in the
Merger Agreement. The parties have submitted their respective filings under the HSR Act with the U.S. Department of Justice and the Federal Trade
Commission as contemplated by the Merger Agreement. The closing of the Transaction is not subject to any financing condition.
For additional information regarding the Transaction, please refer to our current report on Form 8-K and Amendment No. 1 on Form 8-K/A, each
filed with the SEC on January 29, 2024.
Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this
Form 10-K assume the continuation of the Company as a public company.
Dividends
In February 2024, the Company announced that its Board of Directors declared a cash dividend of $0.475 per common share for the quarter ending
March 31, 2024, an increase of 2% over the prior year’s comparable quarter.
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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 from continuing
operations and the percentage of changes in the amount of such items as compared to the amount in the indicated prior period:
Percent of Total Revenues
Three Years
2023–2021
Year Ended December 31,
2022
2023
2021
Percent Change
2023 over
2022
2022 over
2021
Revenues
Rental
Rental related services
Rental operations
Sales
Other
Total revenues
Costs and expenses
Direct costs of rental operations
Depreciation of rental equipment
Rental related services
Other
Total direct costs of rental operations
Cost of sales
Total costs
Gross profit
Selling and administrative expenses
Other income
Income from operations
Interest expense
60 %
16
76
23
1
100
57 %
17
74
25
1
100
12
11
15
38
15
53
47
24
—
23
3
11
12
13
36
17
53
47
25
—
23
5
Income from continuing operations before provision
for income taxes
Provision for income taxes from continuing operations
Income from continuing operations
20
5
15 %
18
5
13 %
61 %
15
76
23
1
100
13
11
16
40
14
54
46
22
—
24
2
22
5
17 %
62 %
14
76
23
1
100
14
10
15
39
14
53
47
23
—
24
2
22
6
16 %
22 %
45
26
40
267
31
11
40
10
18
50
27
36
45
100
29
232
11
20
8 %
17 %
26
18
21
7
19
7
24
31
20
20
20
17
16
0
19
48
16
2
21 %
1.
As a result of the divestiture of Adler Tanks, the results of operations as a percentage of total revenues for the years ended December 31, 2022 and 2021, have been restated to present the
results from continuing operations.
-35-
Twelve Months Ended December 31, 2023 Compared to
Twelve Months Ended December 31, 2022
Overview
Consolidated revenues in 2023 increased 13% to $841.3 million, from $733.8 million in 2022. Consolidated net income in 2023, excluding the gain
on sale of discontinued operations from the divestiture of Adler Tanks, decreased to $113.1 million, or $4.61 per diluted share in 2023, compared to $115.1
million, or $4.70 per diluted share, in 2022. The Company’s year over year total revenue increase was primarily due to higher rental, sales and rental
related services revenues, as more fully described below.
Revenues from discontinued operations for the year ended December 31, 2023, was $9.4 million, compared to $98.2 million for the same period in
2022. Income from discontinued operations for the year ended December 31, 2023, was $62.8 million, which included the net gain on sale of discontinued
operations of $61.5 million, compared to $11.8 million for the same period in 2022. Earnings per diluted share from discontinued operations for the year
ended December 31, 2023 was $2.56, compared to $0.48 for the same period in 2022. For additional information on discontinued operations and the
divestiture of Adler Tanks, refer to Note 5 of the consolidated financial statements.
For 2023 compared to 2022, on a consolidated basis from continuing operations:
•
•
•
•
•
•
•
Gross profit increased $103.4 million, or 36%, to $393.6 million. Mobile Modular’s gross profit increased $96.0 million, or 59%, due to
higher gross profit on rental, sales and rental related services revenues. Portable Storage's gross profit increased $13.6 million, or 25%, due
to higher gross profit on rental and rental related services revenues. TRS-RenTelco’s gross profit decreased $5.3 million, or 8%, primarily
due to lower gross profit on rental and sales revenues. Enviroplex’s gross profit decreased $0.9 million, or 17%, primarily due to $3.0 million
lower sales revenues and lower gross margins of 20.9%, compared to 22.1% in 2022.
Selling and administrative expenses increased $64.6 million, or 45%, to $207.5 million, primarily due to increased headcount and employees’
salaries and benefit costs totaling $29.0 million, partly attributed to increased employee headcount from the Vesta Modular acquisition, and
$21.4 million higher marketing and administrative costs, which included $15.9 million in acquisition and divestiture related transaction costs.
During the year ended December 31, 2023, the Company sold four properties, which resulted in a net gain on sale of $3.6 million. The gain
on sale, which was presented in Other income on the Consolidated Statements of Income, contributed $0.11 in earnings per diluted share.
Interest expense increased $28.3 million, due to 55% higher average debt levels of the Company, accompanied by 72% higher net average
interest rates of 6.12% in 2023 compared to 3.55% in 2022.
Pre-tax income contribution by Mobile Modular, Portable Storage and TRS-RenTelco was 62%, 22% and 16%, respectively, compared to
50%, 22% and 27%, respectively, in 2022. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex
was 0% for 2023 and 1% for 2022.
The provision for income taxes resulted in an effective tax rate of 25.5% and 23.3% for the twelve months ended December 31, 2023 and
2022, respectively. The higher rate in 2023 was primarily due to changes in state business activity levels and nondeductible expenses.
Adjusted EBITDA increased $70.8 million, or 28%, to $322.0 million in 2023. Adjusted EBITDA is a non-GAAP financial measure and is
defined as net income before interest expense, provision for income taxes, depreciation, amortization, non-cash impairment costs, share-
based compensation and transaction costs. A reconciliation of Adjusted EBITDA to net cash provided by operating activities and net income
to Adjusted EBITDA can be found on page 48.
-36-
Mobile Modular
For 2023, Mobile Modular’s total revenues increased $183.0 million, or 48%, to $562.2 million compared to 2022, primarily due to higher rental,
sales and rental related services revenues. Higher gross profit on rental, sales and rental related services revenues, partly offset by $52.8 million higher
selling and administrative expenses, resulted in an increase in pre-tax income of $24.5 million, or 36%, to $92.0 million in 2023.
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.
Mobile Modular – 2023 compared to 2022
(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
Other income
Income from operations
Interest expense allocation
Pre-tax income
Other Selected Information
Adjusted EBITDA
1
Average rental equipment
Average rental equipment on rent
2
Average monthly total yield
3
Average utilization
4
Average monthly rental rate
1
Period end rental equipment
3
Period end utilization
Year Ended December 31,
Increase (Decrease)
2023
2022
$
%
$
$
$
$
$
285,553 $
114,511
400,064
155,267
6,905
562,236
36,921
75,390
86,983
199,294
105,021
304,315
161,649
39,121
200,770
50,246
6,905
257,921
(138,574 )
2,329
121,676
(29,724 )
91,952 $
191,990 $
1,093,086 $
870,621 $
2.18 %
79.7 %
2.73 %
$
1,163,704 $
79.4 %
206,070 $
74,756
280,826
97,046
1,339
379,211
28,373
49,910
76,819
155,102
62,224
217,326
100,878
24,847
125,725
34,822
1,339
161,885
(85,769 )
—
76,116
(8,657 )
67,459 $
121,981 $
855,640 $
667,559 $
2.01 %
78.0 %
2.57 %
869,926 $
80.3 %
79,483
39,755
119,238
58,221
5,566
183,025
8,548
25,480
10,164
44,192
42,797
86,989
60,771
14,274
75,045
15,424
5,566
96,036
52,805
2,329
45,560
21,067
24,493
70,009
237,446
203,062
293,778
39 %
53 %
42 %
60 %
nm
48 %
30 %
51 %
13 %
28 %
69 %
40 %
60 %
57 %
60 %
44 %
nm
59 %
62 %
nm
60 %
nm
36 %
57 %
28 %
30 %
8 %
2 %
6 %
34 %
(1 )%
1.
2.
3.
4.
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.
-37-
Mobile Modular’s gross profit for 2023 increased $96.0 million, or 59%, to $257.9 million. For the year ended December 31, 2023 compared to the
year ended December 31, 2022:
•
•
•
Gross Profit on Rental Revenues – Rental revenues increased $79.5 million, or 39%, due to 30% higher average rental equipment on rent
and 6% higher average monthly rental rates in 2023. As a percentage of rental revenues, depreciation was 13% and 14% in 2023 and 2022,
respectively, and other direct costs were 30% in 2023 and 37% in 2022, which resulted in gross margin percentage of 57% in 2023, compared
to 49% in 2022. The higher rental revenues and increased rental margins resulted in gross profit on rental revenues increasing $60.8 million,
or 60%, to $161.6 million in 2023.
Gross Profit on Rental Related Services – Rental related services revenues increased $39.8 million, or 53%, compared to 2022. 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 delivery, return delivery and dismantle
revenues and higher site related services. The higher revenues accompanied by higher gross margin percentage of 34% in 2023, compared to
33% in 2022, resulted in rental related services gross profit increasing $14.3 million, or 57%, to $39.1 million in 2023.
Gross Profit on Sales – Sales revenues increased $58.2 million, or 60%, primarily due to higher new equipment sales. The higher sales
revenues and lower gross margins of 32% in 2023, compared to 36% in 2022, resulted in sales gross profit increasing $15.4 million, or 44%,
to $50.2 million in 2023. 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 2023, Mobile Modular’s selling and administrative expenses increased $52.8 million, or 62%, to $138.6 million, primarily due to increased
employee salaries and benefit costs totaling $21.6 million, partly attributed to increased employee headcount from the Vesta Modular acquisition, $14.1
million higher allocated corporate expenses, which included $5.3 million of transaction costs primarily attributed to the divestiture of Adler Tanks. In
addition, the Company had $10.7 million higher marketing and administrative costs compared to 2022, which included $7.7 million Vesta transaction costs.
-38-
Portable Storage
For 2023, Portable Storage’s total revenues increased $18.6 million, or 23%, to $101.1 million compared to 2022, primarily due to higher rental,
rental related services and sales revenues. Higher gross profit on rental, rental related services and sales revenues, partly offset by $7.1 million higher
selling and administrative expenses, resulted in an increase in pre-tax income of $3.5 million, or 12%, to $32.9 million in 2023.
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.
Portable Storage – 2023 compared to 2022
(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
Other income
Income from operations
Interest expense allocation
Pre-tax income
Other Selected Information
Adjusted EBITDA
1
Average rental equipment
Average rental equipment on rent
2
Average monthly total yield
3
Average utilization
4
Average monthly rental rate
1
Period end rental equipment
3
Period end utilization
Year Ended December 31,
Increase (Decrease)
2023
2022
$
%
$
$
$
$
$
$
74,536 $
20,510
95,046
4,587
1,504
101,137
3,514
18,568
7,317
29,399
2,858
32,257
63,705
1,942
65,647
1,729
1,504
68,880
(31,537 )
457
37,800
(4,950 )
32,850 $
47,147 $
206,095 $
159,391 $
3.01 %
77.3 %
3.90 %
221,817 $
71.5 %
62,218 $
17,095
79,313
2,933
260
82,506
2,799
16,344
6,212
25,355
1,849
27,204
53,207
750
53,957
1,084
260
55,302
(24,465 )
—
30,837
(1,518 )
29,319 $
37,393 $
169,997 $
144,133 $
3.05 %
84.8 %
3.60 %
184,919 $
82.6 %
12,318
3,415
15,733
1,654
1,244
18,631
715
2,224
1,105
4,044
1,009
5,053
10,498
1,192
11,690
645
1,244
13,578
7,072
457
6,963
3,432
3,531
9,754
36,098
15,258
36,898
20 %
20 %
20 %
56 %
nm
23 %
26 %
14 %
18 %
16 %
55 %
19 %
20 %
nm
22 %
60 %
nm
25 %
29 %
nm
23 %
nm
12 %
26 %
21 %
11 %
(1 )%
(9 )%
8 %
20 %
(13 )%
1.
2.
3.
4.
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.
nm = Not meaningful
-39-
Portable Storage’s gross profit for 2023 increased $13.6 million, or 25%, to $68.9 million. For the year ended December 31, 2023 compared to the
year ended December 31, 2022:
•
•
•
Gross Profit on Rental Revenues – Rental revenues increased $12.3 million, or 20%, due to 11% higher average rental equipment on rent
and 8% higher average monthly rental rates in 2023. As a percentage of rental revenues, depreciation was 5% and 4% in 2023 and 2022,
respectively, and other direct costs were 10% in both 2023 and 2022, which resulted in gross margin percentage of 85% in 2023 compared to
86% in 2022. The higher rental revenues and lower rental margins resulted in gross profit on rental revenues increasing $10.5 million, or
20%, to $63.7 million in 2023.
Gross Profit on Rental Related Services – Rental related services revenues increased $3.4 million, or 20%, compared to 2022. The
increase in rental related services revenues was primarily attributable to increased delivery and return delivery revenues. The higher revenues
coupled with higher gross margin percentage of 9% in 2023, compared to 4% in 2022, resulted in rental related services gross profit
increasing $1.2 million to $1.9 million in 2023.
Gross Profit on Sales – Sales revenues increased $1.7 million, or 56%, primarily due to higher used equipment sales. The higher sales
revenues and higher gross margins of 38% in 2023, compared to 37% in 2022, resulted in sales gross profit increasing $0.6 million, or 60%,
to $1.7 million in 2023. Sales occur routinely as a normal part of Portable Storage’s rental business; however, these sales can fluctuate from
period to period depending on customer requirements, equipment availability and funding.
For 2023, Portable Storage’s selling and administrative expenses increased $7.1 million, or 29%, to $31.5 million, primarily due to $3.2 million
higher allocated corporate expenses, which included $1.3 million of allocated transaction costs from the divestiture of Adler Tanks, and increased employee
salaries and benefit costs totaling $2.0 million, as compared to 2022.
-40-
TRS-RenTelco
For 2023, TRS-RenTelco’s total revenues decreased $2.5 million, or 2%, to $148.3 million compared to 2022, primarily due to lower rental
revenues, partially offset by higher sales and other revenues. Pre-tax income decreased $12.3 million, or 33%, to $24.6 million for 2023, primarily due to
lower gross profit on rental and sales revenues, coupled with an increase in selling and administrative expenses.
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.
TRS-RenTelco – 2023 compared to 2022
(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
Other income
Income from operations
Interest expense allocation
Foreign currency exchange loss
Pre-tax income
Other Selected Information
Adjusted EBITDA
1
Average rental equipment
Average rental equipment on rent
2
Average monthly total yield
3
Average utilization
4
Average monthly rental rate
1
Period end rental equipment
3
Period end utilization
1.
2.
3.
Year Ended December 31,
Increase (Decrease)
2023
2022
$
%
$
114,247 $
3,139
117,386
27,119
3,772
148,277
121,375 $
3,112
124,487
24,571
1,720
150,778
48,477
2,670
20,642
71,789
13,884
85,673
45,128
469
45,597
13,235
3,772
62,604
(30,962 )
832
32,474
(8,146 )
310
24,638 $
84,736 $
388,679 $
228,787 $
2.43 %
58.9 %
4.16 %
374,438 $
55.9 %
49,253
2,592
21,327
73,172
9,707
82,879
50,795
520
51,315
14,864
1,720
67,899
(27,245 )
—
40,654
(3,294 )
(378 )
36,982 $
92,007 $
383,235 $
245,893 $
2.63 %
64.2 %
4.11 %
395,214 $
59.4 %
$
$
$
$
$
(7,128 )
27
(7,101 )
2,548
2,052
(2,501 )
(776 )
78
(685 )
(1,383 )
4,177
2,794
(5,667 )
(51 )
(5,718 )
(1,629 )
2,052
(5,295 )
3,717
832
(8,180 )
4,852
688
(12,344 )
(7,271 )
5,444
(17,106 )
(20,776 )
(6 )%
1 %
(6 )%
10 %
nm
(2 )%
(2 )%
3 %
(3 )%
(2 )%
43 %
3 %
(11 )%
(10 )%
(11 )%
(11 )%
119 %
(8 )%
14 %
nm
(20 )%
nm
nm
(33 )%
(8 )%
1 %
(7 )%
(8 )%
(8 )%
1 %
(5 )%
(6 )%
Average and Period end rental equipment represents the cost of rental equipment excluding new 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 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
-41-
TRS-RenTelco’s gross profit for 2023 decreased $5.3 million, or 8%, to $62.6 million. For the year ended December 31, 2023 compared to the year
ended December 31, 2022:
•
•
Gross Profit on Rental Revenues – Rental revenues decreased $7.1 million, or 6%, to $114.2 million, with depreciation expense decreasing
$0.8 million, or 2%, and other direct costs decreasing $0.7 million, or 3%, resulting in a decrease in gross profit on rental revenues of $5.7
million, or 11%, in 2023 compared to 2022. As a percentage of rental revenues, depreciation was 42% and 41% in 2023 and 2022,
respectively, and other direct costs were 18% in both 2023 and 2022, which resulted in gross margin percentage of 40% in 2023, compared to
42% in 2022. The reduction in rental revenues was attributed to 7% lower average rental equipment on rent, partly offset by 1% higher
average monthly rental rates.
Gross Profit on Sales – Sales revenues increased $2.5 million, or 10%, to $27.1 million in 2023. Gross profit on sales decreased $1.6
million, or 11%, to $13.2 million, with a gross margin percentage of 49% in 2023, compared to 60% in 2022. The reduction in gross margin
during the year was primarily attributed to a decrease in margin on used equipment sales. 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 2023, TRS-RenTelco’s selling and administrative expenses increased $3.7 million, or 14%, to $31.0 million, primarily due to $2.6 million higher
allocated corporate expenses, which included $1.6 million of allocated transaction costs from the divestiture of Adler Tanks, as compared to 2022.
-42-
Twelve Months Ended December 31, 2022 Compared to
Twelve Months Ended December 31, 2021
Overview
Consolidated revenues in 2022 increased to $733.8 million from $616.8 million in 2021. Consolidated net income in 2022 increased to $115.1
million, or $4.70 per diluted share in 2022, compared to $89.7 million, or $3.66 per diluted share, in 2021. The Company’s year over year total revenue
increase was primarily due to higher rental, sales and rental related services revenues as more fully described below.
Revenues from discontinued operations for the twelve months ended December 31, 2022, was $98.2 million, compared to $82.2 million for the same
period in 2021. Income from discontinued operations for the twelve months ended December 31, 2022, was $11.8 million, compared to $4.6 million for the
same period in 2021. Earnings per diluted share from discontinued operations for 2022 was $0.48, compared to $0.19 for the same period in 2021. For
additional information on discontinued operations and the divestiture of Adler Tanks, refer to Note 5 of the consolidated financial statements.
For 2022 compared to 2021, on a consolidated basis from continuing operations:
•
•
•
•
•
•
Gross profit increased $42.9 million, or 17%, to $290.2 million. Mobile Modular’s gross profit increased $41.1 million, or 23%, due to
higher gross profit on rental, sales and rental related services revenues. TRS-RenTelco’s gross profit increased $6.5 million, or 11%,
primarily due to higher gross profit on rental and sales revenues. Enviroplex’s gross profit decreased $4.8 million, or 48%, primarily due to
$7.9 million lower sales revenues and lower gross margins of 22.1% compared to 31.8% in 2021.
Selling and administrative expenses increased $19.9 million, or 16%, to $142.9 million, primarily due to increased headcount and employees’
salaries and benefit costs totaling $11.2 million and $9.3 million higher marketing and administrative costs.
Interest expense increased $4.0 million, or 48%, due to 15% higher average debt levels of the Company, accompanied by 26% higher net
average interest rates of 3.55% in 2022 compared to 2.81% in 2021.
Pre-tax income contribution in 2022 was 72% and 27% by Mobile Modular and TRS-RenTelco, respectively, compared to 66% and 29%,
respectively, in 2021. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex was 1% and 4% in
2022 and 2021, respectively.
The provision for income taxes resulted in an effective tax rate of 23.3% and 26.3% for the twelve months ended December 31, 2022 and
2021, respectively. The lower rate in 2022 was primarily due to decreased business activity levels in higher tax rate states.
Adjusted EBITDA increased $30.6 million, or 14%, to $251.2 million in 2022. Adjusted EBITDA is a non-GAAP financial measure and is
defined as net income before interest expense, provision for income taxes, depreciation, amortization, non-cash impairment costs, share-
based compensation and transaction costs. A reconciliation of Adjusted EBITDA to net cash provided by operating activities and net income
to Adjusted EBITDA can be found on page 48.
-43-
Mobile Modular
For 2022, Mobile Modular’s total revenues increased $98.4 million, or 27%, to $461.7 million compared to 2021, primarily due to higher rental,
sales and rental related services revenues. Higher gross profit on rental, sales and rental related services revenues, partly offset by $17.6 million higher
selling and administrative expenses, resulted in an increase in pre-tax income of $19.8 million, or 26%, to $96.8 million in 2022.
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.
Mobile Modular – 2022 compared to 2021
(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
Pre-tax income
Other Selected Information
Adjusted EBITDA
1
Average rental equipment
Average rental equipment on rent
2
Average monthly total yield
3
Average utilization
4
Average monthly rental rate
1
Period end rental equipment
3
Period end utilization
1.
2.
3.
Year Ended December 31,
Increase (Decrease)
2022
2021
$
%
$
$
$
$
$
268,288 $
91,851
360,139
99,979
1,599
461,717
31,172
66,254
83,031
180,457
64,073
244,530
154,085
25,597
179,682
35,906
1,599
217,187
(110,234 )
106,953
(10,175 )
96,778 $
159,224 $
1,025,637 $
811,693 $
2.18 %
79.1 %
2.75 %
220,569 $
72,330
292,899
68,982
1,435
363,316
28,071
53,018
60,429
141,518
45,758
187,276
132,070
19,310
151,380
23,225
1,435
176,040
(92,603 )
83,436
(6,433 )
77,003 $
130,089 $
925,951 $
705,577 $
1.99 %
76.2 %
2.61 %
47,719
19,521
67,240
30,997
164
98,401
3,101
13,236
22,602
38,939
18,315
57,254
22,015
6,287
28,302
12,681
164
41,147
17,631
23,517
3,742
19,775
29,135
99,686
106,116
$
1,054,845 $
1,001,165 $
53,680
22 %
27 %
23 %
45 %
11 %
27 %
11 %
25 %
37 %
28 %
40 %
31 %
17 %
33 %
19 %
55 %
11 %
23 %
19 %
28 %
58 %
26 %
22 %
11 %
15 %
10 %
4 %
5 %
5 %
6 %
80.7 %
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.
76.4 %
4.
-44-
Mobile Modular’s gross profit for 2022 increased $41.1 million, or 23%, to $217.2 million. For the year ended December 31, 2022 compared to the
year ended December 31, 2021:
•
•
•
Gross Profit on Rental Revenues – Rental revenues increased $47.7 million, or 22%, due to 15% higher average rental equipment on rent
and 5% higher average monthly rental rates in 2022. As a percentage of rental revenues, depreciation was 12% and 13% in 2022 and 2021,
respectively, and other direct costs were 31% in 2022 and 27% in 2021, which resulted in gross margin percentage of 57% in 2022 compared
to 60% in 2021. The higher rental revenues and lower rental margins resulted in gross profit on rental revenues increasing $22.0 million, or
17%, to $154.1 million in 2022.
Gross Profit on Rental Related Services – Rental related services revenues increased $19.5 million, or 27%, compared to 2021. 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 modular building
delivery and return delivery and dismantle revenues and increased delivery and return delivery revenues at Portable Storage. The higher
revenues accompanied by higher gross margin percentage of 28% in 2022 compared to 27% in 2021, resulted in rental related services gross
profit increasing $6.3 million, or 33%, to $25.6 million in 2022.
Gross Profit on Sales – Sales revenues increased $31.0 million, or 45%, due to higher used and new equipment sales. The higher sales
revenues and higher gross margins of 36% in 2022 compared to 34% in 2021, resulted in sales gross profit increasing $12.7 million, or 55%,
to $35.9 million in 2022. 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 2022, Mobile Modular’s selling and administrative expenses increased $17.6 million, or 19%, to $110.2 million, primarily due to $8.2 million
higher allocated corporate expenses, increased employee salaries and benefit costs totaling $6.0 million, and $2.8 million higher marketing and
administrative costs, compared to 2021.
-45-
TRS-RenTelco
For 2022, TRS-RenTelco’s total revenues increased $10.6 million, or 8%, to $150.8 million compared to 2021, primarily due to higher rental and
sales revenues. Pre-tax income increased $3.2 million, or 10%, to $37.0 million for 2022, primarily due to higher gross profit on rental and sales revenues,
partly offset by an increase in selling and administrative expenses.
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.
TRS-RenTelco – 2022 compared to 2021
(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
Foreign currency exchange loss
Pre-tax income
Other Selected Information
Adjusted EBITDA
1
Average rental equipment
Average rental equipment on rent
2
Average monthly total yield
3
Average utilization
4
Average monthly rental rate
1
Period end rental equipment
3
Period end utilization
1.
2.
3.
Year Ended December 31,
Increase (Decrease)
2022
2021
$
%
$
121,375 $
3,112
124,487
24,571
1,720
150,778
113,419 $
2,880
116,299
22,242
1,653
140,194
49,253
2,592
21,327
73,172
9,707
82,879
50,795
520
51,315
14,864
1,720
67,899
(27,245 )
40,654
(3,294 )
(378 )
36,982 $
92,007 $
383,235 $
245,893 $
2.63 %
64.2 %
4.11 %
395,214 $
59.4 %
47,374
2,704
19,148
69,226
9,574
78,800
46,897
176
47,073
12,667
1,653
61,394
(25,152 )
36,243
(2,270 )
(210 )
33,763 $
85,723 $
351,895 $
235,773 $
2.69 %
67.0 %
4.01 %
361,130 $
62.9 %
$
$
$
$
$
7,956
232
8,188
2,329
67
10,584
1,879
(112 )
2,179
3,946
133
4,079
3,898
344
4,242
2,197
67
6,505
2,093
4,411
1,024
(168 )
3,219
6,284
31,340
10,120
34,084
7 %
8 %
7 %
10 %
4 %
8 %
4 %
(4 )%
11 %
6 %
1 %
5 %
8 %
nm
9 %
17 %
4 %
11 %
8 %
12 %
45 %
nm
10 %
7 %
9 %
4 %
(2 )%
(4 )%
2 %
9 %
(6 )%
Average and Period end rental equipment represents the cost of rental equipment excluding new 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 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
-46-
TRS-RenTelco’s gross profit for 2022 increased $6.5 million, or 11%, to $67.9 million. For the year ended December 31, 2022 compared to the year
ended December 31, 2021:
•
•
Gross Profit on Rental Revenues – Rental revenues increased $8.0 million, or 7%, to $121.4 million, with depreciation expense increasing
$1.9 million, or 4%, and other direct costs increasing $2.2 million, or 11%, resulting in an increase in gross profit on rental revenues of $3.9
million, or 8%, in 2022 compared to 2021. As a percentage of rental revenues, depreciation was 41% and 42% in 2022 and 2021,
respectively, and other direct costs was 18% in 2022 compared to 17% in 2021, which resulted in gross margin percentage of 42% in 2022
compared to 41% in 2021. The rental revenues increase was due to 4% higher average rental equipment on rent and 2% higher average
monthly rental rates.
Gross Profit on Sales – Sales revenues increased $2.3 million, or 10%, to $24.6 million in 2022. Gross profit on sales increased $2.2
million, or 17%, to $14.9 million with a gross margin percentage of 60% in 2022, compared to 57% in 2021. The increase in gross margin
during the year was primarily attributed to an increase in margin on used equipment sales. 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 2022, TRS-RenTelco’s selling and administrative expenses increased $2.1 million, or 8%, to $27.2 million, primarily due to $0.9 million higher
allocated corporate expenses and an increase of $0.7 million in marketing and administrative expenses, compared to 2021.
-47-
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, non-cash impairment costs, share-based compensation and transaction costs. 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, and transaction costs is useful
in measuring the Company’s cash available for operations and performance of the Company. Because management finds Adjusted EBITDA useful, the
Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance.
Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data
prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an
alternative for GAAP and may be different from non−GAAP measures used by other companies. Unlike EBITDA, which may be used by other companies
or investors, Adjusted EBITDA does not include share-based compensation charges and transaction costs. 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 Income from Continuing Operations to Adjusted EBITDA
(dollar amounts in thousands)
Income from continuing operations
Provision for income taxes
Interest expense
Depreciation and amortization
EBITDA
Share-based compensation
3
Transaction costs
1
Adjusted EBITDA
2
Adjusted EBITDA margin
Year Ended December 31,
2021
2020
2019
2023
111,852
37,610
40,560
107,918
297,940
8,157
15,877
321,974
$
$
$
$
2022
103,309 $
31,377
12,230
93,490
240,406
6,747
4,053
251,206 $
85,085 $
30,725
8,244
87,972
212,026
6,585
2,045
220,656 $
96,121 $
28,715
6,680
75,751
207,267
4,746
—
212,013 $
85,907
28,961
8,894
69,802
193,564
4,805
—
198,369
39 %
40 %
41 %
43 %
42 %
1.
2.
3.
Adjusted EBITDA is defined as income from operations before interest expense, provision for income taxes, depreciation, amortization, share-based compensation and transaction costs.
Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenues for the period.
Transaction costs include acquisition and divestiture related legal and professional fees and other costs specific to these transactions.
For the year ended December 31, 2023, total Adjusted EBITDA from both continuing and discontinued operations was $325.7 million, excluding
the gain on divestiture of Adler Tanks, compared to $288.9 million for the same period in 2022. For the years ended December 31, 2023 and 2022, the total
Adjusted EBITDA from continuing operations was $322.0 million and $251.4 million, respectively, and the total Adjusted EBITDA from discontinued
operations was $3.7 million and $37.7 million, respectively.
The following table reconciles Adjusted EBITDA on a combined basis, including both continuing and discontinued operations, to the net cash
provided by operating activities on the Company's consolidated statement of cash flows.
-48-
Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities
(dollar amounts in thousands)
1
Adjusted EBITDA
Interest paid
Income taxes paid, net of refunds received
Gain on sale of used rental equipment
Foreign currency exchange (gain) loss
Amortization of debt issuance costs
Change in certain assets and liabilities:
Accounts receivable, net
Prepaid expenses and other assets
Accounts payable and other liabilities
Deferred income
Net cash provided by operating activities
2023
325,656
$
(38,603 )
(91,565 )
(31,642 )
(310 )
8
2022
288,866
$
(14,775 )
(27,362 )
(37,979 )
378
16
Year Ended December 31,
2021
248,617 $
(10,326 )
(9,087 )
(25,441 )
210
15
2020
241,023 $
(9,050 )
(34,903 )
(19,329 )
(78 )
11
(35,143 )
(29,326 )
(17,826 )
14,094
95,343
$
(30,524 )
(16,484 )
8,595
23,701
194,432
$
(23,946 )
(6,816 )
11,155
9,082
193,463 $
4,783
3,807
3,229
(8,989 )
180,504 $
2019
236,824
(12,475 )
(17,528 )
(21,309 )
(84 )
11
(6,310 )
(13,530 )
17,257
5,138
187,994
$
$
1.
2.
3.
Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation, amortization, non-cash impairment costs and share-based
compensation.
Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenues for the period.
Transaction costs include acquisition and divestiture related legal and professional fees and other costs specific to these transactions.
Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, the Note Purchase Agreement,
Series D Senior Notes, Series E Senior Notes and Series F 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”). These instruments contain financial
covenants requiring the Company to not:
•
•
Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Facility and the Note Purchase Agreement (as defined and
more fully described under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources” in this MD&A)) of Adjusted EBITDA (as defined in the Credit Facility and the Note Purchase Agreement)
to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At December 31, 2023, the actual ratio was 3.33 to 1.
Permit the Consolidated Leverage Ratio of funded debt (as defined in the Credit Facility and the Note Purchase Agreement) to Adjusted
EBITDA at any time during any period of four consecutive quarters to be greater than 2.75 to 1. At December 31, 2023, the actual ratio was
2.34 to 1.
At December 31, 2023, 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.
-49-
Liquidity and Capital Resources
The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company in 2023 as compared to
2022 are summarized as follows:
Cash Flows from Operating Activities: The Company’s operations provided net cash flows of $95.3 million for 2023, compared to $194.4 million
in 2022. The $99.1 million reduction in net cash provided by operating activities was primarily the result of the $61.5 million gain on sale of discontinued
operations and $48.9 million lower accounts payable and accrued liabilities in 2023, as compared to 2022.
Cash Flows from Investing Activities: Net cash used in investing activities was $391.9 million for 2023, compared to $131.4 million in 2022. The
$260.4 million increase in net cash used was primarily due to the $462.1 million paid for the business acquisitions of Vesta Modular, Brekke Storage, Dixie
Storage and Inland Leasing in 2023, partly offset by $268.0 million in proceeds received from the sale of the Adler Tanks business.
Cash Flows from Financing Activities: Net cash provided by financing activities was $296.4 million in 2023, compared to net used of $63.5
million in 2022. The change in net cash during 2023 was primarily due to increased borrowings under bank lines of credit and note purchase agreements.
The borrowings in 2023 were primarily attributed to the funding of the Vesta Modular, Brekke Storage, Dixie Storage and Inland Leasing acquisitions, and
capital needs for the tax obligations arising from the divestiture of Adler Tanks.
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 flows from operations, proceeds from the sale of rental equipment and from
borrowings. During the year ended December 31, 2023, the Company sold its Adler Tanks business, generating a total of $202.7 million in net proceeds,
which were primarily used to expand the Company's rental asset fleet through the purchase of Vesta Modular. Sales of rental equipment 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 sales of used rental equipment
Proceeds from sale of discontinued operation, net of tax
Cash available for purchase of rental equipment
Purchases of rental equipment
Cash available for other purposes
2023
Year Ended December 31,
2022
2021
Three Year
Totals
$
95,343
66,168
202,706
364,217
(229,679 )
$
134,538
$
194,432
73,879
—
268,311
(187,689 )
$
80,622
$
195,743
57,337
—
253,080
(114,145 )
$
138,935
485,518
197,384
202,706
885,608
(531,513 )
354,095
$
$
In addition to increasing its rental assets, the Company has periodically made acquisitions of businesses and business assets. During the year ended
December 31, 2023, the Company transacted a total of $462.1 million in acquisition related costs. There were no acquisition related transactions during the
year ended December 31, 2022 and $292.2 million in acquisition related costs during the same period in 2021. The Company had other capital
expenditures for property, plant and equipment of $44.0 million in 2023, $17.6 million in 2022 and $2.7 million in 2021, and has used cash to provide
returns to its shareholders in the form of cash dividends. The Company paid cash dividends of $45.6 million, $44.3 million and $42.2 million in the years
ended December 31, 2023, 2022 and 2021, respectively.
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 2,000,000 shares of the Company's outstanding
common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal
requirements and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of
authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the repurchase program
may be modified, extended or terminated by the Board of Directors at any time. There were no shares of common stock repurchased during the twelve
months
-50-
ended December 31, 2023, 2022 and 2021. As of December 31, 2023, 1,309,805 shares remain authorized for repurchase under the Repurchase Plan.
Unsecured Revolving Lines of Credit
On July 15, 2022, the Company entered into an amended and restated credit agreement with Bank of America, N.A., as Administrative Agent,
Swing Line Lender, L/C Issuer and lender, and other lenders named therein (the “Credit Facility”). The Credit Facility provides for a $650.0 million
unsecured revolving credit facility (which may be further increased to $950.0 million by adding one or more tranches of term loans and/or increasing the
aggregate revolving commitments), which includes a $40.0 million sublimit for the issuance of standby letters of credit and a $20.0 million sublimit for
swingline loans. The proceeds of the Credit Facility are available to be used for general corporate purposes, including permitted acquisitions. The Credit
Facility permits the Company’s existing indebtedness to remain, which includes the Company’s $20.0 million Treasury Sweep Note due July 15, 2027, the
Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as
of April 21, 2011 (as amended): (i) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015 which were repaid on November 5,
2022, (ii) the $40.0 million aggregate outstanding principal of notes issued March 17, 2021 and due March 17, 2028, and (iii) the $60.0 million aggregate
outstanding principal of notes issued June 16, 2021 and due June 16, 2026. In addition, the Company may incur additional senior note indebtedness in an
aggregate amount not to exceed $250.0 million. The Credit Facility matures on July 15, 2027 and replaced the Company’s prior $420.0 million credit
facility dated March 31, 2020 with Bank of America, N.A., as agent, as amended. All obligations outstanding under the prior credit facility as of the date of
the Credit Facility were refinanced by the Credit Facility on July 15, 2022.
On August 19, 2022, the Company entered into an amended and restated Credit Facility Letter Agreement and a Credit Line Note in favor of MUFG
Union Bank, N.A., which provides for a $20.0 million line of credit facility related to its cash management services (“Sweep Service Facility”). The Sweep
Service Facility matures on the earlier of July 15, 2027, or the date the Company ceases to utilize MUFG Union Bank, N.A. for its cash management
services. The Sweep Service Facility replaced the Company’s prior $12.0 million sweep service facility, dated as of March 30, 2020.
At December 31, 2023, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up
to $650.0 million of which $588.0 million was outstanding. The Credit Facility contains financial covenants requiring the Company to not (all defined
terms used below not otherwise defined herein have the meaning assigned to such terms in the Amended Credit Facility):
•
•
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, 2023, the actual ratio was 3.33 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, 2023, the actual ratio was 2.34 to 1.
At December 31, 2023, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the
Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could
impact the Company’s ability to comply with these covenants.
Note Purchase and Private Shelf Agreement
On June 8, 2023, the Company entered into a Second Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase
Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series D and Series E Notes previously issued pursuant to the Prior Amended and Restated
NPA, among the Company and the other parties to the Note Purchase Agreement. The Note Purchase Agreement amended and restated, and superseded in
its entirety, the Prior NPA. Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 2.57% Series D Senior
Notes, due March 17, 2028, and (ii) $60.0 million aggregate principal amount of its 2.35% Series E Senior Notes, due June 16, 2026, to which the terms of
the Note Purchase Agreement shall apply.
In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf
Notes”) in the aggregate principal amount of (x) $300 million minus (y) the amount of other notes (such as the Series D Senior Notes, Series E Senior
Notes and Series F Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so
issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than
15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have
such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes
may be issued and sold from time to time at the discretion of the Company’s Board of Directors and in such amounts as the Board of Directors may
determine, subject to prospective purchasers’ agreement to purchase the Shelf Notes. The Company will sell the Shelf Notes directly to such
-51-
purchasers. The full net proceeds of each Shelf Note will be used in the manner described in the applicable Request for Purchase with respect to such Shelf
Note.
6.25% Senior Notes Due in 2030
On September 27, 2023, the Company issued and sold to the purchasers $75.0 million aggregate principal amount of 6.25% Series F Notes (the
“Series F Senior Notes”) pursuant to the terms of the Second Amended and Restated Note Purchase and Private Shelf Agreement, dated June 8, 2023 (the
“Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series F Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 6.25% per annum and mature on September 27,
2030. Interest on the Series F Senior Notes is payable semi-annually beginning on March 27, 2024 and continuing thereafter on September 27 and March
27 of each year until maturity. The principal balance is due when the notes mature on September 27, 2030. The full net proceeds from the Series F Senior
Notes will primarily be used to fulfill the income tax obligations incurred from the divestiture of Adler Tanks. At December 31, 2023, the principal balance
outstanding under the Series F Senior Notes was $75.0 million.
2.57% Senior Notes Due in 2028
On March 17, 2021, the Company issued and sold to the purchasers $40 million aggregate principal amount of 2.57% Series D Notes (the “Series D
Senior Notes”) pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase
Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series D Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.57% per annum and mature on March 17,
2028. Interest on the Series D Senior Notes is payable semi-annually beginning on September 17, 2021 and continuing thereafter on March 17 and
September 17 of each year until maturity. The principal balance is due when the notes mature on March 17, 2028. The full net proceeds from the Series D
Senior Notes were used to pay off the Company’s $40 million Series B Senior Notes. At December 31, 2023, the principal balance outstanding under the
Series D Senior Notes was $40.0 million.
2.35% Senior Notes Due in 2026
On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E
Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase
Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026.
Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of
each year until maturity. The principal balance is due when the notes mature on June 16, 2026. The full net proceeds from the Series E Senior Notes were
used to pay down the Company’s credit facility. At December 31, 2023, the principal balance outstanding under the Series E Senior Notes was $60.0
million.
Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series D Senior Notes,
Series E Senior Notes and Series F Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not
otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement):
•
•
Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA (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, 2023, the actual ratio was 3.33 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, 2023, the actual ratio was 2.34 to 1.
At December 31, 2023, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the
Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could
impact the Company’s ability to comply with these covenants.
Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit and issue senior notes
adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment.
Contractual Obligations and Commitments
At December 31, 2023, the Company’s material contractual obligations and commitments consisted of outstanding borrowings under our credit
facilities expiring in 2027, outstanding amounts under our 2.35%, 2.57% and 6.25% senior notes due in 2026, 2028 and 2030, respectively, and operating
leases for facilities. The operating lease amounts exclude property taxes and insurance. The table
-52-
below provides a summary of the Company’s contractual obligations and reflects expected payments due as of December 31, 2023 and does not reflect
changes that could arise after that date.
Payments Due by Period
(dollar amounts in thousands)
Revolving lines of credit
6.25% Series F senior notes due in 2030
2.57% Series D senior notes due in 2028
2.35% Series E senior notes due in 2026
Operating leases for facilities
Total contractual obligations
Total
588,000
107,813
44,626
63,525
15,002
818,966
$
$
$
$
Within
1 Year
Within
2 to 3 Years
Within
4 to 5 Years
More than
5 Years
—
4,688
1,028
1,410
6,270
13,396
$
$
— $
9,375
2,056
62,115
6,827
80,373 $
588,000 $
9,375
41,542
—
786
639,703 $
—
84,375
—
—
1,119
85,494
The Company believes that its needs for working capital and capital expenditures through 2024 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 65 for a more detailed presentation of the sources and uses of the
Company's cash.
Critical Accounting Policies
The Company prepares its consolidated financial statements in accordance with GAAP. A summary of the Company’s significant accounting
policies are in Note 1 to the Company’s consolidated financial statements. The Company determined its critical accounting policies by considering those
policies that involve the most complex or subjective assumptions, estimates, and/or judgment. Material changes in these assumptions, estimates or
judgments could have the potential to have a material impact on the Company’s financial results. The Company has identified below the accounting
policies that it believes could potentially have a material impact on operating results if a change in assumption, estimate and/or judgment were to occur.
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 portable storage containers,
external factors to consider may include, but are not limited to, the quality of the steel construction, types of materials stored and the frequency of
movements and uses. Internal factors for portable storage containers may include, but are not limited to, change in equipment specifications and
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.
To the extent that the useful lives of all of our rental equipment were to decrease or increase by one year, the Company estimates the annual
depreciation expense would increase or decrease by approximately $4 million. If the estimated residual values of all of our rental equipment were to
change one percentage point, the Company estimates the annual depreciation expense would change by approximately $1 million. Any changes in
depreciation expense as a result of a change in useful lives or residual values would result in a proportional increase or decrease in the gross profit the
Company would recognize upon the ultimate sale of the equipment.
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 portable storage office conversions, 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. The Company capitalized $16 million in extended life or value added refurbishments in 2023. Changes in these policies to
expense these costs as incurred could impact the Company’s financial results.
-53-
Acquisition Accounting - The Company has made acquisitions of businesses in the past and records the assets acquired and liabilities assumed
based on their respective fair values at the date of acquisition. Long-lived assets (primarily rental equipment), goodwill and other intangible assets
generally represent the largest components of the Company’s acquisitions. Determining the fair value of the assets and liabilities acquired can be
judgmental in nature and can involve the use of significant estimates and assumptions. Rental equipment is valued utilizing either a cost, market or income
approach, or a combination of certain of these methods, depending on the asset being valued and the availability of market or income data. The intangible
assets acquired are primarily comprised of customer relationships, non-compete agreements and trade names. These assets are valued on an excess
earnings or income approach based on projected cash flows. The estimated fair values of these intangible assets reflect various assumptions about revenue
growth rates, operating margins, projected cash flows, discount rates, customer attrition rates, terminal values, useful lives and other prospective financial
information. When appropriate, the Company’s estimates of the fair values of assets and liabilities acquired include assistance from independent third-party
valuation firms. Goodwill is calculated as the excess of the cost of the acquired business over the net of the fair value of the assets acquired and the
liabilities assumed. The judgments made in determining the estimated fair value assigned to the assets acquired, as well as the estimated life of the assets,
can materially impact the Company’s financial results in periods subsequent to the acquisition through depreciation and amortization, and in certain
instances through impairment charges, if the asset becomes impaired in the future. As discussed below, we regularly review for impairments.
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 evaluates the carrying value of rental equipment for impairment whenever events and circumstances have occurred that would
indicate the carrying value may not be fully recoverable. Determining fair value includes estimates and judgments regarding the projected net cash flows
considering current and future market conditions including assumptions regarding utilization, rental pricing, the condition of the equipment, the
equipment’s expected remaining life and sale proceeds. 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’s goodwill is not amortized to expense, the Company assesses whether it is more
likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete
quantitative impairment assessments. These impairment assessments occur annually, or more frequently if an event occurs, or circumstances change in the
interim that would indicate that it was more likely than not the fair value had reduced below its carrying value. Application of the goodwill impairment
assessment requires judgement including the identification of reporting units, assignment of assets and liabilities to reporting units, business projections
including changes in pricing, rental and sale activity and costs, long term growth rates and discount rates. In 2023, 2022 and 2021 the Company performed
qualitative assessments taking into consideration the market value of the Company, any changes in management, key personnel, strategy and any relevant
macroeconomic conditions, concluding that the fair value of the reporting units substantially exceeded the respective reporting units carrying value,
including goodwill.
Intangible assets (other than goodwill) acquired are recorded at their estimated fair value at the date of acquisition. Definite lived intangibles are
amortized over their expected useful lives, while indefinite lived intangibles are not amortized. The Company monitors conditions related to these assets to
determine whether events and circumstances warrant a revision to the remaining amortization period. The Company tests these assets for potential
impairment annually and whenever management determines events or changes in circumstances indicate that the carrying value may not be recoverable.
Revenue recognition:
Lease revenue - Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating
segments. Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. Rental related
services revenues are primarily associated with relocatable modular building and portable storage container leases. For modular building leases, rental
related services revenues for modifications, delivery, installation, dismantle and return delivery are lease related because the payments are considered
minimum lease payments that are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line
basis over the term of the lease. Certain leases are accounted for as 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 revenues include interest income on sales-type leases and rental income on facility leases.
Non-lease revenue - 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. The
Company typically recognizes non-lease related revenues at a point in time because the customer does not simultaneously consume the benefits of the
Company’s promised goods and services, or performance obligations, and obtain control when delivery and installation are complete. Revenue from
contracts that satisfy the criteria for over-time recognition
-54-
are recognized as work is performed by using the input method based on the ratio of costs incurred to estimated total contract costs for each contract. For
contracts that have multiple performance obligations, the transaction price is allocated to each performance obligation in the contract based on the
Company’s best estimate of the standalone selling prices of each distinct performance obligation in the contract. The standalone selling price is typically
determined based upon the expected cost plus an estimated margin of each performance obligation. Judgment is involved in determining the performance
obligations and standalone selling prices. To the extent actual results were to differ from these estimates, the timing of profit recognition could change and
impact the Company’s financial results.
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 2.35%, 2.57% and 6.25% senior notes
due in 2026, 2028 and 2030, respectively, and its revolving lines of credit. Weighted average variable rates are based on implied forward rates in the yield
curve at December 31, 2023. 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 E, Series D and Series F Senior Notes and the Company’s revolving lines
of credit under the Credit Facility and Sweep Service Facility as of December 31, 2023.
(dollar amounts in thousands)
Revolving lines of credit
Weighted average interest rate
2.35% Series E senior notes due in 2026
Stated interest rate
2.57% Series D senior notes due in 2028
Stated interest rate
6.25% Series F senior notes due in 2030
Stated interest rate
2024
2025
2026
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
—
—
$ 60,000
$
2.35 %
—
$
—
$
—
2027
588,00
2028
Thereafter
Estimated
Fair Value
Total
588,00
— $
0 $
—
6.63 %
— $
— $
—
—
— $ 40,000 $
2.57 %
—
$
—
—
0 $ 588,000
— $
6.63 %
—
— $ 60,000 $ 55,950
—
2.35 %
— $ 40,000 $ 35,931
2.57 %
—
75,000 $ 75,000 $ 77,283
6.25 %
6.25 %
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 Company commenced the closure of its Indian operations during 2017. The
Canadian 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 2023, 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 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.
-55-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 248)
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
-56-
Page
57
58
61
62
63
64
65
66
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 consolidated 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. On February 1, 2023,
McGrath RentCorp completed its acquisition of Vesta Modular Housing Solutions Holdings, Inc. ("Vesta Modular"), as discussed in Note 4. Acquisitions.
Management has excluded Vesta Modular's internal controls from its assessment of the effectiveness of internal controls over financial reporting as of
December 31, 2023. Vesta Modular's revenues and total assets (excluding goodwill and intangible assets) represents approximately 13 and 14 percent,
respectively, of the consolidated financial statement amounts as of, and for the fiscal year ended, December 31, 2023.
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, 2023
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, 2023, the Company’s internal control over financial reporting
was effective based on those criteria.
-57-
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
McGrath RentCorp
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of McGrath RentCorp (a California corporation) and subsidiaries (the “Company”) as of
December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2023, 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) (“PCAOB”), the consolidated
financial statements of the Company as of and for the year ended December 31, 2023, and our report dated February 21, 2024 expressed an unqualified
opinion on those financial statements.
Basis for opinion
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 ("Management's
Report"). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of Vesta
Housing Solutions Holdings, Inc. (“Vesta Modular”), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting
14 and 13 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2023. As indicated in
Management’s Report, Vesta Modular was acquired during 2023. Management’s assertion on the effectiveness of the Company’s internal control over
financial reporting excluded internal control over financial reporting of Vesta Modular.
Definition and limitations of internal control over financial reporting
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.
/s/ GRANT THORNTON LLP
San Francisco, California
February 21, 2024
-58-
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
McGrath RentCorp
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of McGrath RentCorp (a California corporation) and subsidiaries (the “Company”) as of
December 31, 2023 and 2022, 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, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2023, 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) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2023, 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 21, 2024 expressed an unqualified
opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Customer Relationships Intangible Asset Acquired through Vesta Modular Acquisition
As described further in Note 4 to the financial statements, the Company completed the purchase of substantially all of the assets of Vesta Housing Solutions
Holdings, Inc. (“Vesta Modular”) for $437.2 million in cash consideration. The acquisition was accounted for as a purchase of a “business” in accordance
with criteria in Accounting Standards Certification (ASC) 805 – Business Combinations using the purchase method of accounting. We identified the
valuation of the acquired customer relationships asset as a critical audit matter.
The principal considerations for our determination that the Company’s assessment of the fair value of the acquired customer relationships asset represents a
critical audit matter is that the judgments and key assumptions made in assessing the fair value of the customer relationship are complex and subjective.
The significant assumptions utilized to determine the fair value included projected future cash
-59-
flows, associated discount rates used to calculate present value, customer attrition rates, and other assumptions that form the basis of the forecasted results.
These significant assumptions are forward looking and could be affected by future economic and market conditions.
Our audit procedures related to the valuation of the customer relationships asset from the acquisition of Vesta Modular included the following, among
others:
• We inspected the purchase agreement and evaluated management’s process for identifying and estimating the fair value of the acquired customer
relationships asset.
• We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company's controls over its valuation of the acquired
customer relationships asset, including determination of the underlying assumptions.
• We evaluated the Company's selection of the valuation methodology and significant assumptions for reasonableness. We compared management’s
assumptions used to develop the discount rates to the weighted average cost of capital of guideline public companies. Additionally, we compared the
significant assumptions related to prospective financial information to the industry. We also performed a sensitivity analysis of the significant assumptions
to evaluate the impact on the concluded fair value that would result from changes in assumptions.
• We reviewed the qualifications of the external third-party valuation specialist engaged by management in the fair value determination.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2002.
San Francisco, California
February 21, 2024
-60-
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Cash
Accounts receivable, net of allowance for credit losses of $2,801 at December 31, 2023 and $2,300 at
December 31, 2022
Rental equipment, at cost:
December 31,
2023
2022
$
877 $
957
227,368
169,937
Relocatable modular buildings
Portable storage containers
Electronic test equipment
Less: accumulated depreciation
Rental equipment, net
Property, plant and equipment, net
Prepaid expenses and other assets
Intangible assets, net
Goodwill
Assets of discontinued operations
Total assets
Liabilities and Shareholders' Equity
Liabilities:
Notes payable
Accounts payable and accrued liabilities
Deferred income
Deferred income taxes, net
Liabilities of discontinued operations
Total liabilities
Commitments and contingencies (Note 12)
Shareholders’ equity:
Common stock, no par value - Authorized 40,000 shares
Issued and outstanding - 24,496 shares as of December 31, 2023 and 24,388 shares as of
December 31, 2022
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.
-61-
1,291,093
236,123
377,587
1,904,803
(575,480 )
1,329,323
169,114
102,789
64,588
323,224
—
2,217,283 $
762,975 $
167,523
111,428
241,555
—
1,283,481
111,122
822,796
(116 )
933,802
2,217,283 $
938,081
185,187
398,267
1,521,535
(531,218 )
990,317
138,713
69,837
35,431
106,403
196,249
1,707,844
413,742
151,208
82,417
203,361
53,171
903,899
110,080
693,943
(78 )
803,945
1,707,844
$
$
$
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
2023
Year Ended December 31,
2022
2021
(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
Costs of sales
Total costs of revenues
Gross profit
Selling and administrative expenses
Other income
Income from operations
Interest expense
Foreign currency exchange gain (loss)
Income from continuing operations before provision for income taxes
Provision for income taxes from continuing operations
Income from continuing operations
Discontinued operations:
Income from discontinued operations before provision for income taxes
Provision for income taxes from discontinued operations
Gain on sale of discontinued operations, net of tax
Income from discontinued operations
Net income
Earnings per share from continuing operations:
Basic
Diluted
Earnings per share from discontinued operations:
Basic
Diluted
Earnings per share:
Basic
Diluted
Shares used in per share calculation:
Basic
Diluted
Cash dividends declared per share
The accompanying notes are an integral part of these consolidated financial statements.
-62-
$
$
474,336
138,160
612,496
207,165
12,181
831,842
$
389,663
94,963
484,626
147,720
3,319
635,665
88,912
96,628
114,942
300,482
137,727
438,209
393,633
(207,539 )
3,618
189,712
(40,560 )
310
149,462
37,610
111,852
1,709
453
61,513
62,769
80,425
68,846
104,358
253,629
91,828
345,457
290,208
(142,914 )
—
147,294
(12,230 )
(378 )
134,686
31,377
103,309
15,334
3,505
—
11,829
333,988
75,210
409,198
122,305
3,088
534,591
75,445
55,722
79,577
210,744
76,525
287,269
247,322
(123,058 )
—
124,264
(8,244 )
(210 )
115,810
30,725
85,085
5,946
1,326
—
4,620
$
$
$
$
$
$
$
$
174,621
$
115,138
$
89,705
4.57
4.56
2.57
2.56
7.14
7.12
24,469
24,529
1.86
$
$
$
$
$
$
$
4.24
4.21
0.49
0.48
4.73
4.70
24,353
24,519
1.82
$
$
$
$
$
$
$
3.51
3.47
0.19
0.19
3.70
3.66
24,220
24,515
1.74
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
Year Ended December 31,
2023
2022
2021
$
174,621 $
115,138 $
89,705
Foreign currency translation adjustment, net of tax impact
Comprehensive income
(38 )
174,583 $
(24 )
115,114 $
50
89,755
$
The accompanying notes are an integral part of these consolidated financial statements.
-63-
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
Balance at December 31, 2020
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Taxes paid related to net share settlement of stock awards
Dividends accrued at $1.74 per share
Other comprehensive income
Balance at December 31, 2021
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Taxes paid related to net share settlement of stock awards
Dividends accrued at $1.82 per share
Other comprehensive loss
Balance at December 31, 2022
Net income
Share-based compensation
Common stock issued under stock plans, net of shares
withheld for employee taxes
Taxes paid related to net share settlement of stock awards
Dividends accrued at $1.86 per share
Other comprehensive loss
Balance at December 31, 2023
Shares
24,128
—
—
132
—
—
—
24,260
—
—
128
—
—
—
24,388
—
—
108
—
—
—
24,496
The accompanying notes are an integral part of these consolidated financial statements.
-64-
Common Stock
$
Amount
106,289
—
7,666
Retained
Earnings
$ 576,419
Accumulated
Other
Comprehensiv
e
Income (Loss)
$
89,705
—
Total
Shareholders’
Equity
(104 ) $ 682,604
89,705
7,666
—
—
—
(5,345 )
—
—
108,610
—
8,009
—
(6,539 )
—
—
110,080
—
8,275
—
—
(42,659 )
—
623,465
115,138
—
—
—
(44,660 )
—
693,943
174,621
—
—
—
—
50
(54 )
—
—
—
—
—
(24 )
(78 )
—
—
—
(5,345 )
(42,659 )
50
732,021
115,138
8,009
—
(6,539 )
(44,660 )
(24 )
803,945
174,621
8,275
—
(7,233 )
—
—
111,122
—
—
(45,768 )
—
$ 822,796 $
$
—
—
(7,233 )
—
(45,768 )
—
(38 )
(38 )
(116 ) $ 933,802
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:
Depreciation and amortization
Deferred income taxes
Provision for credit losses
Share-based compensation
Gain on sale of property, plant and equipment
Gain on sale of discontinued operations
Gain on sale of used rental equipment
Foreign currency exchange (gain) loss
Amortization of debt issuance costs
Change in:
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred income
Net cash provided by operating activities
Cash Flows from Investing Activities:
Proceeds from sale of discontinued operations
Purchases of rental equipment
Purchases of property, plant and equipment
Cash paid for acquisition of businesses
Cash paid for acquisition of business assets
Cash paid for acquisition of non-compete agreements
Proceeds from sales of used rental equipment
Proceeds from sales of property, plant and equipment
Net cash used in investing activities
Cash Flows from Financing Activities:
Net borrowings under bank lines of credit
Borrowings under senior note purchase agreement
Principal payment of Series C senior notes
Principal payment of Series B senior notes
Taxes paid related to net share settlement of stock awards
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
2023
Year Ended December 31,
2022
2021
$
174,621 $
115,138 $
89,705
109,375
(16,952 )
2,633
8,275
(3,618 )
(61,513 )
(31,642 )
(310 )
8
(37,776 )
(29,326 )
(32,526 )
14,094
95,343
268,012
(229,679 )
(43,989 )
(458,315 )
(3,767 )
—
66,168
9,702
(391,868 )
274,225
75,000
—
—
(7,233 )
(45,556 )
296,436
9
(80 )
957
877 $
38,603 $
91,565 $
12,010 $
16,653 $
111,344
4,486
837
8,009
—
—
(37,979 )
378
16
(31,361 )
(16,484 )
16,347
23,701
194,432
—
(187,689 )
(17,617 )
—
—
—
73,879
—
(131,427 )
47,275
—
(60,000 )
—
(6,539 )
(44,269 )
(63,533 )
(6 )
(534 )
1,491
957 $
14,775 $
27,362 $
11,227 $
13,220 $
106,695
26,348
451
7,666
—
—
(25,441 )
210
15
(24,397 )
(6,816 )
12,225
9,082
195,743
—
(114,145 )
(2,680 )
(283,124 )
(6,585 )
(2,500 )
57,337
—
(351,696 )
143,729
100,000
—
(40,000 )
(5,345 )
(42,182 )
156,202
4
253
1,238
1,491
10,326
9,087
11,280
5,750
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
-65-
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 three rental divisions; relocatable modular buildings, portable storage containers and electronic test equipment.
Although the Company’s primary emphasis is on equipment rentals, sales of equipment occur in the normal course of business. At December 31, 2023, the
Company was comprised of four reportable business segments: modular building segment ("Mobile Modular"), portable storage container segment
(“Portable Storage”), electronic test equipment segment (“TRS-RenTelco”) and classroom manufacturing division selling modular classrooms in California
(“Enviroplex”).
Agreement and Plan of Merger with WillScot Mobile Mini Holdings Corp.
On January 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with WillScot Mobile Mini Holdings
Corp., a Delaware corporation ("WillScot Mobile Mini”), Brunello Merger Sub I, Inc., a California corporation and a direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub I”), and Brunello Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of
WillScot Mobile Mini (“Merger Sub II”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub I
will merge with and into the Company (the “First-Step Merger”), with the Company surviving the First-Step Merger and, immediately thereafter, the
Company will merge with and into Merger Sub II (the “Second-Step Merger” and together with the First-Step Merger, the “Transaction”), with Merger Sub
II surviving the Second-Step Merger as a wholly owned subsidiary of WillScot Mobile Mini. Each of the parties to the Merger Agreement intends that the
Transaction will be treated as a single integrated transaction that qualifies as a “reorganization” within the meaning of Section 368(a) of the U.S. Internal
Revenue Code of 1986, as amended. Consummation of the Transaction is subject to the approval of the Company’s shareholders, the receipt of required
regulatory approvals, and satisfaction or waiver of other customary closing conditions. The First-Step Merger and the Second-Step Merger will be
consummated on the same day.
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”),
each share of common stock, no par value, of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective
Time, other than shares of Company Common Stock owned by WillScot Mobile Mini or any subsidiary of WillScot Mobile Mini or the Company, and
shares held by shareholders who did not vote in favor of the Transaction (or consent thereto in writing) and who are entitled to demand and properly
demands appraisal of such shares, will be automatically converted into the right to receive either (1) $123 in cash (the “Per Share Cash Consideration”) or
(2) 2.8211 (the “Exchange Ratio”) shares of validly issued, fully paid and nonassessable shares of common stock, par value $0.0001, of WillScot Mobile
Mini (the “WillScot Mobile Mini Common Stock”) (the “Per Share Stock Consideration” together with the Per Share Cash Consideration, the “Merger
Consideration”), as determined pursuant to the election and allocation procedures in the Merger Agreement. The Company’s shareholders will have the
opportunity to elect to receive either the Per Share Cash Consideration or the Per Share Stock Consideration in respect of their Company Common Stock,
provided that 60% of the Company Common Stock will be converted into the cash consideration and 40% of the Company Common Stock will be
converted into the stock consideration. Pursuant to the terms of the Merger Agreement, the closing of the Merger Agreement is subject to the satisfaction of
customary closing conditions, including adoption of the Merger Agreement by the Company’s shareholders and receipt of regulatory approvals. The
closing of the Transaction is not subject to any financing condition.
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
Lease revenues - Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating segments.
Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. Rental related services
revenues are primarily associated with relocatable modular building and portable storage container leases. For modular building leases, rental related
services revenues for modifications, delivery, installation, dismantle and return delivery are lease related because the payments are considered minimum
lease payments that are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line basis over the
term of the lease. Certain leases are accounted for as 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
-66-
return on the unrecovered lease investment. Other revenues include interest income on sales-type leases and rental income on facility leases.
Non-lease revenues - 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. Revenue from
contracts that satisfy the criteria for over-time recognition are recognized as work is performed by using the input method based on the ratio of costs
incurred to estimated total contract costs for each contract. The majority of revenue for these contracts is derived from long-term projects which typically
span multiple quarters. The Company uses third parties to provide certain services as part of its contracts with customers. The Company is considered the
principal (vs. an agent) as the Company is responsible for the fulfillment of all service elements and risks associated with the underlying performance
obligation. Revenue for these services is recognized on a gross basis.
Other revenue is recognized when earned and primarily includes interest income on sales-type leases, rental income on facility leases 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
Blast resistant and kitchen modules
Portable storage containers
Electronic test equipment and accessories
Costs of Rental Related Services
18 years, 50% residual value
3 to 18 years, no residual value
20 years, no residual value
25 years, 62.5% residual value
1 to 8 years, no residual value
Costs of rental related services are primarily associated with relocatable modular building and portable storage container leases. Modular building
leases primarily 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 portable storage containers consists of costs of delivery, removal and cleaning of the containers.
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, 2023, 2022 and 2021.
Other Direct Costs of Rental Operations
Other direct costs of rental operations include direct labor, supplies, repairs, insurance, property taxes, license fees, impairment of rental equipment
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.
-67-
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 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 expense 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.
Property, plant and equipment from continuing operations consist of the following:
(dollar amounts in thousands)
Land
Land improvements
Buildings
Furniture, office equipment and software
Vehicles and machinery
Less: accumulated depreciation
Construction in progress
Estimated
useful life
in years
Indefinite
20 – 50
30
3 – 10
5 – 25
December 31,
2023
2022
75,143 $
65,931
35,360
30,039
35,233
241,706
(87,399 )
154,307
14,807
169,114 $
61,487
65,451
34,055
33,845
27,419
222,257
(84,447 )
137,810
903
138,713
$
$
Property, plant and equipment depreciation expense was $9.7 million, $9.0 million and $8.9 million for the years ended December 31, 2023, 2022
and 2021, respectively. Construction in progress at December 31, 2023 and 2022 consisted primarily of costs related to acquisition of land and land
improvements. For information on the property, plant and equipment from discontinued operations, refer to Note 5.
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,
training and post implementation 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 less than $0.2 million and $0.1 million in internal use software during the years ended December 31, 2023 and 2022, respectively.
Shipping Costs
The Company includes third party costs to deliver rental equipment to customers in costs of rental related services and costs of sales.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expenses were $5.9 million, $5.0 million and $5.1 million for the years ended
December 31, 2023, 2022 and 2021.
-68-
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. 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. To the extent adjustments are required in any given period, the adjustments would be
included within the “Provision for income taxes” in the Consolidated Statements of Income.
Goodwill and Intangible Assets
Purchase prices of acquired businesses are 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 are allocated to goodwill. At December
31, 2023 and 2022, goodwill and trade name intangible assets from continuing operations which have indefinite lives totaled $323.2 million and $106.4
million, respectively. For information on goodwill and trade name intangible assets from discontinued operations, refer to Note 5.
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 with indefinite lives 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 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. The fair value of the reporting unit is compared to its carrying value to determine if
the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not
impaired. If the carrying value of the net assets assigned to the reporting unit were to exceed its fair value, then a goodwill impairment loss is recorded for
the amount the reporting unit’s carrying value exceeds the estimated fair value.
The Company conducted its annual impairment analysis in the fourth quarter of 2023. The impairment analysis did not result in an impairment
charge for the fiscal year ended 2023. There were no impairment charges in 2022 or 2021. 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
2023
Year Ended December 31,
2022
2021
24,469
24,353
24,220
60
166
295
24,529
24,519
24,515
-69-
In 2023, 2022 and 2021, there were no shares having an anti-dilutive effect requiring exclusion from the computation of diluted earnings per share.
The Company has made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through
privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.
In August 2015, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares of the Company's outstanding common
stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements
and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of authorized but
unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the Repurchase Plan may be modified,
extended or terminated by the Board of Directors at any time. In the twelve months ended December 31, 2023, 2022 and 2021 there were no shares of
common stock repurchased. As of December 31, 2023, 1,309,805 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 $59.5 million at December 31, 2023 and $52.6 million at December 31, 2022. 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 credit losses 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 credit losses when
an account is determined to be uncollectable. The allowance for credit losses is based on the Company’s assessment of the collectability of customer
accounts receivable from operating lease and non-lease revenues. The Company regularly reviews the allowance by considering factors such as historical
payment experience and trends, the age of the accounts receivable balances, the Company’s operating segment, customer industry, credit quality and current
economic conditions that may affect a customer’s ability to pay. The Company recognized credit losses of $2.6 million, $0.8 million and $0.5 million for
the twelve months ended December 31, 2023, 2022 and 2021, respectively. The allowance for credit losses was $2.8 million, $2.3 million and $2.1 million
for the years ended December 31, 2023, 2022 and 2021, respectively.
The allowance for credit loss activity was as follows:
(in thousands)
Beginning balance, January 1
Provision for credit losses
Acquired reserve from Vesta Modular (see Note 4)
Derecognition of reserve from discontinued operations (see Note 5)
Write-offs, net of recoveries
Ending balance, December 31
2023
2022
$
$
$
2,300
2,633
250
(450 )
(1,932 )
$
2,801
2,125
837
—
—
(662 )
2,300
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.
Net Investment in Sales-Type Leases
The Company enters into sales-type leases with certain qualified customers to purchase its rental equipment, primarily at its TRS-RenTelco
operating segment. Sales-type leases have terms that generally range from 12 to 36 months and are collateralized by a security interest in the underlying
rental asset. The net investment in sales-type leases was $3.7 million at December 31, 2023 and $4.5 million at December 31, 2022. The Company’s
assessment of current expected losses on these receivables was not material and no credit loss expense was provided as of December 31, 2023. The
Company regularly reviews the allowance by considering factors such as historical payment experience, the age of the lease receivable balances, credit
quality and current economic conditions that may affect a customer's ability to pay. Lease receivables are considered past due 90 days after invoice. The
Company manages the credit risk in net investment in sales-type leases, on an ongoing basis, using a number of factors, including, but not limited to the
following: historical payment history, credit score, size of operations, length of time in business, industry, historical profitability, historical cash flows,
liquidity and past due amounts. The Company uses credit scores obtained from external credit bureaus as a key indicator for the purposes of determining
credit quality of its new customers. The Company does not own available for sale debt securities or other financial assets at December 31, 2023.
-70-
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 $169.2 million and $89.3 million compared to the recorded value
of $175.0 million and $100.0 million as of December 31, 2023 and 2022, 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”), functioned as a rental and sales office for TRS-RenTelco in
India, which commenced its closure during 2017. The functional currency for TRS-India is the Indian Rupee. All assets and liabilities of TRS-India are
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 it is probable that vesting
conditions will be 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 recognizes forfeitures based on actual forfeitures when they
occur. 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 10.
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 and indefinite lived intangible assets carrying value, the various assets’ useful lives and
residual values, and the allowance for credit losses. In addition, determining the fair value of the assets and liabilities acquired in a business or asset
acquisition can be judgmental in nature and can involve the use of significant estimates and assumptions.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS
On March 27, 2023, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2023-01, Leases (Topic 842):
Common Control Arrangements, which requires a lessee involved in a common control lease agreement to amortize leasehold improvements over the
useful life of the improvements to the common control group, regardless of the lease term, as long as the lessee controls the use of the underlying asset. If
the lessor obtains the right to control the use of the underlying asset through a lease with another entity not within the same control group, the amortization
period cannot exceed the period of the common control group. Furthermore, the ASU requires the accounting for a transfer between entities under common
control through an adjustment to equity when the lessee no longer controls the use of the underlying asset. The ASU is effective for fiscal years beginning
after December 15, 2023. The Company is in the process of evaluating the financial statement impact of this ASU.
In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting—Improvements to Reportable Segment
Disclosures (Topic 280), which will require public companies to provide more transparency in both quarterly and annual reports about the expenses they
incur from revenue generating reportable business segments. In addition, the ASU requires that a public entity disclose significant segment expenses that
are regularly provided to the chief operating decision maker, an amount for
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other segment items by reportable business segment, including a description of its composition, and the primary measures of a business segment's profit or
loss in assessing segment performance. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years
beginning after December 15, 2024. The Company is in the process of evaluating the financial statement impact of this ASU.
In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes—Improvements to Income Tax Disclosures
(Topic 740), which will require Companies to disclose annually the specific categories in income tax rate reconciliations, provide additional information for
reconciling items which meet a quantitative threshold, and disaggregate domestic and foreign income or loss from continuing operations. Additionally, this
ASU will also require the disclosure of income tax expense or benefit from continuing operations disaggregated by federal, state and foreign. This ASU is
effective for fiscal years beginning after December 15, 2024, and applied on a prospective basis. The Company is in the process of evaluating the financial
statement impact of this ASU.
NOTE 3. IMPLEMENTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2023, the Company adopted the Financial Accounting Standards Board's Accounting Standards Update (“ASU”) 2022-02,
Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the separate recognition and
measurement guidance for troubled debt restructurings by creditors. In addition, the ASU requires disclosure of current-period gross write-offs by year of
origination for financing receivables and net investments in leases within the scope of FASB ASC 326-20, Financial Instruments—Credit Losses—
Measured at Amortized Cost. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2023, the Company adopted the ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and
Contract Liabilities from Contracts with Customers, which requires an entity to recognize and measure contract assets and contract liabilities acquired in a
business combination in accordance with ASC 606, Revenue from Contracts with Customers. Additionally, the ASU requires revenue contracts, including
contract assets and liabilities, to be evaluated on the acquisition date and reported as if the contracts had originated with the acquirer, resulting in a
measurement consistent with the recognition on the acquiree's financial statements. The adoption of this new guidance did not have a material impact on
the Company's consolidated financial statements.
NOTE 4. ACQUISITIONS
On February 1, 2023, the Company completed the acquisition of Vesta Housing Solutions Holdings, Inc. (“Vesta Modular”), a portfolio company of
Kinderhook Industries, for $437.2 million cash consideration on the closing date, which included certain adjustments, including net working capital and
certain qualified capital expenditures. In connection with the acquisition, the Company purchased a representation and warranty insurance policy to
provide certain recourse in the event of breaches of representations and warranties of Vesta Modular and the seller of Vesta Modular under the stock
purchase agreement. Vesta Modular was a leading provider of temporary and permanent modular space solutions serving customers between its modular
leasing and modular construction divisions. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in Accounting
Standards Codification ("ASC") 805, Business Combinations, using the purchase method of accounting. Under the purchase method of accounting, the
total purchase price is assigned to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.
The excess of the purchase price over those fair values is recorded as goodwill. The financial results of Vesta Modular were a part of the Mobile Modular
segment since February 1, 2023, including $7.7 million of acquisition related transaction costs incurred during the current year as a result of the acquisition.
On March 1, 2023, the Company completed the acquisition of Jerald R. Brekke, Inc., DBA Brekke Storage ("Brekke Storage"), for a total purchase
price of $16.4 million. Brekke Storage was a regional provider of portable storage solutions in the Colorado market. The acquisition expanded the
Portable Storage fleet by approximately 2,700 units and provided a new regional operation to serve the Colorado market. The acquisition was accounted for
as a purchase of a “business” in accordance with criteria in ASC 805 using the purchase method of accounting. The financial results of Brekke Storage
were a part of the Portable Storage segment since March 1, 2023, including $0.2 million of transaction costs.
On April 1, 2023, the Company completed the acquisition of Dixie Temporary Storage, LLC ("Dixie Storage"), for a purchase price of $4.9 million.
Dixie Storage was a regional provider of portable storage solutions in the South Carolina market and is highly complementary to the Company's Portable
Storage business segment. The acquisition expanded the Portable Storage fleet by approximately 800 units and provided a new regional operation to serve
the South Carolina market. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805 using the purchase
method of accounting. The financial results of Dixie Storage were a part of the Portable Storage segment since April 1, 2023, including $0.1 million of
transaction costs.
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On July 1, 2023, the Company completed the purchase of assets of Inland Leasing and Storage, LLC ("Inland Leasing"), for a purchase price of $3.8
million. Inland Leasing was a regional provider of portable storage solutions in the Colorado market and is highly complementary to the Company's
Portable Storage business segment. The acquisition grew the Portable Storage fleet by approximately 600 units, which will further support the Colorado
market. The acquisition was accounted for as a purchase of "assets" in accordance with criteria in ASC 805 and the assessment of the fair value of the
purchased assets was allocated primarily to rental equipment totaling $3.0 million and intangible assets totaling $0.7 million. Supplemental pro forma
information has not been provided as the historical financial results of Inland Leasing were not significant. Incremental transaction costs associated with
the asset purchase were not significant.
The following tables summarize the purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Vesta
Modular, Brekke Storage and Dixie Storage business acquisitions, with excess amounts allocated to goodwill. The estimated fair values of the assets
acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses. Accordingly, the Company has made
provisional estimates for the assets acquired and liabilities assumed. The valuation of intangible assets acquired is based on certain valuation assumptions
including cash flow projections, discount rates, contributory asset charges and other valuation model inputs. The valuation of tangible long-lived assets
acquired is dependent upon various analyses including an analysis of the condition and estimated remaining economic lives of the assets acquired.
Vesta Modular:
(dollar amounts in thousands)
Rental equipment
Intangible assets:
Goodwill
Customer relationships
Non-compete
Trade name
Cash
Accounts receivable
Property, plant and equipment
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred income
Deferred income taxes
Total purchase price
Brekke Storage:
(dollar amounts in thousands)
Rental equipment
Intangible assets:
Goodwill
Customer relationships
Non-compete
Property, plant and equipment
Deferred income
Total purchase price
Dixie Storage:
(dollar amounts in thousands)
Rental equipment
Intangible assets:
Goodwill
Customer relationships
Non-compete
Property, plant and equipment
Deferred income
Total purchase price
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$
$
$
$
$
$
212,639
211,178
29,900
7,100
800
11
22,666
1,437
3,550
(26,202 )
(14,273 )
(11,596 )
437,210
10,798
4,083
949
59
875
(382 )
16,382
2,758
1,555
259
22
318
(161 )
4,751
The value assigned to identifiable intangible assets was determined based on discounted estimated future cash flows associated with such assets to
their present value. The combined acquired goodwill of $216.8 million reflects the strategic fit of Vesta Modular, Brekke Storage and Dixie Storage with
the Company’s modular and portable storage business operations. The Company amortizes the acquired customer relationships over their expected useful
lives of 11 years for Vesta Modular, 8 years for Brekke Storage and 9 years for Dixie Storage. The expected useful life for the non-compete agreements is 5
years. The trade name intangible acquired from the Vesta Modular acquisition will be amortized over it's useful life of nine months. Goodwill is expected
to have an indefinite life and will be subject to future impairment testing. The goodwill is deductible for tax purposes over 15 years.
The following unaudited supplemental pro forma financial information shows the combined results of continuing operations of the Company and
Vesta Modular as if the acquisition occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of
the purchased intangible assets and depreciation expense of acquired rental equipment valuation step up, interest expense on the debt incurred to finance the
acquisitions. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the combined federal and state statutory
rate of 26.5% on the acquisitions’ combined net income. The pro forma results for the years ended December 31, 2023 and 2022, have been adjusted to
include transaction related costs. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of the
future operations or the results that would have occurred had the acquisitions taken place in the periods noted below:
(dollar amounts in thousands, except for per share amounts)
Pro-forma total revenues
Pro-forma net income
Pro-forma basic earnings per share
Pro-forma diluted earnings per share
Vesta Modular
Actual total revenues
Actual net income
Actual basic earnings per share
Actual diluted earnings per share
NOTE 5. DISCONTINUED OPERATIONS
(Unaudited)
Year Ended December 31,
2023
2022
$
$
$
$
$
$
$
$
839,485
$
174,325 $
4.56 $
4.55 $
110,504
21,458
0.88
0.87
765,916
110,210
4.04
4.01
On February 1, 2023, the Company completed the sale of Adler Tank Rentals, LLC to Ironclad Environmental Solutions, Inc. ("Ironclad"), a
portfolio company of Kinderhook Industries, for a sale price of $268.0 million. The total transaction costs incurred from the divestiture was $6.7 million
and $2.1 million during the years ended December 31, 2023 and 2022, respectively. The divestiture of the Company's Adler Tanks business represents the
Company's strategic shift to concentrate its operations on its core modular and storage businesses. The sale price was subject to certain adjustments,
including net working capital, certain qualified capital expenditures and certain transaction expenses to be borne by the Company. In connection with the
sale, the Company entered into a number of ancillary agreements, including an escrow agreement associated with net working capital adjustments, a
restricted covenant agreement, a transition services agreement, and a number of leases whereby Ironclad or one of its affiliates would be a lessee to certain
properties owned by the Company that the Adler Tanks business would continue to utilize after the sale. These ancillary agreements do not provide for
continued involvement by the Company in Adler Tanks. In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations
and ASC 360, Property, Plant and Equipment, the Company determined that the criteria for the presentation of discontinued operations and held-for-sale,
respectively, were met during the first quarter of 2023.
The following table presents the results of Adler Tanks as reported in income from discontinued operations within the Consolidated Statements of
Income for the years ended December 31, 2023, 2022 and 2021:
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(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
Income from discontinued operations before provision for income taxes
Provision for income taxes from discontinued operations
Income from discontinued operations
Year Ended December 31,
2023
2022
2021
$
6,520 $
2,584
9,104
269
65
9,438
1,325
2,020
1,270
4,614
159
4,773
3,926
564
4,490
110
65
4,665
(2,582 )
2,083
(374 )
1,709
453
$
1,256
$
66,366 $
27,654
94,020
2,933
1,205
98,158
16,004
20,947
12,422
49,373
2,085
51,458
37,940
6,707
44,647
848
1,205
46,700
(28,428 )
18,272
(2,938 )
15,334
3,505
11,829 $
56,025
22,851
78,876
2,930
436
82,242
16,442
18,534
11,492
46,468
2,075
48,543
28,091
4,317
32,408
855
436
33,699
(25,542 )
8,157
(2,211 )
5,946
1,326
4,620
The following table presents the carrying value of the divested business' assets and liabilities as presented within assets and liabilities of
discontinued operations on the Consolidated Balance Sheets as of December 31, 2022:
(in thousands)
Assets
Accounts receivable, net of allowance for credit losses of $450
Rental equipment, net
Property, plant and equipment, net
Prepaid expenses and other assets
Intangible assets, net
Goodwill
Total assets of discontinued operations
Liabilities
Accounts payable and accrued liabilities
Deferred income taxes, net
Total liabilities of discontinued operations
December 31,
2022
20,086
137,738
6,632
191
5,700
25,902
196,249
9,621
43,550
53,171
$
$
$
$
For the years ended December 31, 2023 and 2022, significant operating and investing items related to Adler Tanks were as follows:
-75-
(in thousands)
Operating activities of discontinued operations:
Depreciation and amortization
Gain on sale of used rental equipment
Investing activities of discontinued operations:
Proceeds from sales of used rental equipment
Purchases of rental equipment
Purchases of property, plant and equipment
NOTE 6. LEASES
Lessee
December 31,
December 31,
2023
2022
$
1,457 $
(111 )
269
(25 )
(40 )
17,704
(704 )
2,374
(3,624 )
(10,255 )
The Company leases real estate for certain of its branch offices and rental equipment storage yards, vehicles and equipment used in its rental
operations. The Company determines if an arrangement is a lease at inception. The Company has leases with lease and non-lease components, which are
accounted for separately. Right-Of-Use (“ROU”) assets and liabilities are recognized on the commencement date based on the present value of lease
payments over the lease term. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the
obligation for those payments is incurred, which are not material. The Company’s lease agreements do not contain any material residual value guarantees
or material restrictive covenants. The Company uses the interest rate stated in the lease as the discount rate. If the interest rate is not stated, the Company
uses its incremental borrowing rate based on information available on lease commencement date in determining the present value of lease payments. Many
of the Company’s real estate lease agreements include options to extend the lease, which are not included in the minimum lease terms unless they are
reasonably certain to be exercised. These leases include one or more options to renew, with renewal terms that may extend the lease term from one to three
years. The amount of payments associated with such options is not material. Short-term leases are leases having a term of twelve months or less and
exclude leases with a lease term of one month or less. The Company recognizes short-term leases on a straight-line basis and does not record a related
ROU asset or liability for such leases. At December 31, 2023 and 2022 the Company’s ROU assets and operating lease liabilities were $14.8 million and
$11.6 million, respectively, which are recorded in Prepaid expenses and other assets and Accounts payable and accrued liabilities on the Company’s
Consolidated Balance Sheets.
During the year ended December 31, 2023, operating lease expense was $6.7 million, which includes short term lease expense of $0.1 million. At
December 31, 2023, the weighted-average remaining lease term for operating leases was 3.5 years and the weighted average discount rate was 4.94%. The
Company had no sub-lease income during the year ended December 31, 2023, and did not have any finance leases as of December 31, 2023.
Supplemental cash flow information related to leases was as follows:
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Right of use assets obtained in exchange for lease obligations:
Operating leases
Year Ended December 31,
2023
2022
$
$
6,441 $
5,863
10,058 $
3,284
As of December 31, 2023, maturities of operating lease liabilities were as follows:
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(in thousands)
Year ended December 31,
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: imputed interest
Lessor
$
$
6,857
4,940
2,282
575
270
1,119
16,043
(1,270 )
14,773
The Company’s equipment rentals for each of its operating segments are governed by agreements that detail the lease terms and conditions. The
determination of whether these contracts with customers contain a lease generally does not require significant judgement. The Company accounts for these
rentals as operating leases. These leases do not include material amounts of variable payments and the Company has made the accounting policy election
to exclude all taxes assessed by a governmental authority. The Company generally does not provide an option for the lessee to purchase the rented
equipment at the end of the lease term, thus, does not generate material revenue from sales of equipment under such options. Initial lease terms vary in
length based upon customer needs and generally range from one to sixty months. Customers have the option to keep equipment on rent beyond the initial
lease term on a month-to month basis based upon their needs. All of the Company’s rental products have long useful lives relative to the typical rental term
with the original investment typically recovered in approximately three to five years. The rental products are typically rented for a majority of the time
owned and a significant portion of the original investment is recovered when sold from inventory. The Company’s lease agreements do not contain residual
value guarantees or restrictive covenants.
As of December 31, 2023, maturities of operating lease payments to be received in 2024 and thereafter were as follows:
(in thousands)
Year Ended December 31,
2024
2025
2026
2027
2028
Thereafter
$
$
174,339
59,505
21,986
9,738
2,335
1,097
269,000
In the year ended December 31, 2023, the Company’s lease revenues from continuing operations were $564.1 million, consisting of $561.5 million
of operating lease revenues and $2.6 million of finance lease revenues. The Company has entered into finance leases to finance certain equipment sales to
customers. The lease agreements have a bargain purchase option at the end of the lease term. For these leases, sales revenue and the related accounts
receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis which
results in a constant rate of return on the unrecovered lease investment. For the year ended December 31, 2023, the Company’s finance lease revenues
included $2.2 million of sales revenues and $0.4 million of interest income. The minimum lease payments receivable and the net investment are included
in Accounts receivable on the Company’s Consolidated Balance Sheet for such leases, which were as follows:
(in thousands)
Gross minimum lease payments receivable
Less – unearned interest
Net investment in finance lease receivables
December 31, 2023
4,004
(352 )
3,652
$
$
As of December 31, 2023, the future minimum lease payments under non-cancelable finance leases to be received in 2024 and thereafter were as
follows:
-77-
(in thousands)
Year Ended December 31,
2024
2025
2026
2027
Total minimum future lease payments to be received
NOTE 7. REVENUE RECOGNITION
$
$
2,243
884
429
96
3,652
The Company’s accounting for revenues is governed by two accounting standards. The majority of the Company’s revenues are considered lease or
lease related and are accounted for in accordance with Topic 842, Leases. Revenues determined to be non-lease related are accounted for in accordance
with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company accounts for revenues when approval and commitment from
both parties have been obtained, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and
collectability of consideration is probable. The Company typically recognizes non-lease related revenues at a point in time because the customer does not
simultaneously consume the benefits of the Company’s promised goods and services, or performance obligations, and obtain control when delivery and
installation are complete. For contracts that have multiple performance obligations, the transaction price is allocated to each performance obligation in the
contract based on the Company’s best estimate of the standalone selling prices of each distinct performance obligation in the contract. The standalone
selling price is typically determined based upon the expected cost plus an estimated margin of each performance obligation.
Revenue from contracts that satisfy the criteria for over time recognition are recognized as work is performed by using the ratio of costs incurred to
estimated total contract costs for each contract. The majority of revenue for these contracts is derived from long-term projects which typically span
multiple quarters. The timing of revenue recognition, billings, and cash collections results in billed contract receivables and contract assets on the
Company's Consolidated Balance Sheets. In the Company’s contracts, amounts are billed as work progresses in accordance with agreed-upon contractual
terms, either at periodic intervals or upon achievement of contractual milestones. Billings can occur subsequent to revenue recognition, resulting in
contract assets, or in advance, resulting in contract liabilities. These contract assets and liabilities are reported on the Consolidated Balance Sheets on a
contract-by-contract basis at the end of each reporting period. The contract liabilities included in Deferred income on the Company’s Consolidated Balance
Sheets totaled $40.7 million and $27.4 million at December 31, 2023 and 2022, respectively. Sales revenues totaling $21.4 million were recognized during
the year ended December 31, 2023, which were included in the contract liability balance at December 31, 2022. For certain modular building sales, the
customer retains a small portion of the contract price until full completion of the contract, or revenue is recognizable prior to customer billing, which results
in revenue earned in excess of billings. These unbilled contract assets are included in Accounts receivable on the Company’s Consolidated Balance Sheets
and totaled $8.7 million and $0.6 million at December 31, 2023 and 2022, respectively. The Company did not recognize any material contract asset
impairments during the years ended December 31, 2023 and 2022.
The Company's uncompleted contracts with customers which meet the criteria for over-time revenue recognition have unsatisfied or partially
satisfied performance obligations. As of December 31, 2023, approximately $34.3 million of revenue is expected to be recognized for unsatisfied or
partially satisfied obligations. We expect to recognize revenue for approximately one half of these unsatisfied or partially satisfied performance obligations
over the next 12 months, with the remaining balance recognized thereafter. As of December 31, 2023, approximately $236.4 million of revenue was
recognized for sales and non-lease services transferred at a point in time and approximately $31.3 million of revenue was recognized for sales and non-
lease services transferred over time.
The Company generally rents and sells to customers on 30 day payment terms. The Company does not typically offer variable payment terms, or
accept non-monetary consideration. Amounts billed and due from the Company’s customers are classified as Accounts receivable on the Company’s
Consolidated Balance Sheets. For certain sales of modular buildings, progress payments from the customer are received during the manufacturing of new
equipment, or the preparation of used equipment. The advance payments are not considered a significant financing component because the payments are
used to meet working capital needs during the contract and to protect the Company from the customer failing to adequately complete their obligations
under the contract.
Lease Revenues
Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating segments. Rental billings
for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. Rental related services revenues are
primarily associated with relocatable modular building and portable storage container leases. For modular building leases, rental related services revenues
for modifications, delivery, installation, dismantle and return delivery are lease related because the payments are considered minimum lease payments that
are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line basis over the term of the lease.
Certain leases are accounted for as sales-type leases. For these leases, sales revenue and the related accounts receivable are recognized upon delivery and
installation of the
-78-
equipment and the unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease
investment. Other revenues include interest income on sales-type leases and rental income on facility leases.
Non-Lease Revenues
Non-lease revenues are recognized in the period when control of the performance obligation is transferred, in an amount that reflects the
consideration the Company expects to be entitled to receive in exchange for those goods or services. For portable storage container and electronic test
equipment leases, rental related services revenues for delivery and return delivery are considered non-lease revenues.
Sales revenues are typically recognized at a point in time, which occurs upon the completion of delivery, installation and acceptance of the
equipment by the customer. Sales contracts that satisfy the criteria for over-time recognition are recognized as work is performed by using the ratio of costs
incurred to estimated total contracts costs for each contract. Accounting for non-lease revenues requires judgment in determining the point in time the
customer gains control of the equipment and the appropriate accounting period to recognize revenue.
Sales taxes charged to customers are reported on a net basis and are excluded from revenues and expenses.
The following table disaggregates the Company’s revenues from continuing operations by lease (within the scope of Topic 842) and non-lease
revenues (within the scope of Topic 606) and the underlying service provided for the three years ended December 31, 2023, 2022 and 2021:
(in thousands)
Year Ended December 31,
2023
Leasing
Non-lease:
Rental related services
Sales
Other
Total non-lease
Total revenues
2022
Leasing
Non-lease:
Rental related services
Sales
Other
Total non-lease
Total revenues
2021
Leasing
Non-lease:
Rental related services
Sales
Other
Total non-lease
Total revenues
Mobile
Modular
Portable
Storage
TRS-
RenTelco
Enviroplex Consolidated
$
367,753 $
77,181 $
119,134 $
— $
564,068
36,734
155,267
2,482
194,483
562,236 $
19,250
4,587
119
23,956
101,137 $
2,658
24,951
1,534
29,143
148,277 $
—
20,192
—
20,192
20,192 $
58,642
204,997
4,135
267,774
831,842
$
$
267,779 $
63,422 $
125,695 $
— $
456,896
14,348
97,045
39
111,432
379,211 $
16,082
2,933
69
19,084
82,506 $
2,579
21,267
1,237
25,083
150,778 $
—
23,170
—
23,170
23,170 $
33,009
144,415
1,345
178,769
635,665
$
$
223,383 $
45,792 $
116,769 $
— $
385,944
13,091
64,809
82
77,982
301,365 $
11,943
4,175
41
16,159
61,951 $
2,469
19,788
1,168
23,425
140,194 $
—
31,081
—
31,081
31,081 $
27,503
119,853
1,291
148,647
534,591
$
Customer returns of rental equipment prior to the end of the rental contract term are typically billed a cancellation fee, which is recorded as rental
revenue in the period billed. Sales of new relocatable modular buildings, portable storage containers, electronic test equipment and related accessories and
liquid and solid containment tanks and boxes not manufactured by the Company are typically covered by warranties provided by the manufacturer of the
products sold. The Company typically provides limited 90-day warranties for certain sales of used rental equipment and one-year warranties on equipment
manufactured by Enviroplex. Although the Company’s
-79-
policy is to provide reserves for warranties when required for specific circumstances, the Company has not found it necessary to establish such reserves to
date as warranty costs have not been significant.
The Company’s incremental cost of obtaining lease contracts, which consists of salesperson commissions, are deferred and amortized over the initial
lease term for modular building leases. Incremental costs for obtaining a contract for all other operating segments are expensed in the period incurred
because the lease term is typically less than 12 months.
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NOTE 8. NOTES PAYABLE
Notes payable consists of the following:
(in thousands)
Unsecured revolving lines of credit
2.35% Series E senior notes due in 2026
2.57% Series D senior notes due in 2028
6.25% Series F senior notes due in 2030
Unamortized debt issuance cost
December 31,
2023
2022
$
588,000
60,000
40,000
75,000
763,000
(25 )
$
762,975
313,775
60,000
40,000
—
413,775
(33 )
413,742
$
$
As of December 31, 2023, the future minimum payments under the unsecured revolving lines of credit, 2.35% Series E senior notes, 2.57% Series D senior
notes and 6.25% Series F senior notes due in 2026, 2028 and 2030, respectively, are as follows:
(in thousands)
Year Ended December 31,
2024
2025
2026
2027
2028
Thereafter
$
$
—
—
60,000
588,000
40,000
75,000
763,000
Unsecured Revolving Lines of Credit
On July 15, 2022, the Company entered into an amended and restated credit agreement with Bank of America, N.A., as Administrative Agent,
Swing Line Lender, L/C Issuer and lender, and other lenders named therein (the “Credit Facility”). The Credit Facility provides for a $650.0 million
unsecured revolving credit facility (which may be further increased to $950.0 million by adding one or more tranches of term loans and/or increasing the
aggregate revolving commitments), which includes a $40.0 million sublimit for the issuance of standby letters of credit and a $20.0 million sublimit for
swingline loans. The proceeds of the Credit Facility are available to be used for general corporate purposes, including permitted acquisitions. The Credit
Facility permits the Company’s existing indebtedness to remain, which includes the Company’s $20.0 million Treasury Sweep Note due July 15, 2027, the
Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as
of April 21, 2011 (as amended): (i) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015, which were repaid on November
5, 2022, (ii) the $40.0 million aggregate outstanding principal of notes issued March 17, 2021 and due March 17, 2028, and (iii) the $60.0 million aggregate
outstanding principal of notes issued June 16, 2021 and due June 16, 2026. In addition, the Company may incur additional senior note indebtedness in an
aggregate amount not to exceed $250.0 million. The Credit Facility matures on July 15, 2027 and replaced the Company’s prior $420.0 million credit
facility dated March 31, 2020 with Bank of America, N.A., as agent, as amended. All obligations outstanding under the prior credit facility as of the date of
the Credit Facility were refinanced by the Credit Facility on July 15, 2022.
On August 19, 2022, the Company entered into an amended and restated Credit Facility Letter Agreement and a Credit Line Note in favor of MUFG
Union Bank, N.A., which provides for a $20.0 million line of credit facility related to its cash management services (“Sweep Service Facility”). The Sweep
Service Facility matures on the earlier of July 15, 2027, or the date the Company ceases to utilize MUFG Union Bank, N.A. for its cash management
services. The Sweep Service Facility replaced the Company’s prior $12.0 million sweep service facility, dated as of March 30, 2020.
At December 31, 2023, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up
to $650.0 million of which $588.0 million was outstanding. The Credit Facility contains financial covenants
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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):
•
•
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, 2023 the actual ratio was 3.31 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, 2023, the actual ratio was 2.35 to 1.
Amounts borrowed under the Credit Facility bear interest at the Company’s option at either: (i) SOFR 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 SOFR loans and 0% to 0.75% for base rate loans. In addition, the Company pays an
unused commitment fee for the portion of the $650.0 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, 2023 and 2022, the applicable margins were 1.25% for SOFR based loans, 0.25% for base rate loans
and 0.20% for unused fees. 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 $20.0 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
Note Purchase and Private Shelf Agreement
$
$
Year Ended December 31,
2023
2022
591,000 $
541,635 $
6.63 %
8.50 %
328,752
276,399
3.29 %
7.50 %
On June 8, 2023, the Company entered into a Second Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase
Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series D and Series E Notes previously issued pursuant to the Prior Amended and Restated
NPA, among the Company and the other parties to the Note Purchase Agreement. The Note Purchase Agreement amended and restated, and superseded in
its entirety, the Prior NPA. Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 2.57% Series D Senior
Notes, due March 17, 2028, and (ii) $60.0 million aggregate principal amount of its 2.35% Series E Senior Notes, due June 16, 2026, to which the terms of
the Note Purchase Agreement shall apply.
In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf
Notes”) in the aggregate principal amount of (x) $300 million minus (y) the amount of other notes (such as the Series D Senior Notes, Series E Senior
Notes and Series F Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so
issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than
15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have
such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes
may be issued and sold from time to time at the discretion of the Company’s Board of Directors and in such amounts as the Board of Directors may
determine, subject to prospective purchasers’ agreement to purchase the Shelf Notes. The Company will sell the Shelf Notes directly to such purchasers.
The full net proceeds of each Shelf Note will be used in the manner described in the applicable Request for Purchase with respect to such Shelf Note.
6.25% Senior Notes Due in 2030
On September 27, 2023, the Company issued and sold to the purchasers $75.0 million aggregate principal amount of 6.25% Series F Notes (the
“Series F Senior Notes”) pursuant to the terms of the Second Amended and Restated Note Purchase and Private Shelf Agreement, dated June 8, 2023 (the
“Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series F Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 6.25% per annum and mature on September 27,
2030. Interest on the Series F Senior Notes is payable semi-annually beginning on March 27, 2024 and continuing thereafter on September 27 and March
27 of each year until maturity. The principal balance is due when the notes mature on September 27, 2030. The full net proceeds from the Series F Senior
Notes will primarily be used to fulfill the income tax obligations incurred from the divestiture of Adler Tanks. At December 31, 2023, the principal balance
outstanding under the Series F Senior Notes was $75.0 million.
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2.57% Senior Notes Due in 2028
On March 17, 2021, the Company issued and sold to the purchasers $40 million aggregate principal amount of 2.57% Series D Notes (the “Series D
Senior Notes”) pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase
Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series D Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.57% per annum and mature on March 17,
2028. Interest on the Series D Senior Notes is payable semi-annually beginning on September 17, 2021 and continuing thereafter on March 17 and
September 17 of each year until maturity. The principal balance is due when the notes mature on March 17, 2028. The full net proceeds from the Series D
Senior Notes were used to pay off the Company’s $40 million Series B Senior Notes. At December 31, 2023, the principal balance outstanding under the
Series D Senior Notes was $40.0 million.
2.35% Senior Notes Due in 2026
On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E
Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase
Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.
The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026.
Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of
each year until maturity. The principal balance is due when the notes mature on June 16, 2026. The full net proceeds from the Series E Senior Notes were
used to pay down the Company’s credit facility. At December 31, 2023, the principal balance outstanding under the Series E Senior Notes was $60.0
million.
Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series D Senior Notes
and Series E Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein
have the meaning assigned to such terms in the Note Purchase Agreement):
•
•
Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to
1. At December 31, 2023, the actual ratio was 3.33 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, 2023, the actual ratio was 2.34 to 1.
At December 31, 2023, 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 9. INCOME TAXES
Income before provision (benefit) for income taxes consisted of the following:
(in thousands)
U.S.
Foreign
The provision (benefit) for income taxes consisted of the following:
(in thousands)
Current:
U.S. Federal
State
Foreign
Deferred:
U.S. Federal
State
Foreign
Total
2023
Year Ended December 31,
2022
234,188
228
234,416
$
$
149,759 $
261
150,020 $
2021
121,660
96
121,756
2023
Year Ended December 31,
2022
2021
57,176
$
(5,587 )
1,847
53,436
4,892
1,481
(14 )
6,359
59,795
$
19,480 $
8,708
2,208
30,396
4,563
(68 )
(9 )
4,486
34,882 $
(1,692 )
5,360
2,035
5,703
23,433
2,896
19
26,348
32,051
$
$
$
$
-83-
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
State deferred tax apportionment change, net of federal benefit
Non-deductible transaction costs
Non-deductible executive compensation
Share-based compensation
Enactment of the Tax Cuts and Jobs Act
Other
2023
Year Ended December 31,
2022
2021
21.0 %
4.9
(0.2 )
0.3
0.4
(1.2 )
(0.2 )
0.5
25.5 %
21.0 %
4.9
(1.1 )
—
0.6
(1.7 )
(0.2 )
(0.2 )
23.3 %
21.0 %
5.1
1.6
—
0.8
(2.1 )
—
(0.1 )
26.3 %
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-forward
Deferred revenues
Share-based compensation
Total deferred tax assets, net of valuation allowance of $0.2 million in 2023 and 2022
Deferred income taxes, net
December 31,
2023
2022
273,503
12,567
6,767
292,837
13,742
713
28,670
5,439
2,718
51,282
241,555
$
$
249,568
8,646
8,124
266,338
12,207
588
—
4,069
2,563
19,427
246,911
$
$
The net deferred income tax liability presented in the table above for the period ended December 31, 2022, included a net deferred tax liability of
$43.6 million related to the divested Adler Tanks segment and is included in Liabilities of discontinued operations on the Consolidated Balance Sheets. As
of December 31, 2023, the current and deferred tax liabilities from discontinued operations of $64.8 million were paid in full and no future tax obligations
pertaining to the Adler Tanks segment remain.
The Company's tax loss carryforwards for the year ended December 31, 2023, were $129.2 million and $32.2 million for federal and state
jurisdictions, respectively, which are expected to result in a future federal and state tax benefit of $27.1 million and $1.5 million, respectively. The
availability of these tax losses to offset future income varies by jurisdiction. Furthermore, the ability to utilize the tax losses may be subject to additional
limitations. The company’s federal net operating loss carryforwards have an indefinite carryforward period. The company’s state net operating loss
carryforwards have differing carryforward periods. The Company anticipates that the available net operating losses as of December 31, 2023, will be
utilized prior to their respective expiration dates.
In December 2016, the Company decided to exit the Bangalore, India branch operations of its TRS-RenTelco electronics division. The wind down
of operations in India began in 2017. As a result, a valuation allowance was recorded against the deferred tax assets that resulted primarily from
accumulated net operating loss carry forwards in India that management estimated the benefit of which will not be realized. As of December 31, 2023, the
Company’s foreign net operating losses for tax purposes were $0.6 million. If not realized, these carry forwards will expire in 2024.
For income tax purposes, deductible compensation related to share-based awards is based on the value of the award when realized, which may be
different than the compensation expense recognized by the company for financial statement purposes which is based on the award value on the date of
grant. The difference between the value of the award upon grant, and the value of the award when ultimately realized, creates either additional tax expense
or benefit. In 2023, 2022 and 2021 exercise of share-based awards by employees resulted in an excess tax benefit of $2.7 million, $2.6 million and $2.5
million, respectively.
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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 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, 2023 and 2022. In addition, there have been no material changes in unrecognized benefits during 2023, 2022 and 2021.
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.
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. 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 2019.
The Company recognizes interest and penalties related to unrecognized tax benefits in the provision (benefit) for income taxes in the accompanying
Consolidated Statements of Income for all periods presented. Such interest and penalties were not significant for the years ended December 31, 2023, 2022
and 2021.
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NOTE 10. BENEFIT PLANS
Stock Plans
The Company adopted the 2016 Stock Incentive Plan (the “2016 Plan”), effective June 8, 2016, under which 2,000,000 shares of the common stock
of the Company, plus the number of shares that remain available for grants of awards under the Company's 2007 Stock Option Plan (the “2007 Plan”)
become available as a result of forfeiture, termination, or expiration of awards previously granted under the 2007 Plan, were reserved for the grant of equity
awards to its employees, directors and consultants. The equity awards have a maximum term of 7 years at an exercise price of not less than 100% of the
fair market value of the Company's common stock on the date the equity award is granted. The 2016 Plan replaced the 2007 Plan.
The 2016 Plan provides for the grant of awards in the form of stock options, stock appreciation rights, restricted stock units (“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 2016 Plan by two shares. There were no significant modifications to the 2016 Plan or awards classified as
liabilities in the year ended December 31, 2023.
For the years ended December 31, 2023, 2022 and 2021, the share-based compensation expense was $8.3 million, $8.0 million and $7.7 million,
respectively, before provision for income taxes. The Company recorded a tax benefit of approximately $2.2 million, $2.2 million and $2.1 million,
respectively, related to the aforementioned share-based compensation expenses. There was no capitalized share-based compensation expense in the years
ended December 31, 2023, 2022 and 2021.
Stock Options
As of December 31, 2023, a cumulative total of 8,458,600 shares subject to options have been granted with exercise prices ranging from $3.47 to
$40.37. Of these, options have been exercised for the purchase of 6,906,363 shares, while options for 1,672,732 shares have been terminated, and options
for 240 shares with an exercise price of $34.57 remained outstanding under the stock plans. These options vest over five years and expire seven years after
grant. To date, no options have been issued to any of the Company’s non-employee advisors. As of December 31, 2023, 1,123,946 shares remained
available for issuance of awards under the stock plans.
A summary of the Company’s option activity and related information for the three years ended December 31, 2023 is as follows:
Balance at December 31, 2020
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2021
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2022
Options granted
Options exercised
Options cancelled/forfeited/expired
Balance at December 31, 2023
Exercisable at December 31, 2023
Expected to vest after December 31, 2023
Number of
options
Weighted-
average
price
Weighted-
average
remaining
contractual
term
(in years)
Aggregate
intrinsic
value
(in millions)
409,410
—
$
(133,020 )
(1,760 )
274,630
—
(135,280 )
—
139,350
—
(139,110 )
—
240
240
—
$
$
$
29.33
—
28.57
34.57
29.66
—
25.61
—
33.59
—
33.51
—
34.57
34.57
—
0.17 $
0.17 $
— $
0.02
0.02
—
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
$9.4 million, $7.9 million and $7.0 million for the years ended December 31, 2023, 2022 and 2021, respectively, determined as of the date of option
exercise. As of December 31, 2023, there was no unrecognized compensation cost related to unvested share-based compensation option arrangements
granted under the Company’s stock plans.
-86-
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, 2023:
Exercise price
$30 – 35
$30 – 35
Options Outstanding
Options Exercisable
Number
outstanding at
December 31,
2023
Weighted-
average
remaining
contractual life
(Years)
Weighted-
average grant
date value
Number
exercisable at
December 31,
2023
Weighted-
average grant
date value
240
240
0.17 $
0.17 $
34.57
34.57
240 $
139,350 $
34.57
34.57
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.
No options were granted in the years ended December 31, 2023, 2022 and 2021.
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, 2023:
Balance at December 31, 2020
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2021
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2022
RSUs granted
RSUs vested
RSUs cancelled/forfeited/expired
Balance at December 31, 2023
Number
of shares
Weighted-
average
grant date
fair value
Aggregate
intrinsic
value
(in millions)
$
225,970
116,326
(116,242 )
(8,646 )
217,408
95,028
(114,274 )
(10,754 )
187,408
92,320
(86,402 )
(21,649 )
$
171,677
57.06
72.75
53.32
52.78
67.63
77.79
58.30
70.10
76.74
103.56
50.98
82.69
92.18 $
27.4
Performance-based RSUs issued prior to 2018 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. The performance-based RSU grants issued in 2018 and thereafter vest after three
years with 100% of the shares vesting immediately when performance criteria has been determined to have been met. There were 88,110 performance-
based RSUs expected to vest as of December 31, 2023. Service based RSUs issued to the Company’s directors generally vest over twelve to fourteen
months. Service based RSUs issued to the Company’s management vest over three years. There were 83,567 service-based RSUs expected to vest as of
December 31, 2023. No forfeitures are currently expected. The total fair value of RSUs that vested during the years ended December 31, 2023, 2022 and
2021 based on the weighted average grant date values was $8.6 million, $9.3 million and $9.2 million, respectively.
Share-based compensation expense for RSUs for the years ended December 31, 2023, 2022 and 2021 was $8.3 million, $7.9 million and $7.3
million, respectively. As of December 31, 2023, the total unrecognized compensation expense related to unvested RSUs was $10.7 million and is expected
to be recognized over a weighted-average period of 1.4 years.
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Employee Stock Ownership and 401(k) Plans
The McGrath RentCorp Employee Stock Ownership and 401(k) Plan (the “KSOP”) provides that each participant may annually contribute an
elected percentage of his or her salary, not to exceed the statutory limit. Each employee who has at least two months of service with the Company and is 21
years or older, is eligible to participate in the KSOP. 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, 2023 dividends deducted by the Company were $0.5
million, which resulted in a tax benefit of approximately $0.1 million in 2023.
At December 31, 2023, the KSOP held 249,468 shares, or 1% of the Company’s total common shares outstanding. These shares are included in
basic and diluted earnings per share calculations.
NOTE 11. SHAREHOLDERS’ EQUITY
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 2,000,000 shares of the Company's outstanding
common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal
requirements and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of
authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the repurchase program
may be modified, extended or terminated by the Board of Directors at any time. There were no shares of common stock repurchased during the twelve
months ended December 31, 2023 and 2022. As of December 31, 2023, 1,309,805 shares remain authorized for repurchase under the Repurchase Plan.
NOTE 12. 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,
2024
2025
2026
2027
2028
Thereafter
$
$
6,270
4,702
2,125
516
270
1,119
15,002
Facility rent expense was $10.8 million in 2023, $7.0 million in 2022 and $5.6 million in 2021.
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.
The Company’s health plans are self-funded high deductible plans with annual stop-loss insurance of $200,000 per claim. Beginning in 2019, the
Company’s workers compensation insurance is underwritten by an insurance company with no stop-loss value and $350,000 for prior claim years.
Insurance providers are responsible for making claim payments that exceed these amounts on an
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individual claim basis. In addition, the Company has stop loss insurance that pays for claim payments made during a twelve month coverage period that
exceeds certain specified thresholds in the aggregate. The Company records an expense when health and workers compensation claim payments are made
and accrues for the portion of claims incurred, but not yet paid at period end. The Company makes these accruals based upon a combination of historical
claim payments, loss development experience and actuarial estimates. A high degree of judgment is required in developing the underlying assumptions and
the resulting amounts to be accrued. In addition, our assumptions will change as the Company’s loss experience develops. All of these factors have the
potential to impact the amounts previously accrued and the Company may be required to increase or decrease the amounts previously accrued. At
December 31, 2023 and 2022, accruals for the Company’s health and workers’ compensation high deductible plans were $1.6 million and $2.0 million,
respectively.
NOTE 13. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill were as follows:
(dollar amounts in thousands)
Balance at December 31, 2021
Changes to Design Space purchase accounting
Balance at December 31, 2022
Goodwill acquired through business combination
Derecognition of goodwill divested
Balance at December 31, 2023
Intangible assets from continuing operations consist of the following:
Mobile Modular
Adler Tanks
(Discontinued)
Total
$
$
106,491
(88 )
106,403
216,821
—
323,224
$
$
25,902
—
25,902
—
(25,902 )
—
$
$
132,393
(88 )
132,305
216,821
(25,902 )
323,224
(dollar amounts in thousands)
December 31, 2023
Customer relationships
Non-compete agreements
Trade name
Total amortizing
Trade name - non-amortizing
Total
December 31, 2022
Customer relationships
Non-compete agreements
Customer backlog
Trade name
Total amortizing
Trade name - non-amortizing
Total
Estimated
useful life
in years
8 to 11
5
0.75 to 8
Indefinite
8 to 11
5
—
8
Indefinite
Average
remaining life in
years
Cost
Accumulated
amortization
Net book
value
7.8
3.7
5.3
6.3
3.2
—
6.3
$73,217
10,556
2,000
85,773
171
$85,944
$50,284
3,296
1,900
1,200
56,680
5,871
$62,551
$(17,003)
(3,141)
(1,212)
(21,356)
—
$(21,356)
$(18,098)
(1,159)
(1,900)
(263)
(21,420)
—
$(21,420)
$56,214
7,415
788
64,417
171
$64,588
$32,186
2,137
—
937
35,260
5,871
$41,131
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 with indefinite lives on an annual basis regardless of whether there is evidence of impairment. If indicators of impairment were to be present in
intangible assets used in operations and future discounted cash flows were not expected to be sufficient to recover the asset’s carrying amount, an
impairment loss would be charged to expense in the period identified. The amount of an impairment loss that would be recognized is the excess of the
asset’s carrying value over its fair value. Factors the Company considers important, which may cause impairment include, among others, significant
changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or
projected operating results. The Company last conducted a qualitative analysis of its goodwill and intangible assets in the fourth quarter 2023, with no
indicators of impairment. In addition, no impairment triggering events occurred during the year ended December 31, 2023. Determining fair value of a
reporting unit is judgmental and involves the use of significant estimates and assumptions. The
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Company bases its fair value estimates on assumptions that it believes are reasonable but are uncertain and subject to changes in market conditions.
Intangible assets with finite useful lives are amortized over their respective useful lives. Amortization expense in the years ended December 31,
2023, 2022 and 2021 was $10.7 million, $5.9 million and $5.9 million, respectively. Based on the carrying values at December 31, 2023 and assuming no
subsequent impairment of the underlying assets, the annual amortization is expected to be $10.3 million in 2024, $10.2 million in 2025, $9.8 million in
2026, $9.6 million in 2027 and $8.2 million in 2028. For information on intangible assets from discontinued operations refer to Note 5.
NOTE 14. RELATED PARTY TRANSACTIONS
There were no significant related party transactions in the years ended December 31, 2023, 2022 and 2021, or amounts owed to related parties at
such dates.
NOTE 15. SEGMENT REPORTING
During the quarter ended December 31, 2023, the Company determined that its Portable Storage business segment met the criteria for separate
recognition as defined in the Accounting Standards Codification ("ASC") Topic 280, Segment Reporting. The guidance under this topic requires a public
business entity to evaluate both quantitative and qualitative thresholds to determine the significance of a business segment and whether the separate
reporting of a business segment enhances the users understanding of the reporting entity's performance, future net cash flows and judgments. The
Company evaluated the guidance within Topic 280 and made its determination to separately report the Portable Storage segment primarily due to the
Company's continued growth in container fleet purchases and related increased revenues and improved profitability performance when compared to
previously reported periods.
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,
Portable Storage, TRS-RenTelco 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, Portable Storage and TRS-RenTelco, based on their
pro-rata share of direct revenues. Interest expense is allocated amongst Mobile Modular, Portable Storage and TRS-RenTelco 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 from continuing operations for the years ended December 31, 2023, 2022
and 2021, for the Company’s reportable segments is shown in the following tables:
(dollar amounts in thousands)
Year Ended December 31,
2023
Rental revenues
Rental related services revenues
Sales and other revenues
Total revenues
Depreciation of rental equipment
Gross profit
Selling and administrative expenses
Other income
Income (loss) from operations
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
Average utilization
2
Mobile
Modular
Portable Storage
TRS-
RenTelco
1
Enviroplex
Consolidated
$
$
285,553
114,511
162,172
562,236
36,921
257,921
(138,574 )
2,329
121,676
29,724
91,952
176,200
175,360
1,291,093
967,712
$
74,536
20,510
6,091
101,137
3,514
68,880
(31,537 )
457
37,800
4,950
32,850
27,967
16,057
236,123
217,315
79.4 %
79.7 %
71.5 %
77.3 %
-90-
114,247 $
3,139
30,891
148,277
48,477
62,604
(30,962 )
832
32,474
8,146
24,638
28,945
25,511
377,587
144,296
55.9 %
58.9 %
$
—
—
20,192
20,192
—
4,228
(6,466 )
—
(2,238 )
(2,260 )
22
—
10,440
—
—
474,336
138,160
219,346
831,842
88,912
393,633
(207,539 )
3,618
189,712
40,560
149,462
233,112
227,368
1,904,803
1,329,323
Segment Data (Continued)
(dollar amounts in thousands)
Year Ended December 31,
2022
Rental revenues
Rental related services revenues
Sales and other revenues
Total revenues
Depreciation of rental equipment
Gross profit
Selling and administrative expenses
Income (loss) from operations
Interest expense (income) allocation
Income 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)
2
Utilization (period end)
2
Average utilization
2021
Rental revenues
Rental related services revenues
Sales and other revenues
Total revenues
Depreciation of rental equipment
Gross profit
Selling and administrative expenses
Income from operations
Interest expense (income) allocation
Income before benefit for income taxes
Rental equipment acquisitions
Accounts receivable, net (period end)
Rental equipment, at cost (period end)
Rental equipment, net book value (period end)
2
Utilization (period end)
2
Average utilization
Mobile
Modular
Portable
Storage
TRS-
RenTelco
1
Enviroplex
Consolidated
$
$
206,070
74,756
98,385
379,211
28,373
161,885
(85,769 )
76,116
8,657
67,459
87,535
124,184
929,636
637,151
$
62,218
$
17,095
3,193
82,506
2,799
55,302
(24,465 )
30,837
1,518
29,319
34,072
14,923
193,632
178,241
80.3 %
78.0 %
82.6 %
84.8 %
$
175,626
59,756
65,983
301,365
25,852
136,618
(72,091 )
64,526
5,553
58,973
151,625
101,839
879,272
603,497
75.3 %
75.4 %
44,943 $
12,574
4,434
61,951
2,219
39,422
(20,512 )
18,910
880
18,030
36,767
10,456
160,822
148,040
82.5 %
81.0 %
121,375 $
3,112
26,291
150,778
49,253
67,899
(27,245 )
40,654
3,294
36,982
69,928
26,442
398,267
174,924
59.4 %
64.2 %
113,419 $
2,880
23,895
140,194
47,374
61,394
(25,152 )
36,243
2,270
33,763
61,097
22,115
361,391
161,900
62.9 %
67.0 %
— $
—
23,170
23,170
—
5,122
(5,435 )
(313 )
(1,239 )
926
—
4,302
—
—
389,663
94,963
151,039
635,665
80,425
290,208
(142,914 )
147,294
12,230
134,686
191,535
169,851
1,521,535
990,316
— $
—
31,081
31,081
—
9,888
(5,303 )
4,585
(459 )
5,044
—
8,711
—
—
333,988
75,210
125,393
534,591
75,445
247,322
(123,058 )
124,264
8,244
115,810
249,489
143,121
1,401,485
913,437
1.
2.
Gross Enviroplex sales revenues were $22,615, $24,162 and $32,095 in 2022, 2021 and 2020, respectively. There were $2,422, $992 and $969 inter-segment sales to Mobile Modular in
2023, 2022 and 2021, respectively, 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.
No single customer accounted for more than 10% of total revenues during 2023, 2022 and 2021. Revenue from foreign country customers
accounted for 3% of the Company’s total revenues for 2023 and 4% for years 2022 and 2021.
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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, 2023.
On February 1, 2023, McGrath RentCorp completed its acquisition of Vesta Modular Housing Solutions Holdings, Inc. ("Vesta Modular").
Management has excluded Vesta Modular's internal controls from its assessment of the effectiveness of internal controls over financial reporting as of
December 31, 2023. Vesta Modular's revenues and total assets (excluding goodwill and intangible assets) represents approximately 13% and 14%,
respectively, of the consolidated financial statement amounts as of, and for the fiscal year ended, December 31, 2023.
Changes in Internal Control over Financial Reporting. During the last quarter of the Company’s fiscal year ended December 31, 2023, 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, 2023, 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, 2023 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.
During the three months ended December 31, 2023, none of our directors or officers adopted, modified or terminated a “Rule 10b5-1 trading
arrangement” or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S-K.
During the three months ended December 31, 2023, the Company did not adopt, modify or terminate a “Rule 10b5-1 trading arrangement” as such
term is defined under Item 408 of Regulation S-K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Report,
which, in either case, will be filed no later than 120 days after December 31, 2023.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Report,
which, in either case, will be filed no later than 120 days after December 31, 2023.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Report,
which, in either case, will be filed no later than 120 days after December 31, 2023.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Report,
which, in either case, will be filed no later than 120 days after December 31, 2023.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Exchange Act for its 2024 Annual or Special Meeting of Shareholders or included in an amendment to this Report,
which, in either case, will be filed no later than 120 days after December 31, 2023.
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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 (PCAOB ID: 248)
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. None
3. Exhibits. See Index of Exhibits on page 95 of this report.
Page of this report
57
58
61
62
63
64
65
66
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.
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Number
2.1
Description
Method of Filing
Equity Purchase Agreement, dated as of February 1, 2023, made by and among
McGrath RentCorp, a California corporation, Adler Tank Rentals, LLC, a Delaware
limited liability company, and Ironclad Environmental Solutions, Inc., a Delaware
corporation.
Filed as exhibit 1.01 to the Company’s Current Report on Form 8-K (filed February 1,
2023), and incorporated herein by reference.
2.2
Stock Purchase Agreement, dated as of February 1, 2023, made by and among Vesta
Filed as exhibit 1.02 to the Company’s Current Report on Form 8-K (filed February 1,
Housing Solutions Investor, LLC, a Delaware limited liability company, Vesta Housing
Solutions Holdings, Inc., a Delaware corporation, and McGrath RentCorp, a California
corporation.
2023), and incorporated herein by reference.
2.3
3.1
Agreement and Plan of Merger, dated as of January 28, 2024, by and among WillScot
Mobile Mini Holdings Corp., Brunello Merger Sub I, Inc., Brunello Merger Sub II,
LLC, and McGrath RentCorp.
Filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K/A (filed January
29, 2024), and incorporated herein by reference.
Articles of Incorporation of McGrath RentCorp. ‘p’
3.1.1
Amendment to Articles of Incorporation of McGrath RentCorp. ‘p’
3.1.2
Amendment to Articles of Incorporation of McGrath RentCorp.
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.
3.2
4.1
4.1.1
4.1.2
4.2
4.2.1
Amended and Restated Bylaws
Filed herewith.
Second Amended and Restated Note Purchase and Private Shelf Agreement, dated as
of June 8, 2023 (filed as Exhibit 10.1 to Registrant's Current Report on 8-K filed on
June 13, 2023, and incorporated herein by reference).
Filed as exhibit 10.1 to the Company’s Current Report on Form 8-K (filed June 13,
2023), 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.
Amended and Restated Credit Agreement, dated as of July 15, 2022, 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 July 19,
2022) and incorporated herein by reference.
Amended and Restated Guaranty, dated as of July 15, 2022, among certain domestic
subsidiaries of the Company in favor of Bank of America, N.A., in its capacity as the
Administrative Agent.
Filed as exhibit 10.2 to the Company’s Current Report on Form 8-K (filed July 19,
2022) and incorporated herein by reference.
4.2.2
Amended and Restated Credit Facility Letter Agreement, dated as of August 19, 2022,
Filed as exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q (filed October
between the Company and MUFG Union Bank, N.A.
27, 2022) and incorporated herein by reference.
4.2.3
Amended and Restated Credit Line Note, dated as of August 19, 2022, in favor of
Filed as exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q (filed October
MUFG Union Bank, N.A.
27, 2022) and incorporated herein by reference.
4.3
Description of Registrant’s Securities.
Filed as exhibit 4.2.4 to the Company’s Annual Report on Form 10K for the year
ended December 31, 2019 (filed February 25, 2020), and incorporated herein by
reference.
10.1†
10.1.1†
McGrath RentCorp Employee Stock Ownership Plan, as amended and restated on
December 31, 2008.
Filed as exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 (filed February 26, 2009), and incorporated herein by
reference.
McGrath RentCorp Employee Stock Ownership Trust Agreement, as amended and
restated on December 31, 2008.
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Filed as exhibit 10.3.1 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 (filed February 26, 2009), and incorporated herein by
reference.
Number
Description
Method of Filing
10.2†
McGrath RentCorp 2007 Stock Incentive Plan.
10.2.1†
Form of 2007 Stock Incentive Plan Stock Option Award and Agreement.
Filed as exhibit 10.12 to the Company's Quarterly Report on Form 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 Form 10-Q for the
quarter ended June 30, 2007 (filed August 2, 2007), and incorporated herein by
reference.
10.2.2†
Form of 2007 Stock Incentive Plan Non-Qualified Stock Option Award and
Agreement.
Filed as exhibit 10.12.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007 (filed August 2, 2007), and incorporated herein by
reference.
10.2.3†
Form of 2007 Stock Incentive Plan Stock Appreciation Right Award and Agreement.
10.2.4†
Form of 2007 Stock Incentive Plan Restricted Stock Unit Award and Agreement.
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.
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.
10.3†
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.
10.4†
McGrath RentCorp Change in Control Severance Plan and Summary Plan Description Filed as exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2022 (filed April 28, 2022), and incorporated herein by reference.
10.5†
McGrath RentCorp 2016 Stock Incentive Plan
Filed as Appendix A to the Company's Proxy Statement for the 2016 Annual Meeting
(filed April 29, 2016), and incorporated herein by reference.
10.5.1†
Form of 2016 Stock Incentive Plan Restricted Stock Unit Award and Agreement -
Filed as exhibit 10.8.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2022 (filed April 28, 2022), and incorporated herein by
reference.
10.5.2†
Form of 2016 Stock Incentive Plan Performance-Based Restricted Stock Unit Award
and Agreement - Division Management
Filed as exhibit 10.8.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2022 (filed April 28, 2022), and incorporated herein by
reference.
10.5.3†
Form of 2016 Stock Incentive Plan Stock Appreciation Right Award and Agreement -
Filed as exhibit 10.8.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2022 (filed April 28, 2022), and incorporated herein by
reference.
Corporate
Enviroplex
10.6†
Form of Indemnification Agreement with Directors and Officers
Filed herewith.
21.1
23.1
31.1
31.2
32.1
32.2
97
101
List of Subsidiaries.
Written Consent of Grant Thornton LLP.
Filed herewith.
Filed herewith.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Filed herewith.
Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Filed herewith.
Act of 2002.
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Furnished herewith.
Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Furnished herewith.
Act of 2002.
McGrath RentCorp Compensation Recoupment Policy
Filed herewith.
The following materials from McGrath RentCorp’s annual Report on Form 10-K for
the year ended December 31, 2023, formatted in iXBRL (Inline eXtensible Business
Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated
Balance Sheet, (iii) the Condensed Consolidated Statement of Cash Flows, and (iv)
Notes to Condensed Consolidated Financial Statements.
104 Cover Page Interactive Data File (embedded within the inline XBRL
-96-
document).
† = Indicates a management contract or compensatory plan
‘P’ = exhibit was filed in paper form
-97-
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 21, 2024
MCGRATH RENTCORP
SIGNATURES
by:
/s/ Joseph F. Hanna
JOSEPH F. HANNA
Chief Executive Officer and President
(Principal Executive Officer)
by:
/s/ Keith E. Pratt
KEITH E. PRATT
Executive 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/ Nicolas Anderson
NICOLAS ANDERSON
/s/ Kim A. Box
KIM A. BOX
/s/ Smita Conjeevaram
SMITA CONJEEVARAM
/s/ William J. Dawson
WILLIAM J. DAWSON
/s/ Elizabeth A. Fetter
ELIZABETH A. FETTER
/s/ Joseph F. Hanna
JOSEPH F. HANNA
/s/ Bradley M. Shuster
BRADLEY M. SHUSTER
Title
Director
Director
Director
Director
Director
Date
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
February 21, 2024
Chief Executive Officer, President and Director
February 21, 2024
Chairman of the Board
February 21, 2024
-98-
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
McGRATH RENTCORP,
a California corporation
(Amended and Restated as of April 2, 2023)
1. OFFICES
1.1. Principal Office. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the
State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board
of Directors shall fix and designate a principal business office in the State of California.
1.2. Other Offices. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is
qualified to do business.
2. MEETINGS OF SHAREHOLDERS
2.1. Place of Meetings. All meetings of shareholders shall be held either at the principal executive office of the corporation or at any other place within or
without the State of California designated by the Board of Directors. In the absence of any such designation, shareholders’ meeting shall be held at the
principal executive office of the corporation.
2.2. Annual Meetings. The Annual Meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. In the
absence of such designation, the Annual Meeting of shareholders shall be held on the first Thursday of June in each year at 2:00 p.m. However, if this day
falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At such meeting, directors shall
be elected, reports of the affairs of the corporation shall be considered, and any other proper business may be transacted.
2.3. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the President,
or by the holders of shares in the aggregate entitled to cast not less than 10 percent of the votes at the meeting.
If a special meeting is desired to be called by any person or persons other than the Board of Directors, their request shall be made in writing, specifying the
time of such meeting and the general nature of the business proposed to be transacted. The written request shall then be delivered personally or by
registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, President, any Vice President, or Secretary of the
corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions
of Sections 2.4 and 2.5 of these Bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-
five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the
person or persons requesting the meeting may give the notice. Nothing contained in this paragraph shall be construed as limiting, fixing or affecting the
time when a meeting of shareholders called by action of the Board of Directors may be held.
2.4. Notice of Shareholders’ Meetings. All notices of meetings of shareholders shall be sent or otherwise given to each shareholder entitled to vote thereat
in accordance with Section 2.5 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify
the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the
case of the annual meeting, those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders.
The notice of any meeting at which Directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice,
management intends to present for election.
If shareholder action, other than unanimous approval of those entitled to vote, is proposed to be taken at any meeting for approval of (i) a contract or
transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the California Corporations Code, (ii) an amendment of
the Articles of Incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a
voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (v) a plan of distribution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of that Code, then the notice shall also state the general nature of that proposal.
2.5. Manner of Giving Notice; Affidavit of Notice. Written notice of any meeting of shareholders shall be given to each shareholder entitled to vote
thereat either personally or by first class mail or other means of written communication, charges prepaid, addressed to the shareholder at the address of that
shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears
on the corporation’s books or is given, notice shall be deemed to have been given if sent to that shareholder by first class mail or other means of written
communication to the corporation’s principal executive office, or if published at least once in a newspaper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written
communication.
If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on written demand of
the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of notice.
An affidavit of the mailing or other means of giving any notice of any shareholders’ meeting shall be executed by the Secretary, Assistant Secretary, or any
transfer agent of the corporation giving the notice, and shall be filed and maintained in the Minute Book of the Corporation.
2.6. Quorum. The presence in person or by proxy of shareholders entitled to vote a majority of the voting shares of the corporation at any meeting of
shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
2.7. Adjourned Meetings and Notice Thereof. Whether or not a quorum is present, any shareholders’ meeting may be adjourned from time to time by the
vote of a majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum no other business may be
transacted at that meeting, except as provided in Section 2.6 of these Bylaws.
When any meeting of shareholders is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are
announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for
more than forty-five (45) days from the date set for the original meeting, in which case the Board of Directors shall set a new record date. When required,
notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted
at the original meeting.
2.8. Voting. Except as provided in Section 708 of the California Corporations Code, each outstanding share of this corporation, regardless of class, shall be
entitled to one vote on each matter submitted to a vote of shareholders. The shareholders entitled to vote at any meeting of shareholders shall be determined
in accordance with the provisions of
Section 2.11 of these Bylaws, subject to the provisions of Sections 702, 703 and 704 of the California Corporations Code (relating to voting by fiduciaries,
corporate shareholders, or shares standing in joint ownership). The shareholders’ vote may be by voice vote or by ballot; provided, however, that any
election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Any shareholder entitled to vote on
a proposal may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder’s
approving vote is with respect to all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders unless the vote of a greater number or voting by classes is required by the California Corporations
Code or by the Articles of Incorporation.
At a shareholders’ meeting at which Directors are to be elected, no shareholders shall be entitled to cumulate votes (i.e., cast for any one or more candidates
a number of votes greater than the number of the shareholder’s shares) unless such candidate’s or candidates’ names have been placed in nomination prior
to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder’s intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a
number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder’s shares are entitled, or
distribute the shareholder’s shares on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be elected, shall be elected. A shareholder may not cumulate his votes for any
candidate whose name was not placed in nomination prior to the commencement of the voting.
2.9. Waiver of Notice or Consent by Absent Shareholders. The transactions of any meeting of shareholders, however called and noticed, and wherever
held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either
before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the
holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the
purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters
specified in the second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent shall state the general nature of the proposal. All such
waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting.
2.10. Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares
having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote
on that action were present and voted. In the case of the election of directors, such a consent shall be effective only if signed by the holders of all
outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board
of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the
election of directors. All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records. Any shareholder
giving a written consent, or the shareholder’s proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective
proxy holders, may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the Secretary, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary.
If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not
have been received, the Secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be
given in the manner specified in Section 2.5 of these Bylaws. In the case of approval of (i) contracts or transactions in which a director has a direct or
indirect financial interest, pursuant to Section 310 of the California Corporations Code, (ii) indemnification of agents of the corporation, pursuant to Section
317 of that Code, (iii) reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval.
Any form of written consent distributed to 10 or more shareholders of this corporation shall afford an opportunity on the form of written consent to specify
a choice between approval, disapproval or abstention as to each matter or group of related matters the approval for which the written consent is solicited,
other than elections to office.
2.11. Record Date for Shareholder Notice, Voting, and Giving Consents. For purposes of determining the shareholders entitled to notice of any meeting
or to vote or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a
meeting; and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General
Corporation Law.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business
day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the
meeting is held.
(b) The record date for determining shareholders entitled to give consent to the corporate action in writing without a meeting, (i) when no prior action by
the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board has been taken, shall be at the
close of business on the date on which the Board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such action,
whichever is later.
2.12. Proxies. Every person entitled to vote shares shall have the right to do so either in person or by one or more agents authorized by a written proxy
signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder’s name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder’s attorney in fact. A validly
executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote
pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or by attendance at
the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11)
months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the California Corporations Code.
Any form of proxy distributed to 10 or more shareholders of this corporation shall afford an opportunity on the proxy to specify a choice between approval,
disapproval or abstention as to each matter or group of related matters intended to be acted upon at the meeting for which the proxy is solicited, other than
elections to office.
2.13. Inspectors of Election. Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of election are appointed, the Chairman of the meeting may, and on the request of
any shareholder or a shareholder’s proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, the Chairman of the
meeting may, and upon the request of any shareholder or a shareholder’s proxy shall, appoint a person to fill that vacancy.
As prescribed by California Corporations Code Section 707, these inspectors shall:
(a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.
3. DIRECTORS
3.1. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these Bylaws
relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and
all corporate powers shall be exercised by or under the direction of the Board of Directors.
Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to:
(a) Select and remove all officers, agents and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the
Articles of Incorporation, and with these Bylaws; fix their compensation; and require from them security for faithful service.
(b) Conduct, manage, and control the affairs and business of the corporation, and to make such rules and regulations therefor not inconsistent with law, or
with the Articles of Incorporation, or the Bylaws, as they may deem to be in the best interests of the corporation.
(c) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be
qualified to do business in any other state, territory, dependency, or country and conduct business within or without the State of California; and designate
any place within or without the State of California for the holding of any shareholders’ meeting or meetings, including annual meetings.
(d) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates.
(e) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered,
debts or securities cancelled, or tangible or intangible property actually received.
(f) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation’s purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities.
3.2. Number of Directors. The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors
shall be seven (7) until changed, within the limits specified above, by a Bylaw amending this Section 3.2 duly adopted by the Board of Directors or by the
shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by an amendment
to this Bylaw duly adopted by the vote or written consent of a majority of the outstanding shares entitled to vote.
3.3. Election and Term of Office. The Directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held, or the
Directors are not elected thereat, the Directors may be elected at any special meeting of shareholders held for that purpose. Each Director, including a
Director elected to fill a vacancy, shall hold office until the next annual or special meeting of shareholders at which Directors are elected and until their
successors are elected and qualified.
3.4. Vacancies. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of the death, resignation, or removal of any director,
or if the Board of Directors by resolution declares vacant the office of the Director who has been declared of unsound mind by an order of court or
convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any Director
or Directors are elected, to elect the number of directors to be voted for at that meeting.
Any Director may resign effective on giving written notice to the Chairman of the Board, the President, the Secretary, or the Board of Directors, unless the
notice specifies a later time for that resignation to become effective. If the resignation of a Director is effective at a future time, the Board of Directors may
elect a successor to take office when the resignation becomes effective.
Vacancies in the Board of Directors may be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director,
except that a vacancy created by the removal of a Director by the vote or written consent of the shareholders or by court order may be filled only by the
vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a
majority of the outstanding shares entitled to vote.
The shareholders may elect a Director or Directors at any time to fill any vacancy or vacancies not filled by the Directors, but any such election by written
consent shall require the consent of a majority of the outstanding shares entitled to vote.
No reduction of the authorized number of Directors shall have the effect of removing any Director before that Director’s term of office expires.
3.5. Place of Meetings and Meetings by Telephone. Regular meetings of the Board of Directors may be held at any place within or outside the State of
California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the
principal executive office of the corporation. Special meetings of the Board shall be held at any place within or outside the State of California that has been
designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting,
regular or special, may be held by conference telephone or similar communication equipment, so long as all Directors participating in the meeting can hear
one another, and all such Directors shall be deemed to be present in person at the meeting.
3.6. Annual Meeting. Immediately following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of
organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required.
3.7. Other Regular Meetings. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed
by the Board of Directors; provided, however, that if any regular meeting should fall on a legal holiday, then said meeting shall be held at the same time and
place on the next day thereafter which is not a legal holiday. Such regular meetings may be held without notice.
3.8. Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board or
the President or any Vice President or the Secretary or any two Directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each Director or sent by first-class mail or telegram,
charges prepaid, addressed to each Director at that Director’s address as it is shown on the records of the corporation. In case the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by
telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the Director or to a person at the office of the
Director who the person giving the notice
has reason to believe will promptly communicate it to the Director. The notice need not specify the purpose of the meeting.
3.9. Quorum. A majority of the authorized number of Directors shall constitute a quorum for the transaction of business, except to adjourn as provided in
Section 3.11 of these Bylaws. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present
shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the California Corporations Code (as to approval of
contracts or transactions in which a Director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees),
and Section 317(e) of that Code (as to indemnification of Directors). A meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
3.10. Waiver of Notice. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice, a consent to holding the meeting or an approval of the Minutes. The waiver of notice or consent need not specify
the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the Minutes of the
meetings. Notice of a meeting need not be given to any Director who attends the meeting without protesting, before or at its commencement, the lack of
notice to that Director.
3.11. Adjournment. A majority of the Directors present, whether or not constituting a quorum, may adjourn any meeting of the Board to another time and
place.
3.12. Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, to the Directors who were
not present at the time of the adjournment.
3.13. Action Without Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of
the Board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a
unanimous vote of the Board of Directors. Such written consent or consents shall be filed with the Minutes of the proceedings of the Board.
3.14. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. This shall not be construed to preclude any Director
from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services.
4. COMMITTEES
4.1. Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the authorized number of Directors, designate one or
more committees, each consisting of two or more Directors, to serve at the pleasure of the Board. The Board may designate one or more Directors as
alternate members of any committee, who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the
resolution of the Board, shall have all the authority of the Board, except with respect to:
(a) the approval of any action which, under the General Corporation Law of California, also requires the vote or consent of the shareholders;
(b) the filling of vacancies on the Board of Directors or on any committee;
(c) the fixing of compensation of the Directors for serving on the Board or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of
Directors; or
(g) the appointment of any other committees of the Board of Directors or the members of these committees.
5. OFFICERS
5.1. Officers. The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant
Financial Officers, and such other officers as may be appointed in accordance with these Bylaws. Any number of offices may be held by the same person.
5.2. Election of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or
Section 5.5 of these Bylaws, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an
officer under any contract of employment.
5.3. Subordinate Officers. The Board of Directors may appoint, and may empower the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as
the Board of Directors may from time to time determine.
5.4. Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed,
either with or without cause, by the Board of Directors, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board
of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at
any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
5.5. Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to that office.
5.6. Chairman of the Board. The Board of Directors may, in its discretion, elect a Chairman of the Board from among its members. He shall preside at all
meetings of the Board of Directors at which he is present and shall exercise and perform such other powers and duties as may be from time to time assigned
to him by the Board of Directors or prescribed by the Bylaws.
5.7. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an
officer, the President shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of
the corporation. He shall preside at all meetings of the shareholders and at all meetings of the Board of Directors not presided over by the Chairman of the
Board. He shall have the general powers and duties of management usually vested in the office of president of a corporation, shall have such other powers
and duties as may be prescribed by the Board of Directors or the Bylaws and shall be primarily responsible for carrying out all orders and resolutions of the
Board of Directors.
5.8. Vice President. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors, or if
not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, and the President or the Chairman of the Board.
5.9. Secretary. The Secretary shall keep or cause to be kept, at the principal office, at the office of the corporation’s counsel or at such other place as the
Board of Directors may order, a Book of Minutes of all meetings and actions of Directors, committees of directors, and shareholders, with the time and
place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors’ meetings or
committee meetings, the number of shares present or represented at shareholders’ meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation’s transfer agent or registrar, a share register, or a
duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and dates of
certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to
be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or by the Bylaws.
5.10. Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any Director.
The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the
President and Directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.
6. INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1. Indemnification. The corporation may, to the maximum extent permitted by Section 317 of the California General Corporation Law, indemnify each
of its “agents” (as defined in Section 317(a) of the California General Corporation Law) against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding against such agent arising by reason of the fact any such person is or was an agent of
the corporation. Except with respect to indemnification of agents which is mandatory under Section 317(d) of the California General Corporation Law, such
indemnification shall only be effective:
(a) if “approval by the shareholders” (as defined in Section 153 of the California General Corporation Law) in a particular instance;
(b) if approved by the disinterested vote of the Board of Directors in a particular instance; or
(c) if authorized by a written agreement between the corporation and the agent to be indemnified entered into prior to assertion of the claim giving rise to
indemnity thereunder by the corporation with any director of the corporation (in any or all of his or her corporate capacities) or with such other agent or
agents as the Board of Directors shall approve.
6.2. Required Approval. Except as provided in Section 317(d) of the California General Corporation Law, any indemnification under Section 6.1 of these
Bylaws shall be made by this corporation only if authorized in the specific case (on a determination that indemnification of the agent is proper under the
circumstances because the agent has met the applicable standard of conduct set forth in Sections 317(b) or (c) of the California General Corporation Law)
by:
(a) a majority vote of a quorum of the Board consisting of directors who are not parties to the proceeding;
(b) “approval of the shareholders” (as defined in Section 153 of the California General Corporation Law), with the shares owned by the person to be
indemnified not being considered outstanding or entitled to vote thereon;
(c) the court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this corporation; or
(d) such other method as Section 317 of the California General Corporation Law shall allow.
6.3. Advance of Expenses. Expenses incurred in defending any proceeding described in Section 6.1 of these Bylaws may be advanced by this corporation
before the final disposition of the proceeding on receipt of an undertaking by or on behalf of the agent to repay the amount of the advance if it shall be
determined ultimately that the agent is not entitled to be indemnified as authorized in Sections 6.1 and 6.2 of these Bylaws.
6.4. Insurance. This corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability
asserted against or incurred by the agent in such capacity or arising out of the agent’s status as such, whether or not this corporation would have the power
to indemnify the agent against that liability under Sections 6.1 and 6.2 of these Bylaws. Notwithstanding Section 6.1 above, the corporation shall not be
obligated to indemnify any agent, to the extent any amount subject to indemnification thereunder is covered by insurance payable to such agent, the
premiums for which are paid by the corporation.
6.5. No Limitation of Other Rights. The indemnification provided by this Section 6 above shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under Section 6.6 below to the extent such additional rights to indemnification are authorized in the
corporation’s Articles of Incorporation and Section 6.6 below. The rights to indemnity contained in Sections 6.1 and 6.4 above shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of the person. Nothing
contained in Sections 6.1 through 6.4 above shall affect any right to indemnification to which persons other than the directors and officers may be entitled
by contract or otherwise.
6.6. Additional Indemnification. If expressly authorized in the corporation’s Articles of Incorporation, the corporation may provide indemnification of
agents in excess of the indemnification otherwise permitted by Section 317 of the California General Corporation Law and to the fullest extent permitted by
California law. Such additional indemnification shall only be effective (i) if “approved by the shareholders” (as defined in Section 153 of the California
General Corporation Law) in a particular instance, (ii) if approved by the disinterested vote of the Board of Directors in a particular instance or (iii) if
authorized by a written agreement between the corporation and the agent to be indemnified entered into prior to assertion of the claim giving rise to
indemnity thereunder by the corporation with any director of the corporation (in any or all of his or her corporate capacities) or with such other agent or
agents as the Board of Directors shall approve; provided, however, that no such agent shall be indemnified for any acts, omissions or transactions, or under
circumstances, as to which indemnification is prohibited by Section 204(a)(11) of the California General Corporation Law, as such Section may be
amended from time to time.
6.7. Amendment. Any amendment, repeal or modification of any provision of this Section 6 by the shareholders or the Board of Directors shall not
adversely affect any right or protection of an agent of the corporation at the time of such amendment, repeal or modification.
7. RECORDS AND REPORTS
7.1. Maintenance, Inspection and Location of Share Register. The corporation shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may
(i) inspect and copy the records of shareholders’ names and addresses and shareholdings during usual business hours on five days’ prior written demand on
the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent’s usual charges for
such list, a list of the shareholders’ names and addresses, who are entitled to vote for the election of directors, and their shareholdings as of the most recent
record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to
any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or the date specified in the
demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection and copying on the written demand of
any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder’s interests as a
shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section may be made in person or by an agent or attorney of
the shareholder or holder of a voting trust certificate making the demand.
7.2. Maintenance, Inspection and Location of Bylaws. The corporation shall keep at its principal executive office, the original or a copy of these Bylaws
as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours.
7.3. Maintenance, Inspection and Location of Other Corporate Records. The accounting books and records and Minutes of proceedings of the
shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the
Board of Directors, or, in the absence of such designation, at the principal executive office of the corporation. The Minutes shall be kept in written form and
the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The Minutes and
accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any
reasonable time during usual business hours, for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust
certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of
inspection shall extend to the records of each subsidiary corporation of the corporation.
7.4. Inspection by Directors. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind
and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person or by an agent or
attorney, and the right of inspection includes the right to copy and make extracts of documents.
7.5. Annual Report to Shareholders. The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty
(120) days after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) days before the annual meeting of
shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these Bylaws for giving notice to shareholders of the
corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and records of the corporation. The annual report shall also contain such further
information as required by Section 1501(b) of the California Corporations Code.
7.6. Financial Statements. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal
year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on
file in the principal executive office of the corporation for twelve (12) months, and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request
to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended
more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the Chief Financial Officer shall
cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the
request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this
report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual, or quarterly income
statement which it has prepared, and a balance sheet as of the end of that period.
The quarterly income statements and balance sheets referred to in this Section shall be accompanied by the report, if any, of any independent accountants
engaged by the corporation or the certificate of an authorized officer of the
corporation that the financial statements were prepared without audit from the books and records of the corporation. All financial statements are to be
prepared on a consolidated basis if the corporation has subsidiaries.
7.7. Annual Statement of General Information. The corporation shall, during the period in each year as provided for in Section 1502 of the California
Corporations Code, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of
directors, the number of vacancies on the board, if any, the names and complete business or residence addresses of all incumbent directors, the names and
complete business or residence addresses of the Chief Executive Officer, Secretary and Chief Financial Officer, the street address of its principal executive
office or principal business office in this state, and the general type of business constituting the principal business activity of the corporation, together with
a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the California Corporations Code.
8. GENERAL CORPORATE MATTERS
8.1. Record Date for Purposes Other than Notice and Voting. For purposes of determining the shareholders entitled to receive payment of any dividend
or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by
written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such
action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution, or allotment of rights or to exercise
the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise
provided in the California General Corporation Law.
If the Board of Directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on
the day on which the Board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later.
8.2. Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall
be determined by resolution of the Board of Directors, or in the absence of such determination, by the President and the Secretary or the Chief Financial
Officer.
8.3. Corporate Contracts and Instruments; How Executed. The Board of Directors, except as otherwise provided in these Bylaws, may authorize one or
more officers, employees, or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it
liable for any purpose or for any amount.
8.4. Certificates; Direct Registration System. Shares of the Corporation’s stock may be certificated or uncertificated, as provided under California law.
Any certificates that are issued shall be signed in the name of the Corporation by the Chairman of the Board or Vice Chairman of the Board or the President
or Vice President and by the Chief Financial Officer or any Assistant Financial Officer or the Secretary or any Assistant Secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent,
or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or
registrar at the date of issue. Shares of the Corporation’s capital stock may also be evidenced by registration in the holder’s name in uncertificated, book-
entry form on the books of the Corporation in accordance with a direct registration system approved by the Securities and Exchange Commission and by
the NASDAQ or any securities exchange on which the stock of the Corporation may from time to time be traded.
8.5. Lost Certificates. Except as provided herein, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered
to the corporation and cancelled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost,
stolen or destroyed, authorize the
issuance of a replacement certificate or uncertificated shares in place of any certificate or certificates previously issued by the Corporation on such terms
and conditions as the Board may require, including provision for indemnification of the Corporation secured by a bond or other adequate security sufficient
to protect the Corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or
destruction of the certificate or the issuance of the replacement certificate or the uncertificated shares.
8.6. Representation of Shares of Other Corporations. The Chairman of the Board, the President or any Vice President, or any other person authorized by
resolution of the Board of Directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of
any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these
officers in person or by any person authorized to do so by a proxy duly executed by these officers.
8.7. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California
General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of the foregoing, the singular number includes the
plural, the plural number includes the singular, and the term “person” refers to corporations and other entities as well as to natural persons.
9. AMENDMENTS
9.1. Amendment by Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of
a majority of the outstanding shares entitled to vote.
9.2. Amendment by Directors. Subject to the rights of the shareholders as provided in Section 9.1 hereof, bylaws may be adopted, amended, or repealed
by the Board of Directors, except that the Board of Directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors
only for the purpose of fixing the exact number of directors within the limits specified in Section 3.2 of these Bylaws.
CERTIFICATION
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of McGrath RentCorp, a California corporation; and
(2) That the foregoing is a full, true and correct copy of the Bylaws of the corporation with all amendments to date of this Certificate.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said corporation this 2nd day of April, 2023.
Gilda Malek
Corporate Secretary
McGrath RentCorp
INDEMNIFICATION AGREEMENT
Exhibit 10.6
This Indemnification Agreement (the “Agreement”) is entered into, effective as of
______________ between McGrath RentCorp, a California corporation, and ________________ (“Officer/Director”).
Whereas, it is essential to McGrath RentCorp to retain and attract, as directors, officers and other agents, the most
capable persons available; and
Whereas, Officer/Director is a director and/or officer or other agent of McGrath RentCorp; and
Whereas, both McGrath RentCorp and Officer/Director recognize the increased risk of litigation and other claims
currently being asserted against directors, officers and other agents of corporations; and
Whereas, in recognition of Officer/Director’s need for substantial protection against personal liability in order to
enhance Officer/Director’s continued and effective service to McGrath RentCorp, and in order to induce Officer/Director to
provide services to McGrath RentCorp as a director, officer or other agent, McGrath RentCorp desires to provide in this
Agreement for the indemnification of, and the advancing of expenses to, Officer/Director to the fullest extent (whether partial or
complete) permitted by law (regardless of any amendment to or revocation of any Bylaws of McGrath RentCorp or any change in
the ownership of McGrath RentCorp or the composition of its Board of Directors) and, to the extent insurance is maintained, for
the coverage of Officer/Director under McGrath RentCorp’s general and/or directors’ and officers’ liability insurance policies;
and
Whereas, Officer/Director is relying upon the rights afforded him under this Agreement in continuing in his position with
McGrath RentCorp;
NOW, THEREFORE, in consideration of the above premises and of Officer/Director continuing to serve McGrath
RentCorp directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows:
As used in this Agreement, the capitalized terms listed below shall have the meaning ascribed to them as follows:
1.
CERTAIN DEFINITIONS
1.1“Board” means the Board of Directors of McGrath RentCorp.
1.2A “Change in Control” shall be deemed to have occurred if:
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Exhibit 10.6
1.2.1 at any time after the effective date of this Agreement, any “person” (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities
under an employee benefit plan of McGrath RentCorp or a corporation owned directly or indirectly by the stockholders
of McGrath RentCorp in substantially the same proportions as their ownership of stock of McGrath RentCorp, becomes
the “Beneficial Owner” (as defined in Rule 13d–3 under said Act), directly or indirectly, of securities of McGrath
RentCorp representing 30% or more of the total voting power represented by McGrath RentCorp’s then outstanding
Voting Securities; or
1.2.2 during any period of two consecutive years after the effective date of this Agreement (or if two years have
not elapsed since the effective date of this Agreement, such shorter period), individuals who at the beginning of such
period constitute the Board and any new director whose election by the Board or nomination for election by McGrath
RentCorp’s stockholders was approved by a vote of at least two-thirds (⅔) of the directors then still in office, who either
were directors at the beginning of the period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; or
1.2.3 any time after the effective date of this Agreement, the stockholders of McGrath RentCorp approve a
merger or consolidation of McGrath RentCorp with any other corporation, other than a merger or consolidation which
results in the Voting Securities of McGrath RentCorp outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of McGrath RentCorp or such surviving entity outstanding
immediately after such merger or consolidation and such plan of merger or consolidation is not abandoned or otherwise
terminated before completion; or
1.2.4 any time after the effective date of this Agreement, the stockholders of McGrath RentCorp approve a plan
of complete liquidation of McGrath RentCorp or an agreement for the sale or disposition by McGrath RentCorp (in one
transaction or a series of transactions) of all or substantially all of McGrath RentCorp’s assets and such plan or
agreement is not abandoned or otherwise terminated before completion.
1.3 “Expenses” shall be broadly construed and shall mean any expense, liability or loss, including but not limited to
attorneys’ breach, judgments, fines, ERISA excise taxes, penalties, amounts paid or to be paid in settlement, any interest,
assessments or other charges imposed thereon, any federal, state, local or foreign taxes imposed as a result of the actual or
deemed receipt of any payments under this Agreement, and all other costs and obligations, paid or incurred or accrued in
connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the
foregoing in, any Proceeding relating to any Indemnifiable Event or enforcing a right to indemnification under this Agreement,
Section 317 of the California Corporations Code or otherwise. “Expenses” shall also include the amount of any reasonable
retainer required for Officer/Director to retain competent counsel to defend him in any Proceeding relating to any Indemnifiable
Event.
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1.4An “Indemnifiable Event” is any event or occurrence that takes place either prior to or after the execution of this
Agreement, related to the fact Officer/Director:
1.4.1 is or was a director, an officer, an employee or an agent of McGrath RentCorp; or
1.4.2 is or was serving at the request of McGrath RentCorp as a director, officer, employee, trustee, agent or
fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise; or
1.4.3 is or was a director, officer, employee or agent of a foreign or domestic corporation that is a predecessor
corporation of McGrath RentCorp or of another enterprise at the request of such predecessor corporation;
and is related to anything done or not done by Officer/Director in any such capacity, whether or not the basis of the Proceeding is
alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent of McGrath RentCorp, as described in subsections 1.4.1 through 1.4.3 above.
1.5 “Independent Counsel” is an attorney, law firm or member of a law firm, experienced in matters of corporate law,
(i) selected by three or more persons seeking indemnification and/or advancement of expenses under indemnification agreements
with McGrath RentCorp substantially the same as this Agreement and approved by Officer/Director and McGrath RentCorp
(which approval shall not be unreasonably withheld) or (ii) selected by McGrath RentCorp and approved by Officer/Director
(which approval shall not be unreasonably withheld), and who has not otherwise performed services for McGrath RentCorp,
Officer/Director or any other party to the Proceeding giving rise to a claim for indemnification hereunder (other than in
connection with other indemnification matters) within the last five years; provided, however, Independent Counsel shall not
include any person or entity who, under the applicable standards of professional conduct then prevailing, would have a conflict of
interest in representing either McGrath RentCorp or Officer/Director in an action to determine Officer/Director’s rights under
this Agreement.
1.6A “Proceeding” is any threatened, pending or completed action (including an action by or in the right of McGrath
RentCorp), suit or proceeding, or any inquiry, hearing or investigation, whether conducted by McGrath RentCorp or any other
party, Officer/Director in good faith believes might lead to the institution of any such action, suit or proceeding, whether civil,
criminal, administrative, investigative or other.
1.7The “Reviewing Party” is any appropriate person or body consisting of a member or members of the Board or any
other person or body appointed by the Board, none of whom is a party to the particular Proceeding with respect to which
Officer/Director is seeking indemnification; provided, however, after a Change in Control (other than a Change in Control
approved by a majority of directors of the Board who were directors immediately prior to such Change in Control), the
Reviewing Party shall be Independent Counsel.
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1.8“Voting Securities” are any securities of McGrath RentCorp that vote generally in the election of directors.
Exhibit 10.6
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2.
AGREEMENT TO INDEMNIFY
Exhibit 10.6
2.1General Agreement.
2.1.1 In the event Officer/Director was, is or becomes a party to, or witness or other participant in, or is
threatened to be made a party to, or witness or other participant in, a Proceeding by reason of (or arising in part out of) an
Indemnifiable Event, McGrath RentCorp shall indemnify Officer/Director from and against any and all Expenses to the fullest
extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or
interpretation, only to the extent such amendment or interpretation permits McGrath RentCorp to provide broader indemnification
rights than were permitted prior thereto).
2.1.2 The rights to receive indemnification and the advancement of Expenses under this Agreement are not
exclusive of any other rights to which Officer/Director may be entitled or subsequently entitled under any law, statute or rule,
McGrath RentCorp's Articles of Incorporation or Bylaws, by vote of the shareholders or the Board or otherwise.
2.1.3 To the extent that a change in applicable law, statute or rule (including without limitation by judicial
decision) permits greater indemnification by agreement than would be afforded currently under McGrath RentCorp’s Articles of
Incorporation or Bylaws, applicable law or this Agreement, it is the intent of the parties that Officer/Director enjoy by this
Agreement the greater benefits so afforded by such change. In the event of any change in any applicable law, statute or rule
(including without limitation by judicial decision) which narrows the right of a California corporation to indemnify a director,
officer, employee or agent of the corporation, such changes, to the extent not otherwise required by such applicable law, statute or
rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.
2.2Partial Indemnification. If Officer/Director is entitled under any provision of this Agreement to indemnification by
McGrath RentCorp for some or a portion of Expenses, but not, however, for the total amount thereof, McGrath RentCorp shall
nevertheless indemnify Officer/Director for the portion thereof to which Officer/Director is entitled.
2.3Prohibited Indemnification. Subject only to Section 2.4 below, if applicable, no indemnification nor Expense
Advance (as defined below) pursuant to this Agreement shall be paid by McGrath RentCorp:
2.3.1 In connection with any Proceeding initiated by Officer/Director against McGrath RentCorp or any
director or officer of McGrath RentCorp unless: (a) McGrath RentCorp has joined in, or the Board has consented to, the
initiation of such Proceeding; (b) the Proceeding is one to enforce indemnification rights under this Agreement or any
other agreement or insurance policy or under McGrath RentCorp’s Articles of Incorporation or Bylaws; or (c) the
Proceeding is instituted after a Change in Control and Independent Counsel has approved its initiation;
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Exhibit 10.6
2.3.2 On account of any Proceeding in which judgment is rendered against Officer/Director for an accounting
of profits made from the purchase or sale by Officer/Director of securities of McGrath RentCorp pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any federal,
state or local laws;
2.3.3 To the extent Officer/Director settles or otherwise disposes of a Proceeding or causes the settlement or
disposal of a Proceeding without McGrath RentCorp’s express prior written consent (which shall not be unreasonably
withheld), unless Officer/Director receives court approval for such settlement or other disposition where McGrath
RentCorp had the opportunity to oppose Officer/Director’s request for such court approval or the settlement is approved
by Independent Counsel;
2.3.4 With regard to any judicial award if McGrath RentCorp was not given a reasonable and timely
opportunity, at its expense, to participate in the defense of such action unless McGrath RentCorp’s participation in such
Proceeding was barred by this Agreement or the court in such Proceeding; or
2.3.5 For any acts, omissions, transactions or circumstances for which indemnification is prohibited by
applicable state or federal law.
For convenience only, a copy of Sections 204(a)(10), 204(a)(11) and 317 of the California Corporations Code, the principal
provisions which limit Officer/Director’s right to indemnification, is included as Appendix A hereto. Officer/Director is
cautioned that indemnification may be further limited by any changes to such laws or any other applicable law. McGrath
RentCorp is not obligated to notify Officer/Director of any such changes. Further, McGrath RentCorp and Officer/Director
are advised that the Securities and Exchange Commission believes indemnification for liabilities arising under federal securities
laws is against public policy and is, therefore, unenforceable.
2.4Mandatory Indemnification. Notwithstanding any other provision of this Agreement, to the extent Officer/Director
has been successful on the merits (within the meaning of Section 317(d) of the California Corporations Code) in defense of any
Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, Officer/Director
shall be indemnified against all Expenses incurred in connection therewith.
3.
EXPENSE ADVANCES
3.1Advance of Expenses to Officer/Director. Expenses incurred by Officer/Director in any Proceeding for which
indemnification may be sought under this Agreement shall be advanced by McGrath RentCorp to Officer/Director within twenty
(20) business days after receipt by McGrath RentCorp of a statement or statements from Officer/Director requesting such
advance and reasonably evidencing the Expenses incurred by Officer/Director (each an “Expense Advance” and collectively,
“Expense Advances”). Any dispute as to whether and to what extent Officer/Director shall be entitled to Expense Advances
shall be determined by the Reviewing Party upon submission by Officer/Director or McGrath RentCorp, and the provisions of
Sections 6.2 through 6.4 below shall apply.
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Exhibit 10.6
3.2Repayment of Expenses by Officer/Director. If it is ultimately determined that Officer/Director is not entitled to be
indemnified by McGrath RentCorp, Officer/Director hereby agrees to repay any Expense Advances advanced by McGrath
RentCorp under Section 3.1 above. Officer/Director agrees to execute any further agreements regarding the repayment of
Expense Advances as McGrath RentCorp may reasonably request prior to receiving any such advances. Ultimate determination
as to whether or not Officer/Director is entitled to be indemnified shall be made in accordance with Section 6 below.
4.
INDEPENDENT COUNSEL; THE REVIEWING PARTY
4.1Written Opinions. Any opinion required in this Agreement to be given by the Reviewing Party or by Independent
Counsel shall be given in writing to McGrath RentCorp and Officer/Director concurrently.
4.2Expenses of Independent Counsel. McGrath RentCorp agrees to bear the reasonable fees and expenses of
Independent Counsel, irrespective of the determination as to Officer/Director’s entitlement to indemnification. McGrath
RentCorp further agrees to indemnify such counsel fully against any and all expenses (including attorneys’ fees), claims,
liabilities, losses and damages arising out of or relating to this Agreement or the engagement of such Independent Counsel
pursuant to this Agreement.
5.
NOTIFICATION AND DEFENSE OF PROCEEDING
5.1Notice of Claim. Officer/Director shall give written notice to McGrath RentCorp promptly after Officer/Director
has actual knowledge of any Proceeding as to which indemnity may be sought under this Agreement. The failure of
Officer/Director to give written notice, as provided in this Section 5.1, shall not relieve McGrath RentCorp of its obligations to
provide indemnification under this Agreement; provided, however, the amounts for which Officer/Director may be indemnified
shall be reduced to the extent McGrath RentCorp may have been prejudiced by such failure.
5.2Defense. With respect to any Proceeding, McGrath RentCorp will be entitled to participate in the Proceeding at its
own expense. Except as otherwise provided below, to the extent McGrath RentCorp so desires, it may, upon delivery of written
notice to Officer/Director, assume the defense of any Proceeding with counsel reasonably satisfactory to Officer/Director.
However, McGrath RentCorp shall not be entitled to assume the defense of any Proceeding (i) brought by or on behalf of
McGrath RentCorp, or (ii) as to which Officer/Director has reasonably determined there may be a conflict of interest between
Officer/Director and McGrath RentCorp in the defense of the Proceeding and Officer/Director does in fact assume and conduct
the defense.
5.2.1 If McGrath RentCorp assumes the defense, Officer/Director shall furnish such information as he may
possess regarding Officer/Director or the Proceeding in question that McGrath RentCorp may reasonably request and as may be
required in connection with the defense or settlement of such Proceeding and shall fully cooperate with McGrath RentCorp in
every other respect. Except as provided in Section 5.3 below, if McGrath RentCorp assumes the defense of the Proceeding,
McGrath RentCorp shall take all necessary steps in good faith to defend, settle or otherwise dispose of the Proceeding.
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Exhibit 10.6
5.2.2 After written notice from McGrath RentCorp to Officer/Director of its election to assume the defense of
any Proceeding, McGrath RentCorp will not be liable to Officer/Director under this Agreement or otherwise for any Expenses
subsequently incurred by Officer/Director in connection with the defense of such Proceeding other than reasonable costs of
investigation or as otherwise provided in clauses (i) through (iv) below. Officer/Director shall have the right to employ
Officer/Director’s own counsel in such Proceeding, but all Expenses related thereto incurred after written notice from McGrath
RentCorp of its assumption of the defense shall be at Officer/Director’s expense, unless: (i) the employment of counsel by
Officer/Director has been authorized by McGrath RentCorp; (ii) Officer/Director has reasonably determined there may be a
conflict of interest between Officer/Director and McGrath RentCorp in the defense of the Proceeding; (iii) after a Change in
Control, the employment of counsel by Officer/Director has been approved by Independent Counsel; or (iv) McGrath RentCorp
shall not, in fact, assume and conduct the defense of such Proceeding within a reasonable time after giving written notice of its
election to assume the defense of such Proceeding.
5.2.3 Any Expenses incurred by McGrath RentCorp in defense of the Proceeding under this Section 5.2 (except
in a situation described in clause (i), (ii) or (iv) of Section 5.2.2) shall be considered Expenses advanced by McGrath RentCorp to
Officer/Director under Section 3 above.
5.3Limitation on McGrath RentCorp’s Disposition of any Proceeding. McGrath RentCorp may consent to a
settlement or other disposition of all or any part of any Proceeding which McGrath RentCorp is defending under Section 5.2
above without first obtaining the written consent of Officer/Director, provided (i) McGrath RentCorp shall not settle any
Proceeding in any manner that would impose any penalty or limitation on Officer/Director not fully indemnified by McGrath
RentCorp without Officer/Director’s written consent and (ii) any settlement or other disposition does not cause Officer/Director
to lose any material right to indemnification under this Agreement.
6.
INDEMNIFICATION PROCESS AND APPEAL
6.1Initial Request and Determination.
6.1.1 To obtain payment(s) of Expenses under this Agreement, Officer/Director shall submit to McGrath
RentCorp a written request(s) therefor, including such documentation and information as is reasonably available to
Officer/Director and is reasonably necessary to determine whether and to what extent Officer/Director is entitled to such
payment(s). A determination as to whether and to what extent a requested payment is proper shall be made by the Reviewing
Party as soon as practicable, and (if applicable) payment thereof shall be made by McGrath RentCorp as soon as practicable
thereafter, but in each case no later than thirty (30) business days after receipt of the initial written request, except in the case of
Expense Advances, the determination and payment of which (if applicable) shall be made no later than twenty (20) business days
after written request by Officer/Director is presented to McGrath RentCorp.
extent Officer/Director is entitled to indemnification at any time after
6.1.2 McGrath RentCorp may initiate a determination from the Reviewing Party as to whether and to what
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Exhibit 10.6
final resolution of the Proceeding for which indemnity is claimed hereunder, subject to Officer/Director’s rights to require such
determination as set forth above.
6.1.3 Officer/Director shall cooperate with the Reviewing Party making the determination with respect to
Officer/Director’s entitlement to indemnification, including providing to such person(s) or body any documentation or
information which is not privileged or otherwise protected from disclosure, and which is reasonably available to Officer/Director
and reasonably necessary for such determination. All reasonable Expenses incurred by Officer/Director in so cooperating with
the person(s) or body making such determination shall be borne by McGrath RentCorp, irrespective of the determination as to
Officer/Director’s entitlement to indemnification.
6.2Suit to Enforce Rights. Regardless of any action or inaction by the Reviewing Party, if Officer/Director has not
received payment of an Expense Advance after making a request therefor in accordance with Section 3.1 above or full
indemnification of Expenses after making a demand therefor in accordance with Section 6.1 above within sixty (60) days of such
request or demand, Officer/Director shall have the right to enforce his indemnification rights under this Agreement by
commencing litigation in any court in the State of California having subject matter jurisdiction thereof and in which venue is
proper seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect
thereof. Likewise, McGrath RentCorp may seek an initial determination by the court or challenge any determination by the
Reviewing Party in the manner set forth above. McGrath RentCorp and Officer/Director each hereby consent to service of
process and to appear in any such proceeding. Any determination by the Reviewing Party not challenged by Officer/Director or
McGrath RentCorp through legal action within two years after final resolution of the Proceeding shall be binding on McGrath
RentCorp and Officer/Director. The remedy provided for in this Section 6 shall be in addition to any other remedies available to
Officer/Director or McGrath RentCorp in law or equity.
6.3Defense to Indemnification, Burden of Proof, Presumptions and Equitable Relief.
6.3.1 It shall be a defense to any action brought by Officer/Director or McGrath RentCorp concerning
enforceability of this Agreement that it is not permissible under applicable law for McGrath RentCorp to indemnify
Officer/Director for the amount claimed.
6.3.2 In connection with any action or determination by any Reviewing Party or otherwise as to whether
Officer/Director is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on
McGrath RentCorp.
6.3.3 Neither the failure of the Reviewing Party or McGrath RentCorp (including its Board, Independent
Counsel or stockholders) to have made a determination prior to the commencement of such action by Officer/Director that
indemnification of the claimant is proper under the circumstances because he has met any particular standard of conduct or had
any particular belief, nor an actual determination by the Reviewing Party or McGrath RentCorp (including its Board, Independent
Counsel or stockholders) that Officer/Director has not met such
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Exhibit 10.6
applicable standard of conduct or did not have such belief, shall be a defense to the action or create a presumption
Officer/Director has not met the applicable standard of conduct.
6.3.4 For purposes of this Agreement, the termination of any claim, action, suit or proceeding by judgment,
order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent shall
not create a presumption Officer/Director did not meet any particular standard of conduct or have any particular belief or that a
court has determined indemnification is not permitted by applicable law.
6.3.5 McGrath RentCorp agrees that its failure to make indemnification payments or Expense Advances to
Officer/Director shall cause irreparable damage to Officer/Director, the exact amount of which is impossible to ascertain, and for
this reason agrees that Officer/Director shall be entitled to such injunctive or other equitable relief as shall be necessary to
adequately provide for such reasonably anticipated payments, said right to be in addition to all other rights or remedies available
to Officer/Director hereunder.
6.4Indemnification for Expenses Incurred in Enforcing Rights. McGrath RentCorp shall indemnify Officer/Director
against any and all Expenses and, if requested by Officer/Director, shall (within twenty (20) business days of such request)
advance such Expenses to Officer/Director that are incurred by Officer/Director in connection with any claim asserted against or
action brought by Officer/Director against McGrath RentCorp for:
6.4.1 indemnification of Expenses or payment of Expense Advances by McGrath RentCorp under this
Agreement or any other agreement or under applicable law or McGrath RentCorp’s Articles of Incorporation or Bylaws
now or hereafter in effect relating to indemnification for Indemnifiable Events; or
6.4.2 recovery under directors’ and officers’ liability insurance policies maintained by McGrath RentCorp;
provided, however, McGrath RentCorp shall be obligated to so indemnify Officer/Director only if Officer/Director’s claim or
action results in the payment of all or part of the indemnification of Expenses, payment of Expense Advances or recovery under
insurance policies sought by Officer/Director.
7.
INSURANCE; SUBROGATION
7.1Liability Insurance. To the extent McGrath RentCorp maintains an insurance policy or policies providing general
and/or directors’ and officers’ liability insurance, Officer/Director shall be covered by such policy or policies, in accordance with
its or their terms, to the maximum extent of the coverage available for any director, officer, employee or agent of McGrath
RentCorp and to the extent Officer/Director occupies any such positions with McGrath RentCorp or any other entity at the
request of McGrath RentCorp.
7.2No Duplication of Payments. McGrath RentCorp shall not be liable under this Agreement to make any payment in
connection with any claim made against Officer/Director to
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Exhibit 10.6
the extent Officer/Director has otherwise received payment (under any insurance policy, the Bylaws of McGrath RentCorp or
otherwise) of the amounts otherwise indemnifiable hereunder.
7.3Subrogation. In the event of payment under this Agreement, McGrath RentCorp shall be subrogated to the extent of
such payment to all of the rights of recovery of Officer/Director, who shall execute all papers required and shall do everything
that may be necessary to secure such rights, including the execution of such documents necessary to enable McGrath RentCorp
effectively to bring suit to enforce such rights.
8.
STANDARD PROVISIONS
8.1Continuing Coverage. The indemnification and the payment of Expense Advances provided under this Agreement
shall continue as to Officer/Director for any action taken or not taken while serving in an indemnified capacity pertaining to an
Indemnifiable Event even though Officer/Director may have ceased to serve in such capacity at the time of any Proceeding.
8.2Entire Agreement; Remedies Cumulative. This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter contained herein and supersedes all prior and contemporaneous agree(cid:0)ments, representations and
understandings of the parties, including in particular, that certain Indemnification Agreement by and between the parties hereto
dated June 6, 1988. The rights and remedies provided in this Agreement and by law shall be cumulative and the exercise of any
particular right or remedy shall not preclude the exercise of any other right or remedy in addition to, or as an alternative of, such
right or remedy.
8.3Notices. All notices, requests, demands and other communica(cid:0)tions required or permitted under this Agreement
shall be made in writing and shall be deemed to have been duly given (i) on the date of service if served personally, (ii) on the
date of transmission if sent by facsimile transmission with printed proof of electronic receipt, (iii) on the date of delivery if
delivered by a courier service with proof of delivery, or (iv) on the third business day after mailing if mailed by first class mail,
certified–return receipt requested, postage prepaid, to the following addresses:
If to McGrath RentCorp, then to: McGrath RentCorp
VP Human Resources
5700 Las Positas Road
Livermore, CA 94550
ADVANCE \d6
Fax: 1–925–453–3333
If to Officer/Director, then to:
[Officer/Director]ADVANCE \d6
_________________
Any party hereto may change its address set forth above for notices by giving notice to the other party hereto in accordance with
the terms of this Section.
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Exhibit 10.6
8.4Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business and/or assets of McGrath RentCorp), assigns, spouses, heirs and personal and
legal representatives. McGrath RentCorp shall require and cause any successor (whether direct or indirect by purchase, merger,
consolidation or otherwise) to all, or substantially all, of the business and/or assets of McGrath RentCorp expressly to assume and
agree to perform this Agreement in the same manner and to the same extent that McGrath RentCorp would be required to
perform if no such succession had taken place. This Agreement may not be assigned without the prior written consent of the
other parties hereto, which consent shall not be unreasonably withheld.
8.5Modification; Waiver; Supersedure. No supplement, modification or amendment of this Agreement shall be
binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision hereof, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver of any of the provisions of this Agreement shall be binding unless in the form of a writing signed by the party
against whom enforcement of the waiver is sought. Except as specifically provided herein, neither the failure to exercise nor any
delay in exercising any right or remedy hereunder shall constitute a waiver thereof.
8.6Construction.
in construing or interpreting this Agreement.
8.6.1 The titles and subtitles used in this Agreement are used for convenience only and are not to be considered
8.6.2 A reference herein to any section shall be deemed to include a reference to every section the number of
which begins with the number of the section specifically referred to (e.g., a reference to Section 1.2 includes a reference to
Sections 1.2, 1.2.1, 1.2.2, 1.2.3 and 1.2.4).
8.6.3 Any reference in this Agreement to the indemnity provisions of the Bylaws of McGrath RentCorp, to the
California Corporations Code or to any applicable law shall refer to such provisions as they shall be amended from time to time
or to any successor provision(s).
Agreement.
8.6.4 Any ambiguous terms in this Agreement will not be construed against McGrath RentCorp for drafting this
8.7Applicable Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this
Agreement, is to be construed in accordance with and governed by the internal laws of the State of California without giving
effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the
State of California to the rights and duties of the parties.
8.8Severability. If any provision (or portion thereof) of this Agreement shall be held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation,
each portion of this Agreement containing any provision held to be invalid, void or otherwise
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Exhibit 10.6
unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by
the provision held invalid, void or unenforceable.
8.9Legal Advice. OFFICER/DIRECTOR IS AWARE THAT THIS AGREEMENT WAS PREPARED BY COUNSEL FOR MCGRATH RENTCORP.
BY SIGNING BELOW, OFFICER/DIRECTOR ACKNOWLEDGES THAT HE HAS BEEN ADVISED TO SEEK INDEPENDENT COUNSEL TO REVIEW THIS
AGREEMENT ON HIS BEHALF PRIOR TO THE EXECUTION OF THIS AGREEMENT AND HAS HAD ADEQUATE TIME TO DO SO.
8.10Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an
original, but both of which together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
Exhibit 10.6
[Officer/Director]
McGrath RentCorp
by
Joseph Hanna, Chief Executive Officer
[Remainder of this page has been left blank intentionally.]
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Appendix A
CALIFORNIA CORPORATIONS CODE
Exhibit 10.6
§204(a)(10) Provisions eliminating or limiting the personal liability of a director for monetary damages in an action brought by
or in the right of the corporation for breach of a director's duties to the corporation and its shareholders, as set forth in Section
309, provided, however, that (A) such a provision may not eliminate or limit the liability of directors (i) for acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show
a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware,
or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the corporation or
its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation or its shareholders, (vi) under Section 310, or (vii) under Section 316, (B) no such provision
shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when the provision becomes
effective, and (C) no such provision shall eliminate or limit the liability of an officer for any act or omission as an officer,
notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the
directors.
§204(a)(11) A provision authorizing, whether by bylaw, agreement, or otherwise, the indemnification of agents (as defined in
Section 317) in excess of that expressly permitted by Section 317 for those agents of the corporation for breach of duty to the
corporation and its stockholders, provided, however, that the provision may not provide for indemnification of any agent for any
acts or omissions or transactions from which a director may not be relieved of liability as set forth in the exception to paragraph
(10) or as to circumstances in which indemnity is expressly prohibited by Section 317.
§317
(a) For the purposes of this section, "agent" means any person who is or was a director, officer, employee or other agent of
the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign
or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of the
predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right
to indemnification under subdivision (d) or paragraph (4) of subdivision (e).
(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the
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– Appendix 1 –
Exhibit 10.6
corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against
expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if
that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in
the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of
any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself,
create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the
best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful.
(c) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the
fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in
connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in
the best interests of the corporation and its shareholders.
No indemnification shall be made under this subdivision for any of the following:
(1) In respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the
corporation in the performance of that person's duty to the corporation and its shareholders, unless and only to the extent that the
court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of the
case, the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall
determine.
(2) Of amounts paid in settling or otherwise disposing of a pending action without court approval.
(3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court
approval.
(d) To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in
subdivision (b) or (c) or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually
and reasonably incurred by the agent in connection therewith.
(e) Except as provided in subdivision (d), any indemnification under this section shall be made by the corporation only if
authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the
agent has met the applicable standard of conduct set forth in subdivision (b) or (c), by any of the following:
(1) A majority vote of a quorum consisting of directors who are not parties to such proceeding.
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(2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion.
Exhibit 10.6
(3) Approval of the shareholders (Section 153), with the shares owned by the person to be indemnified not being
entitled to vote thereon.
(4) The court in which the proceeding is or was pending upon application made by the corporation or the agent or the
attorney or other person rendering services in connection with the defense, whether or not the application by the agent, attorney
or other person is opposed by the corporation.
(f) Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the
proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately
that the agent is not entitled to be indemnified as authorized in this section. The provisions of subdivision (a) of Section 315 do
not apply to advances made pursuant to this subdivision.
(g) The indemnification authorized by this section shall not be deemed exclusive of any additional rights to indemnification
for breach of duty to the corporation and its shareholders while acting in the capacity of a director or officer of the corporation to
the extent the additional rights to indemnification are authorized in an article provision adopted pursuant to paragraph (11) of
subdivision (a) of Section 204. The indemnification provided by this section for acts, omissions, or transactions while acting in
the capacity of, or while serving as, a director or officer of the corporation but not involving breach of duty to the corporation and
its shareholders shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under
any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, to the extent the additional rights to
indemnification are authorized in the articles of the corporation. An article provision authorizing indemnification "in excess of
that otherwise permitted by Section 317" or "to the fullest extent permissible under California law" or the substantial equivalent
thereof shall be construed to be both a provision for additional indemnification for breach of duty to the corporation and its
shareholders as referred to in, and with the limitations required by, paragraph (11) of subdivision (a) of Section 204 and a
provision for additional indemnification as referred to in the second sentence of this subdivision. The rights to indemnity
hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit
of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to
indemnification to which persons other than the directors and officers may be entitled by contract or otherwise.
(h) No indemnification or advance shall be made under this section, except as provided in subdivision (d) or paragraph (4)
of subdivision (e), in any circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles, bylaws, a resolution of the shareholders, or an
agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were
incurred or other amounts were paid, which prohibits or otherwise limits indemnification.
MCG5 325 02.1
BMS 072617
Indemnification Agreement
Officer/Director McGrath RentCorp
– Appendix 3 –
(2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.
Exhibit 10.6
(i) A corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in that capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against that liability under this section. The fact that a corporation
owns all or a portion of the shares of the company issuing a policy of insurance shall not render this subdivision inapplicable if
either of the following conditions are satisfied: (1) if the articles authorize indemnification in excess of that authorized in this
section and the insurance provided by this subdivision is limited as indemnification is required to be limited by paragraph (11) of
subdivision (a) of Section 204; or (2) (A) the company issuing the insurance policy is organized, licensed, and operated in a
manner that complies with the insurance laws and regulations applicable to its jurisdiction of organization, (B) the company
issuing the policy provides procedures for processing claims that do not permit that company to be subject to the direct control of
the corporation that purchased that policy, and (C) the policy issued provides for some manner of risk sharing between the issuer
and purchaser of the policy, on one hand, and some unaffiliated person or persons, on the other, such as by providing for more
than one unaffiliated owner of the company issuing the policy or by providing that a portion of the coverage furnished will be
obtained from some unaffiliated insurer or reinsurer.
(j) This section does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee
benefit plan in that person's capacity as such, even though the person may also be an agent as defined in subdivision (a) of the
employer corporation. A corporation shall have power to indemnify such a trustee, investment manager, or other fiduciary to the
extent permitted by subdivision (f) of Section 207.
MCG5 325 02.1
BMS 072617
Indemnification Agreement
Officer/Director McGrath RentCorp
– Appendix 4 –
LIST OF SUBSIDIARIES
(as of December 31, 2023)
Exhibit 21.1
Mobile Modular Management Corporation
Enviroplex, Inc.
TRS-RenTelco Inc.
McGrath 180, LLC
McGrath RentCorp Asia PTE. LTD.
TRS-RenTelco India Private Limited
Vesta Housing Solutions Holdings, LLC
Vesta Housing Solutions Group, LLC
Modular Holdings, LLC
Vesta Housing Solutions, LLC
Innovative Modular Solutions, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated February 21, 2024, with respect to the consolidated financial statements and internal control over financial reporting
included in the Annual Report of McGrath RentCorp on Form 10-K for the year ended December 31, 2023. We consent to the incorporation by reference
of said reports in the Registration Statements of McGrath RentCorp on Forms S-8 (File Nos. 333-74089, 333-151815, 333-161128, and 333-183231).
Exhibit 23.1
/s/ GRANT THORNTON LLP
San Francisco, California
February 21, 2024
Exhibit 31.1
I, Joseph F Hanna, certify that:
McGRATH RENTCORP
SECTION 302 CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of McGrath RentCorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
controls over financial reporting.
Date: February 21, 2024
By: /s/ Joseph F. Hanna
Joseph F. Hanna
Chief Executive Officer
Exhibit 31.2
I, Keith E. Pratt, certify that:
McGRATH RENTCORP
SECTION 302 CERTIFICATION
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of McGrath RentCorp;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
controls over financial reporting.
Date: February 21, 2024
By: /s/ Keith E. Pratt
Keith E. Pratt
Chief Financial Officer
McGRATH RENTCORP
SECTION 906 CERTIFICATION
Exhibit 32.1
In connection with the periodic report of McGrath RentCorp (the "Company") on Form 10-K for the period ended December 31, 2023 as filed with the
Securities and Exchange Commission (the "Report"), I, Joseph F. Hanna, Chief Executive Officer of the Company, hereby certify as of the date hereof,
solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities
and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability of that section. This certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
Date: February 21, 2024
By: /s/ Joseph F. Hanna
Joseph F. Hanna
Chief Executive Officer
McGRATH RENTCORP
SECTION 906 CERTIFICATION
Exhibit 32.2
In connection with the periodic report of McGrath RentCorp (the "Company") on Form 10-K for the period ended December 31, 2023 as filed with the
Securities and Exchange Commission (the "Report"), I, Keith E. Pratt, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely
for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities
and Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability of that section. This certification will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
Date: February 21, 2024
By: /s/ Keith E. Pratt
Keith E. Pratt
Chief Financial Officer
Exhibit 97
MCGRATH RENTCORP
COMPENSATION RECOUPMENT POLICY
Effective Date: December 1, 2023
In the event of any required accounting restatement of the financial statements of McGrath RentCorp (the “Company”)
due to the material noncompliance of the Company with any financial reporting requirement under the applicable U.S. federal
securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is
material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in
the current period or left uncorrected in the current period (a “Restatement”), the Board of Directors of the Company (or any
committee to which the Board of Directors may delegate its authority) (the “Board”) shall recover reasonably promptly from any
person, who is or was an executive officer, as such term is defined in Rule 10D-1 adopted under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), of the Company (each, a “Covered Person”) the amount of any “Erroneously Awarded
Incentive-Based Compensation” (as defined below).
The amount of incentive-based compensation that must be recovered from a Covered Person pursuant to the immediately
preceding paragraph in the event that the Company is required to prepare a Restatement is the amount of incentive-based
compensation received by a Covered Person that exceeds the amount of incentive-based compensation that otherwise would have
been received had it been determined based on the restated amounts and must be computed without regard to any taxes paid
(referred to as the “Erroneously Awarded Incentive-Based Compensation”). For incentive-based compensation based on stock
price or total shareholder return, where the amount is not subject to mathematical recalculation directly from the information in a
Restatement, the amount must be based on a reasonable estimate of the effect of the Restatement on the stock price or total
shareholder return, as applicable, upon which the incentive-based compensation was received, and the Company must maintain
documentation of that reasonable estimate and provide such documentation to the Nasdaq Stock Market LLC (“Nasdaq”). For the
purposes of this policy, incentive-based compensation will be deemed to be received in the fiscal period during which the
financial reporting measure specified in the applicable incentive-based compensation award is attained, even if the payment or
grant occurs after the end of that period.
In determining the amount of Erroneously Awarded Incentive-Based Compensation to be recovered from a Covered
Person, this policy shall apply to all incentive-based compensation received by a Covered Person: (i) after beginning service as an
executive officer; (ii) who served as an executive officer at any time during the performance period for the incentive-based
compensation; (iii) while the Company has a class of securities listed on a national securities exchange or a national securities
association; and (iv) during the three completed fiscal years immediately preceding the date that the Company is required to
prepare a Restatement, including any applicable transition period that results from a change in the Company’s fiscal year within
or
1
Exhibit 97
immediately following those three completed fiscal years. For this purpose, the Company is deemed to be required to prepare a
Restatement on the earlier of: (i) the date the Board, or the Company’s officers authorized to take such action if Board action is
not required, concludes, or reasonably should have concluded, that the Company is required to prepare a Restatement; or (ii) the
date a court, regulator, or other legally authorized body directs the Company to prepare a Restatement. The Company’s obligation
to recover Erroneously Awarded Incentive-Based Compensation is not dependent on if or when the restated financial statements
are filed with the Securities and Exchange Commission.
The Company shall recover the Erroneously Awarded Incentive-Based Compensation from Covered Persons unless the
Board determines that recovery is impracticable because: (i) the direct expense to a third party to assist in enforcing this policy
would exceed the amount of Erroneously Awarded Incentive-Based Compensation; provided that the Company must make a
reasonable attempt to recover the Erroneously Awarded Incentive-Based Compensation before concluding that recovery is
impracticable, document such reasonable attempt to recover the Erroneously Awarded Incentive-Based Compensation and
provide such documentation to Nasdaq; or (ii) recovery would likely cause an otherwise tax-qualified retirement plan, under
which benefits are broadly available to employees of the Company, to fail to meet the applicable requirements of 26 U.S.C.
401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
For purposes of this policy, “incentive-based compensation” refers to any compensation that is granted, earned, or vested
based wholly or in part upon the attainment of a “financial reporting measure,” which refers to measures that are determined and
presented in accordance with Generally Accepted Accounting Principles which are used in preparing the Company’s financial
statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are
also financial reporting measures for this purpose. For avoidance of doubt, a financial reporting measure need not be presented
within the Company’s financial statements or included in a filing with the Securities and Exchange Commission.
In no event will the Company indemnify any Covered Person for any amounts that are recovered under this policy. This
policy is in addition to (and not in lieu of) any right of repayment, forfeiture or right of offset against any employees that is
required pursuant to any statutory repayment requirement (regardless of whether implemented at any time prior to or following
the adoption or amendment of this policy), including Section 304 of the Sarbanes-Oxley Act of 2002. Any amounts paid to the
Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 shall be considered in determining any amounts recovered
under this policy.
The application and enforcement of this policy does not preclude the Company from taking any other action to enforce a
Covered Person’s obligations to the Company, including termination of employment or institution of legal proceedings. The terms
of this policy shall be binding and enforceable against all persons subject to this policy and their beneficiaries, heirs, executors,
administrators or other legal representatives.
2
This policy shall be interpreted in a manner that is consistent with Rule 10D-1 under the Exchange Act, Rule 5608 of the
Nasdaq listing rules and any related rules or regulations adopted by the Securities and Exchange Commission or Nasdaq (the
“Applicable Rules”) as well as any other applicable law. To the extent the Applicable Rules require recovery of incentive-based
compensation in additional circumstances besides those specified above, nothing in this policy shall be deemed to limit or restrict
the right or obligation of the Company to recover incentive-based compensation to the fullest extent required by the Applicable
Rules.
3
Exhibit 97