McGrath Rentp(MGRC) - 2019 Q2 - Quarterly Report

Report Information Registrant Information McGRATH RENTCORP, a California-registered company, trades as MGRC on the NASDAQ Global Select Market, with 24,253,091 common shares outstanding as of July 29, 2019, classified as a large accelerated filer Registrant Information | Metric | Details | | :--- | :--- | | Company Name | McGRATH RENTCORP | | Place of Registration | California | | Trading Symbol | MGRC | | Registered Exchange | NASDAQ Global Select Market | | Filing Status | Large accelerated filer | | Shares Outstanding (as of July 29, 2019) | 24,253,091 shares | Forward-Looking Statements Forward-looking statements in this 10-Q report are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from expectations - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from projections; the company does not guarantee future performance[7][8] - The company undertakes no obligation to update forward-looking statements to conform to actual results or changes in expectations, unless required by law[8] Financial Statements Report of Independent Registered Public Accounting Firm Grant Thornton LLP reviewed McGrath RentCorp's condensed consolidated financial statements for the period ended June 30, 2019, finding no material modifications needed for GAAP compliance, and previously issued an unqualified opinion on the 2018 annual statements - Grant Thornton LLP reviewed the condensed consolidated financial statements for the period ended June 30, 2019, finding no material modifications needed for GAAP compliance[9] - The firm previously issued an unqualified opinion on the company's annual consolidated financial statements for the year ended December 31, 2018[10] Condensed Consolidated Statements of Income For the three and six months ended June 30, 2019, the company reported increased total revenue and net income, with three-month total revenue up 9% to $127.4 million and net income up 22% to $19.5 million Condensed Consolidated Statements of Income Key Data (Unaudited, in thousands of US dollars) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Change (%) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 127,439 | 116,983 | 9% | 249,447 | 222,068 | 12% | | Rental Revenue | 88,105 | 77,267 | 14% | 170,801 | 151,528 | 13% | | Sales Revenue | 13,707 | 19,546 | -30% | 30,532 | 31,637 | -3% | | Gross Profit | 59,881 | 53,928 | 11% | 116,886 | 104,098 | 12% | | Operating Income | 29,066 | 24,449 | 19% | 56,376 | 46,491 | 21% | | Net Income | 19,488 | 15,912 | 22% | 37,937 | 30,378 | 25% | | Basic Earnings Per Share | 0.80 | 0.66 | 21% | 1.57 | 1.26 | 25% | | Diluted Earnings Per Share | 0.79 | 0.65 | 22% | 1.54 | 1.24 | 24% | | Cash Dividends Per Share | 0.375 | 0.340 | 10% | 0.750 | 0.680 | 10% | Condensed Consolidated Statements of Comprehensive Income For the three and six months ended June 30, 2019, comprehensive income was $19.5 million and $37.9 million respectively, showing growth primarily driven by increased net income Condensed Consolidated Statements of Comprehensive Income Key Data (Unaudited, in thousands of US dollars) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | 19,488 | 15,912 | 37,937 | 30,378 | | Foreign Currency Translation Adjustment | (6) | 167 | (40) | 141 | | Tax Benefit (Provision) | — | (44) | 7 | (40) | | Comprehensive Income | 19,482 | 16,035 | 37,904 | 30,479 | Condensed Consolidated Balance Sheets As of June 30, 2019, total assets increased to $1.28 billion, up approximately 5.2% from December 31, 2018, primarily due to growth in net rental equipment and prepaid expenses, with corresponding increases in liabilities and equity Condensed Consolidated Balance Sheets Key Data (Unaudited, in thousands of US dollars) | Metric | June 30, 2019 | December 31, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash | 1,496 | 1,508 | -1% | | Accounts Receivable, Net | 121,018 | 121,016 | 0% | | Rental Equipment, Net | 943,152 | 901,015 | 5% | | Property, Plant and Equipment, Net | 126,906 | 126,899 | 0% | | Prepaid Expenses and Other Assets | 53,062 | 31,816 | 67% | | Intangible Assets, Net | 6,807 | 7,254 | -6% | | Goodwill | 27,808 | 27,808 | 0% | | Total Assets | 1,280,249 | 1,217,316 | 5% | | Liabilities | | | | | Notes Payable | 301,878 | 298,564 | 1% | | Accounts Payable and Accrued Liabilities | 109,443 | 90,844 | 20% | | Deferred Revenue | 66,618 | 49,709 | 34% | | Deferred Income Taxes, Net | 210,001 | 206,664 | 2% | | Total Liabilities | 687,940 | 645,781 | 6% | | Shareholders' Equity | | | | | Common Stock | 104,984 | 103,801 | 1% | | Retained Earnings | 487,407 | 467,783 | 4% | | Accumulated Other Comprehensive Loss | (82) | (49) | 67% | | Total Shareholders' Equity | 592,309 | 571,535 | 4% | | Total Liabilities and Shareholders' Equity | 1,280,249 | 1,217,316 | 5% | Condensed Consolidated Statements of Shareholders' Equity As of June 30, 2019, total shareholders' equity increased to $592.3 million, driven by net income and share-based compensation, partially offset by dividend payments and accumulated other comprehensive loss Shareholders' Equity Changes (in thousands of US dollars) | Metric | Balance as of December 31, 2018 | Net Income | Share-Based Compensation | Dividends Paid | Other Comprehensive Loss | Balance as of June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock | 103,801 | — | 1,354 | — | — | 104,984 | | Retained Earnings | 467,783 | 37,937 | — | (18,313) | — | 487,407 | | Accumulated Other Comprehensive Loss | (49) | — | — | — | (33) | (82) | | Total Shareholders' Equity | 571,535 | 37,937 | 2,746 | (18,313) | (33) | 592,309 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2019, net cash from operating activities significantly increased by 71% to $92 million, primarily used for investing activities (increased rental equipment purchases) and financing activities (reduced bank borrowings and increased dividends) Condensed Consolidated Statements of Cash Flows Key Data (Unaudited, in thousands of US dollars) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 91,987 | 53,765 | 71% | | Net Cash Used in Investing Activities | (76,382) | (45,867) | 66% | | Net Cash Used in Financing Activities | (15,591) | (5,862) | 166% | | Cash Balance, End of Period | 1,496 | 4,484 | -67% | | Rental Equipment Purchases | (90,701) | (58,662) | 55% | | Dividends Paid | (17,337) | (14,501) | 20% | Notes to Condensed Consolidated Financial Statements Condensed Consolidated Financial Information These unaudited condensed consolidated financial statements include all necessary adjustments for fair presentation, with certain disclosures simplified per SEC rules, and current period results are not necessarily indicative of full-year performance - The condensed consolidated financial statements are unaudited, but management believes they include all necessary adjustments for fair presentation[25] - Current period results are not necessarily indicative of full-year performance and should be read in conjunction with the company's 2018 Form 10-K annual report[25] Revenue Recognition Revenue recognition follows Topic 842 (Leases) and Topic 606 (Revenue from Contracts with Customers), with lease revenue recognized straight-line and non-lease revenue recognized upon transfer of control, with lease revenue being the primary source - The company's revenue recognition follows Topic 842 (Leases) and Topic 606 (Revenue from Contracts with Customers) accounting standards[26] - Rental revenue and rental-related service revenue are recognized on a straight-line basis, while non-rental revenue, such as sales, is recognized when control is transferred[28][29][30] Revenue by Lease and Non-Lease Type (in thousands of US dollars) | Revenue Type | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Lease Revenue | 101,431 | 86,747 | 196,939 | 170,301 | | Non-Lease Revenue | 26,008 | 30,236 | 52,508 | 51,767 | | - Rental-Related Services | 12,375 | 10,973 | 22,330 | 20,855 | | - Sales | 13,032 | 18,714 | 29,086 | 29,969 | | - Other | 601 | 549 | 1,092 | 943 | | Total Revenue | 127,439 | 116,983 | 249,447 | 222,068 | Implemented Accounting Pronouncements (Lease Accounting) The company adopted ASU No. 2016-02 (Leases) on January 1, 2019, recognizing $10.2 million in right-of-use assets and operating lease liabilities as a lessee, while lessor accounting remained consistent with no income statement impact Lessee Accounting Adoption of ASU No. 2016-02 on January 1, 2019, resulted in the recognition of $10.2 million in right-of-use assets and operating lease liabilities, with a weighted-average remaining lease term of 4.3 years and a discount rate of 4.59% as of June 30, 2019 - The company adopted ASU No. 2016-02 on January 1, 2019, leading to the recognition of $10.2 million in right-of-use assets and operating lease liabilities[35] Lessee Lease Information (in thousands of US dollars) | Metric | Six Months Ended June 30, 2019 | | :--- | :--- | | Operating Lease Cash Flow | 1,785 | | Right-of-Use Assets | 1,582 | | Operating Lease Liabilities (Total) | 11,197 | | Less Estimated Interest | (1,007) | | Operating Lease Liabilities (Net) | 10,190 | | Weighted-Average Remaining Lease Term | 4.3 Years | | Weighted-Average Discount Rate | 4.59% | Lessor Accounting As a lessor, the company's revenue recognition remained consistent with prior standards, resulting in no income statement impact, with future operating lease receivables of $127.9 million and net finance lease investments of $2.48 million as of June 30, 2019 - As a lessor, the company's lease revenue recognition remained consistent with prior standards, thus having no impact on the income statement[39] Lessor Lease Information (in thousands of US dollars) | Metric | June 30, 2019 | | :--- | :--- | | Future Operating Lease Receivables | 127,891 | | Gross Minimum Finance Lease Payments Receivable | 2,739 | | Less Unearned Interest | (263) | | Net Investment in Finance Leases Receivable | 2,476 | | Lease Revenue for Three Months Ended June 30, 2019 | 101,400 | | Lease Revenue for Six Months Ended June 30, 2019 | 196,900 | Earnings Per Share For the three and six months ended June 30, 2019, basic EPS was $0.80 and $1.57, respectively, and diluted EPS was $0.79 and $1.54, all showing growth from the prior year Earnings Per Share Calculation (in thousands of shares) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Weighted-Average Common Shares for Basic EPS | 24,246 | 24,145 | 24,221 | 24,106 | | Dilutive Effect of Equity Incentive Securities | 333 | 439 | 340 | 443 | | Weighted-Average Common Shares for Diluted EPS | 24,579 | 24,584 | 24,561 | 24,549 | Intangible Assets As of June 30, 2019, net intangible assets were $6.81 million, primarily comprising trade names and customer relationships, with annual impairment assessments and projected amortization expenses of $0.3 million for the remainder of 2019 and $0.1 million annually from 2020 to 2025 Intangible Asset Composition (in thousands of US dollars) | Intangible Asset | Estimated Useful Life (Years) | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | :--- | | Trade Names | Indefinite | 5,871 | 5,871 | | Customer Relationships | 11 | 9,849 | 9,849 | | Total | | 15,720 | 15,720 | | Less Accumulated Amortization | | (8,913) | (8,466) | | Intangible Assets, Net | | 6,807 | 7,254 | - The company annually assesses goodwill and intangible assets for potential impairment and expects amortization expenses of $0.3 million for the remainder of 2019 and $0.1 million annually from 2020 to 2025[45][47] Segment Reporting The company operates four reportable segments: Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex, all achieving revenue growth in the first half of 2019, with Mobile Modular contributing the majority of revenue and gross profit - The company has four reportable segments: Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex[48] Segment Financial Information (Six Months Ended June 30, 2019, in thousands of US dollars) | Metric | Mobile Modular | TRS-RenTelco | Adler Tanks | Enviroplex | Consolidated | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 132,814 | 62,986 | 49,770 | 3,877 | 249,447 | | Gross Profit | 62,865 | 28,492 | 24,086 | 1,443 | 116,886 | | Operating Income | 31,818 | 16,429 | 9,192 | (1,063) | 56,376 | | Pre-Tax Income | 28,057 | 15,130 | 7,546 | (517) | 50,216 | | Rental Equipment Purchases | 43,614 | 42,999 | 3,327 | — | 89,940 | | Period-End Utilization Rate | 79.6% | 67.3% | 55.3% | — | — | | Average Utilization Rate | 79.1% | 65.7% | 57.1% | — | — | Segment Financial Information (Six Months Ended June 30, 2018, in thousands of US dollars) | Metric | Mobile Modular | TRS-RenTelco | Adler Tanks | Enviroplex | Consolidated | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 113,722 | 58,390 | 44,227 | 5,729 | 222,068 | | Gross Profit | 53,050 | 27,242 | 21,912 | 1,894 | 104,098 | | Operating Income | 24,120 | 15,682 | 7,254 | (565) | 46,491 | | Pre-Tax Income | 20,698 | 13,993 | 5,678 | (245) | 40,124 | | Rental Equipment Purchases | 22,287 | 34,502 | 2,669 | — | 59,458 | | Period-End Utilization Rate | 77.2% | 62.8% | 61.3% | — | — | | Average Utilization Rate | 77.3% | 62.8% | 58.5% | — | — | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) General Business Overview McGrath RentCorp primarily leases modular buildings, electronic test equipment, and liquid/solid containment tanks, with revenue from equipment rentals and sales, influenced by industry demand, educational funding, R&D, and energy sector fluctuations - The company's primary businesses involve leasing modular buildings, electronic test equipment, and liquid/solid containment tanks[54] - Mobile Modular, TRS-RenTelco, and Adler Tanks contributed 56%, 30%, and 15% respectively to the company's pre-tax income in the first half of 2019[56] - Rental and related service revenues accounted for 87% of consolidated revenue in the first half of 2019 and 85% in the first half of 2018[61] Non-GAAP Financial Measures (Adjusted EBITDA) Adjusted EBITDA, defined as net income excluding interest, taxes, depreciation, amortization, non-cash impairment, and share-based compensation, is used to assess liquidity, financial position, and debt covenant compliance, growing 15% and 16% for the three and six months ended June 30, 2019, respectively - Adjusted EBITDA is defined as net income plus interest expense, provision for income taxes, depreciation, amortization, non-cash impairment charges, and share-based compensation[64][69] - Management uses Adjusted EBITDA to assess operating performance, comply with financial covenants, and meet future capital expenditure and working capital needs[65] Reconciliation of Net Income to Adjusted EBITDA (in thousands of US dollars) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | 19,488 | 15,912 | 37,937 | 30,378 | | EBITDA | 51,090 | 44,465 | 99,549 | 86,403 | | Adjusted EBITDA | 52,444 | 45,429 | 102,295 | 88,270 | | Adjusted EBITDA Margin | 41% | 39% | 41% | 40% | Recent Developments On June 5, 2019, the Board of Directors approved a quarterly cash dividend of $0.375 per share, representing a 10% increase from the prior year - The company's Board of Directors announced a quarterly cash dividend of $0.375 per share, representing a 10% increase from the prior year[73] Results of Operations - Three Months Ended June 30, 2019 vs. 2018 For the three months ended June 30, 2019, consolidated revenue increased 9% to $127.4 million and net income rose 22% to $19.5 million, with Mobile Modular and Adler Tanks showing significant pre-tax income growth Consolidated Overview (3 Months) For the three months ended June 30, 2019, consolidated revenue grew 9% to $127.4 million, net income increased 22% to $19.5 million, and diluted EPS rose 22% to $0.79, with gross profit up 11%, operating income up 19%, and Adjusted EBITDA up 15% Consolidated Performance Overview (Three Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 127,439 | 116,983 | 9% | | Net Income | 19,488 | 15,912 | 22% | | Diluted Earnings Per Share | 0.79 | 0.65 | 22% | | Gross Profit | 59,881 | 53,928 | 11% | | Operating Income | 29,066 | 24,449 | 19% | | Adjusted EBITDA | 52,444 | 45,429 | 15% | | Effective Tax Rate | 24.9% | 24.6% | - | | Mobile Modular Pre-Tax Income Contribution | 56% | 48% | - | | TRS-RenTelco Pre-Tax Income Contribution | 31% | 35% | - | | Adler Tanks Pre-Tax Income Contribution | 15% | 15% | - | | Enviroplex Pre-Tax Income Contribution | -2% | 2% | - | Mobile Modular Segment (3 Months) Mobile Modular segment's total revenue increased 13% to $67.7 million, and pre-tax income surged 43% to $14.4 million, driven by higher rental and service revenue, improved average monthly rental rates, and utilization, partially offset by lower sales revenue Mobile Modular Segment Performance (Three Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 67,722 | 59,871 | 13% | | Rental Revenue | 44,737 | 38,204 | 17% | | Rental-Related Services Revenue | 15,901 | 12,388 | 28% | | Sales Revenue | 6,725 | 8,961 | -25% | | Total Gross Profit | 31,986 | 26,729 | 20% | | Pre-Tax Income | 14,431 | 10,065 | 43% | | Average Monthly Total Yield | 1.90% | 1.70% | 12% | | Average Utilization Rate | 79.2% | 77.1% | 3% | | Average Monthly Rental Rate | 2.39% | 2.21% | 8% | TRS-RenTelco Segment (3 Months) TRS-RenTelco segment's total revenue grew 6% to $32.3 million, with pre-tax income up 8% to $8.1 million, primarily driven by increased rental and service revenue, despite a decline in sales revenue and gross margin TRS-RenTelco Segment Performance (Three Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 32,310 | 30,352 | 6% | | Rental Revenue | 25,489 | 22,165 | 15% | | Rental-Related Services Revenue | 854 | 707 | 21% | | Sales Revenue | 5,317 | 6,844 | -22% | | Total Gross Profit | 14,825 | 14,394 | 3% | | Pre-Tax Income | 8,062 | 7,478 | 8% | | Average Monthly Total Yield | 2.86% | 2.69% | 6% | | Average Utilization Rate | 67.2% | 63.2% | 6% | | Average Monthly Rental Rate | 4.25% | 4.26% | 0% | Adler Tanks Segment (3 Months) Adler Tanks segment's total revenue increased 14% to $26.3 million, and pre-tax income rose 24% to $4.0 million, fueled by growth in rental-related services, rental, and sales revenue, despite a slight decrease in average utilization Adler Tanks Segment Performance (Three Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 26,335 | 23,049 | 14% | | Rental Revenue | 17,879 | 16,898 | 6% | | Rental-Related Services Revenue | 7,712 | 5,991 | 29% | | Sales Revenue | 593 | 30 | nm | | Total Gross Profit | 12,663 | 11,516 | 10% | | Pre-Tax Income | 4,030 | 3,255 | 24% | | Average Monthly Total Yield | 1.90% | 1.82% | 4% | | Average Utilization Rate | 57.5% | 59.1% | -3% | | Average Monthly Rental Rate | 3.31% | 3.08% | 7% | Results of Operations - Six Months Ended June 30, 2019 vs. 2018 For the six months ended June 30, 2019, consolidated revenue increased 12% to $249.4 million and net income rose 25% to $37.9 million, with Mobile Modular, Adler Tanks, and TRS-RenTelco all showing pre-tax income growth, Mobile Modular being the largest contributor Consolidated Overview (6 Months) For the six months ended June 30, 2019, consolidated revenue grew 12% to $249.4 million, net income increased 25% to $37.9 million, and diluted EPS rose 24% to $1.54, with gross profit up 12%, operating income up 21%, and Adjusted EBITDA up 16% Consolidated Performance Overview (Six Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 249,447 | 222,068 | 12% | | Net Income | 37,937 | 30,378 | 25% | | Diluted Earnings Per Share | 1.54 | 1.24 | 24% | | Gross Profit | 116,886 | 104,098 | 12% | | Operating Income | 56,376 | 46,491 | 21% | | Adjusted EBITDA | 102,295 | 88,270 | 16% | | Effective Tax Rate | 24.5% | 24.3% | - | | Mobile Modular Pre-Tax Income Contribution | 56% | 52% | - | | TRS-RenTelco Pre-Tax Income Contribution | 30% | 35% | - | | Adler Tanks Pre-Tax Income Contribution | 15% | 14% | - | | Enviroplex Pre-Tax Income Contribution | -1% | -1% | - | Mobile Modular Segment (6 Months) Mobile Modular segment's total revenue increased 17% to $132.8 million, and pre-tax income grew 36% to $28.1 million, driven by higher rental, service, and sales revenue, along with improved average monthly rental rates and utilization Mobile Modular Segment Performance (Six Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 132,814 | 113,722 | 17% | | Rental Revenue | 86,998 | 75,231 | 16% | | Rental-Related Services Revenue | 30,372 | 24,322 | 25% | | Sales Revenue | 14,725 | 13,554 | 9% | | Total Gross Profit | 62,865 | 53,050 | 19% | | Pre-Tax Income | 28,057 | 20,698 | 36% | | Average Monthly Total Yield | 1.85% | 1.68% | 10% | | Average Utilization Rate | 79.1% | 77.3% | 2% | | Average Monthly Rental Rate | 2.34% | 2.17% | 8% | TRS-RenTelco Segment (6 Months) TRS-RenTelco segment's total revenue grew 8% to $63.0 million, with pre-tax income up 8% to $15.1 million, primarily driven by increased rental revenue, despite a decline in sales revenue and gross margin TRS-RenTelco Segment Performance (Six Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 62,986 | 58,390 | 8% | | Rental Revenue | 49,112 | 43,694 | 12% | | Rental-Related Services Revenue | 1,562 | 1,514 | 3% | | Sales Revenue | 11,067 | 12,019 | -8% | | Total Gross Profit | 28,492 | 27,242 | 5% | | Pre-Tax Income | 15,130 | 13,993 | 8% | | Average Monthly Total Yield | 2.81% | 2.70% | 4% | | Average Utilization Rate | 65.7% | 62.8% | 5% | | Average Monthly Rental Rate | 4.27% | 4.30% | -1% | Adler Tanks Segment (6 Months) Adler Tanks segment's total revenue increased 13% to $49.8 million, and pre-tax income grew 33% to $7.5 million, driven by comprehensive growth in rental, service, and sales revenue, despite a slight decrease in average utilization Adler Tanks Segment Performance (Six Months Ended June 30, in thousands of US dollars) | Metric | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | 49,770 | 44,227 | 13% | | Rental Revenue | 34,691 | 32,603 | 6% | | Rental-Related Services Revenue | 13,988 | 11,081 | 26% | | Sales Revenue | 863 | 335 | 158% | | Total Gross Profit | 24,086 | 21,912 | 10% | | Pre-Tax Income | 7,546 | 5,678 | 33% | | Average Monthly Total Yield | 1.85% | 1.76% | 5% | | Average Utilization Rate | 57.1% | 58.5% | -2% | | Average Monthly Rental Rate | 3.23% | 3.00% | 8% | Liquidity and Capital Resources For the six months ended June 30, 2019, operating cash flow significantly increased by 71% to $92 million, primarily allocated to investing activities (increased rental equipment purchases) and financing activities, with the company meeting capital needs through credit facilities and senior notes while complying with all financial covenants Cash Flow Analysis In the first half of 2019, net cash from operating activities increased 71% to $92 million, while net cash used in investing activities rose by $30.5 million to $76.4 million, and net cash used in financing activities increased by $9.7 million to $15.6 million - Net cash provided by operating activities increased by 71% to $92.0 million in the first half of 2019[123] - Net cash used in investing activities increased by $30.5 million to $76.4 million, primarily due to a 55% increase in rental equipment purchases to $90.7 million[124] - Net cash used in financing activities increased by $9.7 million to $15.6 million, mainly due to reduced bank credit borrowings and increased dividend payments[125] Debt Instruments and Covenants The company has a $432 million unsecured revolving credit facility with $230.1 million available as of June 30, 2019, and has issued $100 million in senior notes, while remaining compliant with all financial covenants including fixed charge coverage and leverage ratios - The company has a $432 million unsecured revolving credit facility, with $201.9 million utilized and $230.1 million available as of June 30, 2019[129] - The company issued $40 million in 3.68% Series B Senior Notes (due 2021) and $60 million in 3.84% Series C Senior Notes (due 2022)[131][132] Financial Covenant Compliance (June 30, 2019) | Covenant | Requirement | Actual Ratio | | :--- | :--- | :--- | | Consolidated Fixed Charge Coverage Ratio | Not less than 2.50:1 | 4.09:1 | | Consolidated Leverage Ratio | Not more than 2.75:1 | 1.39:1 | | Tangible Net Worth | Not less than $374.9 million | $557.7 million | Common Stock Repurchase The Board authorized the repurchase of 2,000,000 common shares in August 2015, with 1,592,026 shares remaining authorized as of June 30, 2019, and no repurchases made in the first half of 2019 or 2018 - The Board authorized the repurchase of 2,000,000 common shares in August 2015, with 1,592,026 shares remaining authorized as of June 30, 2019[135] - No common stock repurchases were made in the first six months of 2019 or 2018[135] Contractual Obligations & Off-Balance Sheet Arrangements The company's contractual obligations have not materially changed since the 2018 annual report, and there were no significant off-balance sheet arrangements as of June 30, 2019 - The company's contractual obligations have not materially changed since the 2018 annual report[136] - No significant off-balance sheet arrangements existed as of June 30, 2019[137] Other Information Quantitative and Qualitative Disclosures About Market Risk The company states that its market risk exposure has not materially changed since the 2018 annual report - The company's market risk exposure has not materially changed since the 2018 annual report[138] Controls and Procedures As of June 30, 2019, management, under CEO and CFO supervision, concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls - As of June 30, 2019, the company's disclosure controls and procedures were deemed effective[139] - No material changes occurred in the company's internal control over financial reporting[139] Legal Proceedings The company faces various legal proceedings and claims arising from ordinary operations, but management expects these will not materially adversely affect its financial condition, operating results, or cash flows - The company faces various legal proceedings and claims arising in the ordinary course of business[142] - Management anticipates these proceedings will not materially adversely affect the company's financial condition, operating results, or cash flows[142] Risk Factors The company faces diverse risks including macroeconomic fluctuations, market competition, operational efficiency, technological changes, regulatory compliance, and segment-specific risks (modular buildings, electronic test equipment, liquid/solid containment tanks), all potentially impacting financial condition and operating results General Business Risks General business risks include operating performance and stock price volatility, loss of key personnel, reliance on third-party suppliers, IT system security, acquisition integration, goodwill impairment, residual value risk, credit management, asset efficiency, EHS litigation, catastrophic losses, and debt covenant restrictions with rising interest rates - Operating results may fluctuate due to economic conditions, policies, customer budgets, seasonality, strategic initiatives, costs, equipment mix, interest rates, and tax rate changes[144] - Reliance on third-party manufacturers poses risks of supply chain disruptions, potentially harming reputation and financial condition[150] - Information technology system vulnerabilities could lead to data breaches, reputational damage, or business interruptions[151][152] - Acquisitions involve integration difficulties, management distraction, market entry challenges, compliance risks, unknown issues, negative customer/employee reactions, failure to realize synergies, and potential equity dilution or debt default risks[154][155][156] - Disposal of rental equipment carries residual value risk, where market value may be below depreciated value, impacting operating results and cash flows[158] - Debt instruments contain restrictive covenants that may limit the company's ability to conduct certain transactions, finance future operations or capital needs, with default potentially leading to accelerated debt maturity[168][169] - Most debt carries floating interest rates, so rising rates could increase interest expense and negatively impact net income[171] Risks Related to Relocatable Modular Buildings Segment Risks for the modular buildings segment include reduced public school funding, policy changes, regulatory non-compliance, new market expansion, unfavorable government contracts, educational seasonality, intense competition, redeployment challenges, rising costs, manufacturer dependence, and product liability - Significant reductions or delays in public school funding could decrease demand and pricing for modular classroom units, impacting revenue and profitability[175][177] - Failure to comply with applicable regulations could harm business and financial condition, leading to reduced operating results and cash flows[179] - The modular building rental industry is highly competitive, potentially leading to pricing pressure and affecting market share and profitability[187][188] - Significant increases in raw material and labor costs could raise acquisition costs for new modular rental units and fleet maintenance costs, increasing operating costs and harming profitability[190] Risks Related to Electronic Test Equipment Segment Risks for the electronic test equipment segment include market downturns, excess inventory, seasonality, equipment obsolescence, intense competition, inability to acquire equipment favorably, and international operational risks such as political conditions, compliance, and currency fluctuations - Market risks and cyclical downturns in industries using test equipment could lead to depressed product demand, resulting in excess inventory, impairment charges, and reduced operating results and cash flows[194][195] - Leased test equipment may become obsolete due to new technology or loss of manufacturer support, leading to impairment charges[197][198] - The electronic test equipment rental market is highly competitive, and failure to compete effectively could materially adversely affect operating results[199] - International operations face additional risks including political, economic, legal conditions, compliance, collections, costs, personnel, cultural differences, seasonality, integration, payment cycles, currency fluctuations, and taxation[202] - Adverse currency exchange rate fluctuations could negatively impact financial results when translated into US dollars[203] Risks Related to Liquid and Solid Containment Tanks and Boxes Segment Risks for the liquid and solid containment segment include tort/environmental litigation, intense competition, commodity price volatility, regulatory changes (e.g., hydraulic fracturing), seasonality, rising costs, supplier shortages, high customer concentration, and redeployment challenges - Failure of customers to fulfill responsibilities or accidents involving leased products could lead to tort or environmental litigation, or cleanup costs, materially adversely affecting business, future operating results, or financial condition[204][205] - The liquid and solid containment rental industry is highly competitive, and competitive pressures could lead to reduced market share or rental rates, thereby adversely affecting operating results[206][207] - Market risks, commodity price volatility, regulatory changes or disruptions, and industry cyclical downturns could lead to depressed product demand, resulting in excess inventory, impairment charges, and reduced operating results and cash flows[208] - Changes in hydraulic fracturing regulations could materially adversely affect demand for rental products and reduce operating results and cash flows[209] - Significant increases in raw material, fuel, and labor costs could raise acquisition and operating costs for rental equipment, increasing operating costs and reducing profitability[211] - A significant portion of liquid and solid containment tank and box business revenue comes from a few customers, and losing one or more major customers could adversely affect the business[213] Exhibits This report includes various exhibits, such as the consent of Grant Thornton LLP, CEO and CFO certifications required by Sarbanes-Oxley, and condensed consolidated financial statements provided in iXBRL format - Exhibits include the consent of Grant Thornton LLP, CEO and CFO certifications required by Sarbanes-Oxley, and condensed consolidated financial statements in iXBRL format[221]