MCGRATH RENTCORP 10-Q

Item 1. Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders McGrath RentCorp Results of review of interim financial statements We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp (a California Corporation) and subsidiaries (the “Company”) as of September 30, 2022, and the related condensed consolidated statements of income, comprehensive income, and shareholders’ equity for the three-month and nine-month periods ended September 30, 2022 and 2021, cash flows for the nine-month periods ended September 30, 2022 and 2021, and the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2021, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2021, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Basis for review results These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. /s/ GRANT THORNTON LLP San Francisco, California October 27, 2022 3 MCGRATH RENTCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2022 2021 2022 2021 Revenues Rental $ 118,361 $ 103,269 $ 333,226 $ 283,937 Rental related services 35,361 31,513 88,497 73,870 Rental operations 153,722 134,782 421,723 357,807 Sales 45,391 37,636 97,738 80,503 Other 1,423 874 3,479 2,612 Total revenues 200,536 173,292 522,940 440,922 Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 24,176 23,802 72,114 68,216 Rental related services 25,971 24,356 64,967 56,236 Other 31,708 24,711 92,356 67,696 Total direct costs of rental operations 81,855 72,869 229,437 192,148 Costs of sales 29,241 24,618 59,737 50,021 Total costs of revenues 111,096 97,487 289,174 242,169 Gross profit 89,440 75,805 233,766 198,753 Selling and administrative expenses 44,095 39,907 124,010 109,305 Income from operations 45,345 35,898 109,756 89,448 Other expense: Interest expense ( 4,177 ) ( 3,168 ) ( 9,998 ) ( 7,208 ) Foreign currency exchange loss ( 236 ) ( 128 ) ( 404 ) ( 185 ) Income before provision for income taxes 40,932 32,602 99,354 82,055 Provision for income taxes 10,365 9,350 23,857 20,797 Net income $ 30,567 $ 23,252 $ 75,497 $ 61,258 Earnings per share: Basic $ 1.25 $ 0.96 $ 3.10 $ 2.53 Diluted $ 1.25 $ 0.95 $ 3.08 $ 2.50 Shares used in per share calculation: Basic 24,379 24,245 24,342 24,209 Diluted 24,504 24,507 24,516 24,506 Cash dividends declared per share $ 0.455 $ 0.435 $ 1.365 $ 1.305 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 MCGRATH RENTCORP CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net income $ 30,567 $ 23,252 $ 75,497 $ 61,258 Other comprehensive income: Foreign currency translation adjustment, net of tax impact 65 27 129 63 Comprehensive income $ 30,632 $ 23,279 $ 75,626 $ 61,321 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 McGrath RentCorp CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) September 30, December 31, (in thousands) 2022 2021 Assets Cash $ 1,561 $ 1,491 Accounts receivable, net of allowance for credit losses of $ 2,125 in 2022 and 2021 189,959 159,499 Rental equipment, at cost: Relocatable modular buildings 1,085,060 1,040,094 Electronic test equipment 396,068 361,391 Liquid and solid containment tanks and boxes 309,607 309,908 1,790,735 1,711,393 Less: accumulated depreciation ( 690,913 ) ( 646,169 ) Rental equipment, net 1,099,822 1,065,224 Property, plant and equipment, net 139,203 135,325 Prepaid expenses and other assets 72,258 54,945 Intangible assets, net 42,607 47,049 Goodwill 132,305 132,393 Total assets $ 1,677,715 $ 1,595,926 Liabilities and Shareholders' Equity Liabilities: Notes payable $ 419,464 $ 426,451 Accounts payable and accrued liabilities 154,942 136,313 Deferred income 92,115 58,716 Deferred income taxes, net 238,126 242,425 Total liabilities 904,647 863,905 Shareholders’ equity: Common stock, no par value - Authorized 40,000 shares Issued and outstanding - 24,382 shares as of September 30, 2022 and 24,260 shares as of December 31, 2021 107,463 108,610 Retained earnings 665,530 623,465 Accumulated other comprehensive income (loss) 75 ( 54 ) Total shareholders’ equity 773,068 732,021 Total liabilities and shareholders’ equity $ 1,677,715 $ 1,595,926 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 McGrath RentCorp CONDENSED Consolidated Statements OF SHAREHOLDERS’ EQUITY (unaudited) Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ (in thousands, except per share amounts) Shares Amount Earnings Income (Loss) Equity Balance at December 31, 2021 24,260 $ 108,610 $ 623,465 $ ( 54 ) $ 732,021 Net income — — 18,793 — 18,793 Share-based compensation — 1,760 — — 1,760 Common stock issued under stock plans, net of shares withheld for employee taxes 75 — — — — Taxes paid related to net share settlement of stock awards — ( 3,605 ) — — ( 3,605 ) Dividends accrued of $ 0.455 per share — — ( 11,084 ) — ( 11,084 ) Other comprehensive income — — — 3 3 Balance at March 31, 2022 24,335 $ 106,765 $ 631,174 $ ( 51 ) $ 737,888 Net income — — 26,137 — 26,137 Share-based compensation — 1,652 — — 1,652 Common stock issued under stock plans, net of shares withheld for employee taxes 43 — — — — Taxes paid related to net share settlement of stock awards — ( 2,523 ) — — ( 2,523 ) Dividends accrued of $ 0.455 per share — — ( 11,181 ) — ( 11,181 ) Other comprehensive income — — — 61 61 Balance at June 30, 2022 24,378 $ 105,894 $ 646,130 $ 10 $ 752,034 Net income — — 30,567 — 30,567 Share-based compensation — 1,694 — — 1,694 Common stock issued under stock plans, net of shares withheld for employee taxes 4 — — — — Taxes paid related to net share settlement of stock awards — ( 125 ) — — ( 125 ) Dividends accrued of $ 0.455 per share — — ( 11,167 ) — ( 11,167 ) Other comprehensive income — — — 65 65 Balance at September 30, 2022 24,382 $ 107,463 $ 665,530 $ 75 $ 773,068 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ (in thousands, except per share amounts) Shares Amount Earnings Income (Loss) Equity Balance at December 31, 2020 24,128 $ 106,289 $ 576,419 $ ( 104 ) $ 682,604 Net income — — 17,398 — 17,398 Share-based compensation — 1,777 — — 1,777 Common stock issued under stock plans, net of shares withheld for employee taxes 78 — — — — Taxes paid related to net share settlement of stock awards — ( 3,482 ) — — ( 3,482 ) Dividends accrued of $ 0.435 per share — — ( 10,650 ) — ( 10,650 ) Other comprehensive income — — — 38 38 Balance at March 31, 2021 24,206 $ 104,584 $ 583,167 $ ( 66 ) $ 687,685 Net income — — 20,608 — 20,608 Share-based compensation — 1,820 — — 1,820 Common stock issued under stock plans, net of shares withheld for employee taxes 39 — — — — Taxes paid related to net share settlement of stock awards — ( 1,346 ) — — ( 1,346 ) Dividends accrued of $ 0.435 per share — — ( 10,643 ) — ( 10,643 ) Other comprehensive loss — — — ( 3 ) ( 3 ) Balance at June 30, 2021 24,245 $ 105,058 $ 593,132 $ ( 69 ) $ 698,121 Net income — — 23,252 — 23,252 Share-based compensation — 1,705 — — 1,705 Common stock issued under stock plans, net of shares withheld for employee taxes 2 — — — — Taxes paid related to net share settlement of stock awards — ( 19 ) — — ( 19 ) Dividends accrued of $ 0.435 per share — — ( 10,630 ) — ( 10,630 ) Other comprehensive income — — — 27 27 Balance at September 30, 2021 24,247 $ 106,744 $ 605,754 $ ( 42 ) $ 712,456 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 McGrath RentCorp CONDENSED Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, (in thousands) 2022 2021 Cash Flows from Operating Activities: Net income $ 75,497 $ 61,258 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 83,272 79,047 Deferred income taxes ( 4,299 ) 15,403 Provision for doubtful accounts 307 193 Share-based compensation 5,106 5,302 Gain on sale of used rental equipment ( 26,705 ) ( 17,788 ) Foreign currency exchange loss 404 185 Amortization of debt issuance costs 13 11 Change in: Accounts receivable ( 30,767 ) ( 33,471 ) Prepaid expenses and other assets ( 17,313 ) ( 11,409 ) Accounts payable and accrued liabilities 14,384 17,428 Deferred income 33,399 20,128 Net cash provided by operating activities 133,298 136,287 Cash Flows from Investing Activities: Purchases of rental equipment ( 130,395 ) ( 90,379 ) Purchases of property, plant and equipment ( 10,594 ) ( 969 ) Cash paid for acquisition of businesses — ( 285,624 ) Proceeds from sales of used rental equipment 54,193 41,556 Net cash used in investing activities ( 86,796 ) ( 335,416 ) Cash Flows from Financing Activities: Net (payments) borrowings under bank lines of credit ( 7,000 ) 176,758 Borrowings under note purchase agreement — 100,000 Principal payment of Series B senior notes — ( 40,000 ) Taxes paid related to net share settlement of stock awards ( 6,253 ) ( 4,847 ) Payment of dividends ( 33,175 ) ( 31,635 ) Net cash (used in) provided by financing activities ( 46,428 ) 200,276 Effect of foreign currency exchange rate changes on cash ( 4 ) ( 5 ) Net increase in cash 70 1,142 Cash balance, beginning of period 1,491 1,238 Cash balance, end of period $ 1,561 $ 2,380 Supplemental Disclosure of Cash Flow Information: Interest paid, during the period $ 8,982 $ 6,477 Net income taxes paid, during the period $ 24,885 $ 8,074 Dividends accrued during the period, not yet paid $ 11,167 $ 10,002 Rental equipment acquisitions, not yet paid $ 9,555 $ 2,199 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 MCGRATH RENTCORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 2022 NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION The condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021 have not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals, consolidating and eliminating entries) necessary for the fair presentation of the consolidated financial position, results of operations and cash flows of McGrath RentCorp (the “Company”) have been made. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated results for the three and nine months ended September 30, 2022 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K, filed with the SEC on February 23, 2022 for the year ended December 31, 2021 (the “2021 Annual Report”). NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS In March 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates 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. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements. NOTE 3. REVENUE RECOGNITION The Company’s accounting for revenues is governed by two accounting standards. The majority of the Company’s revenues are considered lease or lease related and are accounted for in accordance with Accounting Standards Codification (ASC) 842, Leases. Revenues determined to be non-lease related are accounted for in accordance with ASC 606, Revenue from Contracts with Customers. The Company accounts for revenues when approval and commitment from both parties have been obtained, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company typically recognizes non-lease related revenues at a point in time because the customer does not simultaneously consume the benefits of the Company’s promised goods and services, or performance obligations, and obtains control when delivery and installation are complete. For contracts that have multiple performance obligations, the transaction price is allocated to each performance obligation in the contract based on the Company’s best estimate of the standalone selling prices of each distinct performance obligation in the contract. The standalone selling price is typically determined based upon the expected cost plus an estimated margin of each performance obligation. The Company generally rents and sells to customers on 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 sheet. 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. These contract liabilities are included in Deferred income on the Company’s consolidated balance sheet and totaled $ 35.8 million and $ 16.8 million at September 30, 2022 and December 31, 2021, respectively. Sales revenues totaling $ 2.4 million and $ 8.8 million were recognized during the three and nine months ended September 30, 2022, which were included in the contract liability balance at December 31, 2021. For certain modular building sales, the customer retains a small portion of the contract price until full completion of the contract, which results in revenue earned in excess of billings. These unbilled contract assets are included in Accounts receivable on the Company’s consolidated balance sheet and totaled $ 1.0 million and $ 1.3 million at September 30, 2022 and December 31, 2021, respectively. Lease Revenues Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating segments. Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. Rental related services revenues are primarily associated with relocatable modular buildings and liquid and solid containment tanks and boxes leases. For modular building leases, rental related services revenues for modifications, delivery, installation, dismantle and return 10 delivery are lease related because the payments are considered minimum lease payments that are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line basis over the term of the lease. Certain leases are accounted for as finance leases. For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. Other revenues include interest income on finance leases and rental income on facility leases. In the three and nine months ended September 30, 2022, the Company’s lease revenues were $ 136.5 million and $ 381.8 million, respectively, consisting of $ 136.2 million and $ 379.7 million of operating lease revenues, respectively, and $ 0.3 million and $ 2.1 million of finance lease revenues, respectively. 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 straight-line basis, which results in a constant rate of return on the unrecovered lease investment. The Company’s finance lease revenues for the three and nine months ended September 30, 2022 include $ 0.2 million and $ 1.8 million of sales revenues, respectively, and $ 0.1 million and $ 0.3 million of interest income, respectively. Non-Lease Revenues Non-lease revenues are recognized in the period when control of the performance obligation is transferred, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. For liquid and solid containment solutions, portable storage containers and electronic test equipment, rental related services revenues for delivery and return delivery are considered non-lease revenues. Sales revenues are typically recognized at a point in time, which occurs upon the completion of delivery, installation and acceptance of the equipment by the customer. Accounting for non-lease revenues requires judgment in determining the point in time the customer gains control of the equipment and the appropriate accounting period to recognize revenue. Sales taxes charged to customers are reported on a net basis and are excluded from revenues and expenses. 11 The following table disaggregates the Company’s revenues by lease (within the scope of ASC 842) and non-lease revenues (within the scope of ASC 606) and the underlying service provided for the three and nine months ended September 30, 2022 and 2021: (in thousands) Mobile Modular TRS- RenTelco Adler Tanks Enviroplex Consolidated Three Months Ended September 30, 2022 Leasing $ 86,428 $ 32,265 $ 17,825 $ — $ 136,518 Non-lease: Rental related services 10,427 684 7,069 — 18,180 Sales 28,922 5,291 976 9,978 45,167 Other 61 287 323 — 671 Total non-lease 39,410 6,262 8,368 9,978 64,018 Total revenues $ 125,838 $ 38,527 $ 26,193 $ 9,978 $ 200,536 2021 Leasing $ 73,375 $ 29,692 $ 15,011 $ — $ 118,078 Non-lease: Rental related services 10,628 591 6,239 — 17,458 Sales 26,362 4,502 960 5,541 37,365 Other 29 289 73 — 391 Total non-lease 37,019 5,382 7,272 5,541 55,214 Total revenues $ 110,394 $ 35,074 $ 22,283 $ 5,541 $ 173,292 Nine Months Ended September 30, 2022 Leasing $ 240,693 $ 92,585 $ 48,548 $ — $ 381,826 Non-lease: Rental related services 22,960 1,919 18,890 — 43,769 Sales 64,113 14,031 2,234 15,545 95,923 Other 94 824 504 — 1,422 Total non-lease 87,167 16,774 21,628 15,545 141,114 Total revenues $ 327,860 $ 109,359 $ 70,176 $ 15,545 $ 522,940 2021 Leasing $ 196,362 $ 86,223 $ 40,958 $ — $ 323,543 Non-lease: Rental related services 18,418 1,821 16,713 — 36,952 Sales 48,766 13,485 2,161 14,897 79,309 Other 68 931 119 — 1,118 Total non-lease 67,252 16,237 18,993 14,897 117,379 Total revenues $ 263,614 $ 102,460 $ 59,951 $ 14,897 $ 440,922 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 policy is to provide reserves for warranties when required for specific circumstances, warranty costs have not been significant to date. The Company’s incremental cost of obtaining lease contracts, which consists of salesperson commissions, are deferred and amortized over the initial lease term for modular leases. Incremental costs for obtaining a contract for all other operating segments are expensed in the period incurred because the lease term is typically less than 12 months. 12 NOTE 4. EARNINGS PER SHARE Basic earnings per share (“EPS”) is computed as net income divided by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed assuming conversion of all potentially dilutive securities including the dilutive effect of stock options, unvested restricted stock awards and other potentially dilutive securities. The table below presents the weighted-average number of shares of common stock used to calculate basic and diluted earnings per share: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Weighted-average number of shares of common stock for calculating basic earnings per share 24,379 24,245 24,342 24,209 Effect of potentially dilutive securities from equity-based compensation 125 262 174 297 Weighted-average number of shares of common stock for calculating diluted earnings per share 24,504 24,507 24,516 24,506 There were no anti-dilutive securities excluded from the computation of diluted earnings per share for the three months ended September 30, 2022, and 7,315 anti-dilutive securities in the form of common stock excluded for the nine months ended September 30, 2022. There were no anti-dilutive securities excluded for the same periods in 2021. The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares of the Company's outstanding common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased, and the Repurchase Plan may be modified, extended or terminated by the Company’s Board of Directors at any time. There were no shares repurchased during the three and nine months ended September 30, 2022 and 2021. As of September 30, 2022, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan. NOTE 5. INTANGIBLE ASSETS Intangible assets consist of the following: (dollar amounts in thousands) Estimated useful life in years Average remaining life in years Cost Accumulated amortization Net book value September 30, 2022 Customer relationships 8 to 11 6.6 $ 50,285 $ ( 16,826 ) $ 33,459 Non-compete agreements 5 3.5 3,296 ( 994 ) 2,302 Customer backlog — — 1,900 ( 1,900 ) — Trade name 8 6.5 1,200 ( 225 ) 975 Total amortizing 56,681 ( 19,945 ) 36,736 Trade name - non-amortizing Indefinite 5,871 — 5,871 Total $ 62,552 $ ( 19,945 ) $ 42,607 December 31, 2021 Customer relationships 8 to 11 7.3 $ 50,285 $ ( 12,991 ) $ 37,294 Non-compete agreements 5 4.2 3,296 ( 499 ) 2,797 Customer backlog 0.5 — 1,900 ( 1,900 ) — Trade name 8 7.3 1,200 ( 113 ) 1,087 Total amortizing 56,681 ( 15,503 ) 41,178 Trade name - non-amortizing Indefinite 5,871 — 5,871 Total $ 62,552 $ ( 15,503 ) $ 47,049 13 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 2021, with no indicators of impairment. In addition, no impairment triggering events occurred during the nine months ended September 30, 2022. Determining fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions. The 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 nine months ended September 30, 2022 and 2021, was $ 4.4 million and $ 4.2 million, respectively. Based on the carrying values at September 30, 2022 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $ 1.5 million for the remainder of fiscal year 2022, $ 5.9 million annually in 2023 through 2025, $ 5.4 million in 2026 and $ 5.2 million in 2027. 14 NOTE 6. SEGMENT REPORTING The Company’s four reportable segments are (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing segment selling modular buildings used primarily as classrooms in California (“Enviroplex”). The operations of each of these segments are described in Part I – Item 1, “Business,” and the accounting policies of the segments are described in “Note 1 – Summary of Significant Accounting Policies” in the Company’s 2021 Annual Report. Management focuses on several key measures to evaluate and assess each segment’s performance, including rental revenue growth, gross profit and gross margins, income from operations, income before provision for income taxes and adjusted EBITDA. Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are generally allocated to Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of direct revenues. Interest expense is allocated amongst Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental equipment at cost, intangible assets, accounts receivable, deferred income and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the nine months ended September 30, 2022 and 2021 for the Company’s reportable segments is shown in the following table: (dollar amounts in thousands) Mobile Modular TRS- RenTelco Adler Tanks Enviroplex 1 Consolidated Nine Months Ended September 30, 2022 Rental revenues $ 195,598 $ 89,990 $ 47,638 $ — $ 333,226 Rental related services revenues 66,947 2,329 19,221 — 88,497 Sales and other revenues 65,315 17,040 3,317 15,545 101,217 Total revenues 327,860 109,359 70,176 15,545 522,940 Depreciation of rental equipment 23,329 36,789 11,996 — 72,114 Gross profit 149,405 48,824 31,933 3,604 233,766 Selling and administrative expenses 79,245 19,930 20,642 4,193 124,010 Income (loss) from operations 70,160 28,894 11,291 ( 589 ) 109,756 Interest (expense) income allocation ( 6,616 ) ( 2,160 ) ( 1,941 ) 719 ( 9,998 ) Income before provision for income taxes 63,544 26,330 9,350 130 99,354 Adjusted EBITDA 105,912 66,675 25,520 ( 377 ) 197,730 Rental equipment acquisitions 73,895 57,169 3,067 — 134,131 Accounts receivable, net (period end) 139,730 24,353 18,185 7,691 189,959 Rental equipment, at cost (period end) 1,085,060 396,068 309,607 — 1,790,735 Rental equipment, net book value (period end) 780,939 177,221 141,662 — 1,099,822 Utilization (period end) 2 81.2 % 65.2 % 58.3 % Average utilization 2 78.5 % 64.8 % 51.7 % 2021 Rental revenues $ 159,118 $ 84,340 $ 40,479 $ — $ 283,937 Rental related services revenues 54,726 2,149 16,995 — 73,870 Sales and other revenues 49,770 15,971 2,477 14,897 83,115 Total revenues 263,614 102,460 59,951 14,897 440,922 Depreciation of rental equipment 20,437 35,429 12,350 — 68,216 Gross profit 125,357 44,867 24,167 4,362 198,753 Selling and administrative expenses 67,977 18,381 18,853 4,094 109,305 Income from operations 57,380 26,486 5,314 268 89,448 Interest (expense) income allocation ( 4,401 ) ( 1,588 ) ( 1,560 ) 341 ( 7,208 ) Income before provision for income taxes 52,979 24,713 3,754 609 82,055 Adjusted EBITDA 89,634 63,378 20,144 456 173,612 Rental equipment acquisitions 162,579 53,161 164 — 215,904 Accounts receivable, net (period end) 118,467 24,854 16,062 9,448 168,831 Rental equipment, at cost (period end) 1,023,344 363,799 311,677 — 1,698,820 Rental equipment, net book value (period end) 737,807 169,250 156,405 — 1,063,462 Utilization (period end) 2 76.7 % 66.9 % 50.4 % Average utilization 2 76.0 % 67.4 % 44.0 % 1. Gross Enviroplex sales revenues were $ 16,401 and $ 15,909 for the nine months ended September 30, 2022 and 2021, respectively. There were $ 856 and $ 1,012 inter-segment sales to Mobile Modular in the nine months ended September 30, 2022 and 2021, respectively, which required elimination in consolidation. 2. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment, and for Mobile Modular and Adler Tanks, excluding new equipment inventory. 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 for the nine months ended September 30, 2022 and 2021. Revenues from foreign country customers accounted for 4 % of the Company’s total revenues for the same periods. 15 NOTE 7. ACQUISITIONS On May 17, 2021, the Company completed the purchase of substantially all of the assets of Design Space Modular Buildings PNW, LP (“Design Space”) for $ 267.3 million in cash consideration on the closing date. Design Space provides modular buildings and portable storage containers rental and sale solutions to customers in the West and Pacific Northwest states in the U.S. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in 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 Design Space were a part of the Mobile Modular segment since May 17, 2021, including $ 1.7 million of transaction costs. On April 1, 2021 the Company completed the purchase of assets of GRS Holding LLC, DBA Kitchens To Go (“Kitchens To Go”) for $ 18.3 million in cash consideration. Kitchens To Go provides interim and permanent modular kitchen solutions for foodservice providers that require flexible facilities to continue or expand operations. 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 Kitchens To Go were a part of the Mobile Modular segment since April 1, 2021, including $ 0.3 million of transaction costs. The following tables summarize the purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Design Space and Kitchens To Go acquisitions, with excess amounts allocated to goodwill. 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. Design Space: (dollar amounts in thousands) Rental equipment $ 116,272 Intangible assets: Goodwill 101,874 Customer relationships 37,900 Non-compete 2,500 Customer backlog 1,600 Accounts receivable 12,025 Property, plant and equipment 4,139 Prepaid expenses and other assets 5,366 Accounts payable and accrued liabilities ( 11,613 ) Deferred income ( 2,784 ) Total purchase price $ 267,279 Kitchens To Go: (dollar amounts in thousands) Rental equipment $ 12,853 Intangible assets: Goodwill 2,322 Customer relationships 1,700 Trade name 1,200 Non-compete 600 Customer backlog 300 Accounts receivable 212 Property, plant and equipment 365 Prepaid expenses and other assets 1,199 Accounts payable and accrued liabilities ( 1,659 ) Deferred income ( 747 ) Total purchase price $ 18,345 16 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 $ 104,196 reflects the strategic fit of Design Space and Kitchens to Go with the Company’s modular business operations. The Company amortizes the acquired customer relationships, tradename and non-compete over their expected useful lives of 8 years , 8 years and 5 years , respectively. As of the nine months ended September 30, 2022, the customer backlog has been amortized in full. 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 pro forma financial information shows the combined results of operations of the Company, Design Space and Kitchens To Go as if the acquisitions occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of the purchased intangible assets and depreciation expense of acquired rental equipment valuation step up, interest expense on the debt incurred to finance the acquisitions. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the combined federal and state statutory rate of 28 % on the acquisitions’ combined net income. The pro forma results for the nine months ended September 30, 2021 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: (Unaudited) Nine months ended September 30, (dollar amounts in thousands, except for per share amounts) 2022 2021 Pro-forma total revenues $ 522,940 $ 471,955 Pro-forma net income $ 75,497 $ 64,618 Pro-forma basic earnings per share $ 3.10 $ 2.67 Pro-forma diluted earnings per share $ 3.08 $ 2.64 Design Space and Kitchens To Go Actual total revenues $ 56,227 Actual net income $ 6,231 Actual basic earnings per share $ 0.26 Actual diluted earnings per share $ 0.25 On December 31, 2021 the Company completed the purchase of the assets of Titan Storage Containers, LLC (“Titan”) for $ 6.9 million in cash consideration. 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 $ 6.2 million and rolling stock assets totaling $ 0.8 million, partially offset by accrued liabilities of $ 0.2 million. The rolling stock assets included delivery trucks, delivery trailers, trucks and forklifts. Supplemental pro forma prior year information has not been provided as the historical financial results of Titan were not significant. Incremental transaction costs associated with the asset purchase were not significant. 17 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Form 10-Q, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains forward-looking statements under federal securities laws. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors. These factors include, but are not limited to, those set forth under this Item, those discussed in Part II—Item 1a, “Risk Factors” and elsewhere in this Form 10-Q and those that may be identified from time to time in our reports and registration statements filed with the SEC. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in Part I—Item 1 of this Form 10-Q and the Consolidated Financial Statements and related Notes and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 23, 2022 (the “2021 Annual Report”). In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2021 Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Form 10-Q to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law. The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. The following discussions are subject to the future effects of the COVID-19 pandemic and its variants. General The Company, incorporated in 1979, is a leading rental provider of relocatable modular buildings for classroom and office space, electronic test equipment for general purpose and communications needs, and liquid and solid containment tanks and boxes. The Company’s primary emphasis is on equipment rentals. The Company is comprised of four reportable business segments: (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing segment selling modular buildings used primarily as classrooms in California (“Enviroplex”). The Mobile Modular business segment includes the results of operations of the Mobile Modular Portable Storage division, which represented approximately 11% of the Company’s total revenues in the nine months ended September 30, 2022. Mobile Modular Portable Storage offers portable storage units and high security portable office units for rent, lease and purchase. Kitchens To Go was acquired on April 1, 2021, with its results included in the Mobile Modular segment since that date. Design Space was acquired on May 17, 2021, with its results included in the Mobile Modular segment since that date. See Note 7 to the Condensed Consolidated Financial Statements for the nine months ended September 30, 2022, for more details about the acquisitions. In the nine months ended September 30, 2022, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 64%, 26%, 9% and 1% of the Company’s income before provision for taxes (the equivalent of “pretax income”), respectively, compared to 64%, 30%, 5% and 1% for the same period in 2021. The Company generates its revenues primarily from the rental of its equipment on operating leases and from sales of equipment occurring in the normal course of business. The Company requires significant capital outlay to purchase its rental inventory and recovers its investment through rental and sales revenues. Rental revenues and certain other service revenues negotiated as part of lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the leases. Sales revenues and related costs are recognized upon delivery and installation of the equipment to customers. Sales revenues are less predictable and can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Generally, rental revenues less cash operating costs recover the equipment’s capitalized cost in a short period of time relative to the equipment’s potential rental life and when sold, sale proceeds are usually above its net book value. The Company’s modular revenues (consisting of revenues from Mobile Modular, Mobile Modular Portable Storage, Kitchens To Go and Enviroplex) are derived from rentals and sales to commercial and education customers. Modular revenues are affected by demand for classrooms, which in turn is affected by shifting and fluctuating school populations, the levels of state funding to public schools, the need for temporary classroom space during reconstruction of older schools and changes in policies regarding class size. As a result of any reduced funding, lower expenditures by these schools may result in certain planned programs to increase the number of classrooms, such as those that the Company provides, to be postponed or terminated. However, reduced expenditures may also result in schools reducing their long-term facility construction projects in favor of using the Company’s modular classroom solutions. At this time, the Company can provide no assurances as to whether public schools will either reduce or increase their demand for the Company's modular classrooms as a result of fluctuations in state funding of public schools. Looking forward, the Company believes that any 18 interruption in the passage of facility bonds or contraction of class size reduction programs by public schools may have a material adverse effect on both rental and sales revenues of the Company. (For more information, see “ Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12) ” in the Company’s 2021 Annual Report and “ Item 1a. Risk Factors – Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability ” in Part II – Other Information of this Form 10-Q.) Revenues of TRS-RenTelco are derived from the rental and sale of general purpose and communications test equipment to a broad range of companies, from Fortune 500 to middle and smaller market companies primarily in the aerospace, defense, communications, manufacturing and semiconductor industries. Electronic test equipment revenues are primarily affected by the business activity within these industries related to research and development, manufacturing, and communication infrastructure installation and maintenance. Revenues of Adler Tanks are derived from the rental and sale of fixed axle tanks (“tanks”) and vacuum containers, dewatering containers and roll-off containers (collectively referred to as “boxes”). These tanks and boxes are rented to a broad range of industries and applications including oil and gas exploration and field services, refinery, chemical and industrial plant maintenance, environmental remediation and field services, infrastructure building construction, marine services, pipeline construction and maintenance, tank terminals services, wastewater treatment, and waste management and landfill services for the containment of hazardous and non-hazardous liquids and solids. The Company’s rental operations include rental and rental related service revenues which comprised approximately 81% of consolidated revenues in the nine months ended September 30, 2022 and 2021. Of the total rental operations revenues for the nine months ended September 30, 2022, Mobile Modular, TRS-RenTelco and Adler Tanks comprised 62%, 22% and 16%, respectively, compared to 60%, 24% and 16%, respectively, in the same period of 2021. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment (if applicable), and other direct costs of rental operations (which include direct labor, supplies, repairs, insurance, property taxes, license fees, cost of sub-rentals and amortization of certain lease costs). The Company’s Mobile Modular, TRS-RenTelco and Adler Tanks business segments sell modular units, electronic test equipment and liquid and solid containment tanks and boxes, respectively, which are either new or previously rented. In addition, Enviroplex sells new modular buildings used primarily as classrooms in California. For the nine months ended September 30, 2022 and 2021, sales and other revenues of modular, electronic test equipment and liquid and solid containment tanks and boxes comprised approximately 19% of the Company’s consolidated revenues. Of the total sales and other revenues for the nine months ended September 30, 2022 and 2021, Mobile Modular and Enviroplex together comprised 80% and 78%, respectively, TRS-RenTelco comprised 17% and 19%, respectively, and Adler Tanks comprised 3% in both periods. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold, such as delivery, installation, modifications and related site work. Selling and administrative expenses primarily include personnel and benefit costs, which include share-based compensation, depreciation and amortization, bad debt expense, advertising costs, and professional service fees. The Company believes that sharing of common facilities, financing, senior management, and operating and accounting systems by all of the Company’s operations results in an efficient use of overhead. Historically, the Company’s operating margins have been impacted favorably to the extent its costs and expenses are leveraged over a large installed customer base. However, there can be no assurances as to the Company’s ability to maintain a large installed customer base or ability to sustain its historical operating margins. Recent Developments Amended and Restated Credit Agreement 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. Dividends On September 15, 2022, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.455 per common share for the quarter ended September 30, 2022, an increase of 5% over the prior year’s comparable quarter. COVID-19 The outbreak of a new strain of coronavirus, COVID-19, which began in December 2019, has continued to spread globally including to every state in the United States. The Center for Disease Control ("CDC") and World Health Organization ("WHO") 19 recognized this outbreak as a pandemic, which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence and business sentiment. The Company has taken a number of precautionary health and safety measures to safeguard its employees and customers, while maintaining business continuity. The Company has implemented remote work policies and enhanced cleaning and hygiene protocols in all of its facilities, products and vehicles. The Company is continuing to monitor and assess orders issued by federal, state and local governments to ensure compliance with evolving COVID-19 guidelines. The Company also continues to monitor the impact of COVID-19 on its existing customers who themselves may be impacted by governmental shutdowns and other impacts due to the governmental orders. While the Company has not seen a significant impact from COVID-19 in the financial results for the three and nine months ended September 30, 2022 as set forth in the below sections discussing the results of operations for the three and nine months ended September 30, 2022, the Company is currently unable to determine or predict the full nature, duration or scope of the overall impact the COVID-19 pandemic and related business and operational pressures will have on its business, results of operations, liquidity or capital resources. The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of employees, customers and shareholders. 20 Results of Operations Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Overview Consolidated revenues for the three months ended September 30, 2022 increased 16% to $200.5 million from $173.3 million in the same period in 2021. Consolidated net income for the three months ended September 30, 2022 increased 32% to $30.6 million, from $23.3 million for the same period in 2021. Earnings per diluted share for the three months ended September 30, 2022 increased 31% to $1.25 from $0.95 for the same period in 2021. For the three months ended September 30, 2022, on a consolidated basis: • Gross profit increased $13.6 million, or 18%, to $89.4 million in 2022. Mobile Modular’s gross profit increased $6.9 million, or 14%, primarily due to higher gross profit on rental, sales, and rental related services revenues. TRS-RenTelco’s gross profit increased $2.5 million, or 16%, primarily due to higher gross profit on rental revenues. Adler Tanks’ gross profit increased $3.5 million, or 38%, primarily due to higher gross profit on rental and rental related services revenues. Enviroplex’s gross profit increased $0.8 million, or 52%, primarily due to $4.4 million higher sales revenues in 2022, partly offset by lower gross margins of 23%, compared to 27% in 2021. • Selling and administrative expenses increased $4.2 million, or 11%, to $44.1 million, primarily due to increased headcount and employees’ salaries and benefit costs totaling $2.6 million and $2.3 million higher marketing and administrative costs, partly offset by $1.0 million lower amortization of intangibles. • Interest expense increased $1.0 million, or 32%, to $4.2 million, due to 43% higher net average interest rates of 3.85% in 2022 compared to 2.69% in 2021, partly offset by 8% lower average debt levels of the Company. • Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 61%, 25% and 11%, respectively, compared to 65%, 27% and 7%, respectively, for the comparable 2021 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was 3% and 1% in 2022 and 2021, respectively. • The provision for income taxes resulted in an effective tax rate of 25.3% and 28.7% for the quarters ended September 30, 2022 and 2021, respectively. The lower rate in 2022 was primarily attributable to increased business activities in lower tax rate states. • Adjusted EBITDA increased $8.8 million, or 13%, to $74.7 million in 2022. 21 Mobile Modular For the three months ended September 30, 2022, Mobile Modular’s total revenues increased $15.4 million, or 14%, to $125.8 million compared to the same period in 2021, primarily due to higher rental, rental related services, and sales revenues. The revenue increase, together with higher gross profit on rental, sales and rental related services revenues, partly offset by higher selling and administrative expenses, resulted in a 16% increase in pre-tax income to $25.0 million for the three months ended September 30, 2022, from $21.6 million for the same period in 2021. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Mobile Modular – Three Months Ended 9/30/22 compared to Three Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 69,111 $ 59,223 $ 9,888 17 % Rental related services 27,353 24,468 2,885 12 % Rental operations 96,464 83,691 12,773 15 % Sales 28,922 26,362 2,560 10 % Other 452 341 111 33 % Total revenues 125,838 110,394 15,444 14 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 7,747 7,544 203 3 % Rental related services 19,973 18,508 1,465 8 % Other 22,837 16,533 6,304 38 % Total direct costs of rental operations 50,557 42,585 7,972 19 % Costs of sales 18,696 18,145 551 3 % Total costs of revenues 69,253 60,730 8,523 14 % Gross Profit Rental 38,527 35,146 3,381 10 % Rental related services 7,380 5,960 1,420 24 % Rental operations 45,907 41,106 4,801 12 % Sales 10,226 8,217 2,009 24 % Other 452 341 111 33 % Total gross profit 56,585 49,664 6,921 14 % Selling and administrative expenses 28,798 26,138 2,660 10 % Income from operations 27,787 23,526 4,261 18 % Interest expense allocation (2,795 ) (1,975 ) 820 42 % Pre-tax income $ 24,992 $ 21,551 $ 3,441 16 % Other Selected Information Adjusted EBITDA $ 39,734 $ 36,160 $ 3,574 10 % Average rental equipment 1 $ 1,030,792 $ 975,119 $ 55,673 6 % Average rental equipment on rent $ 825,129 $ 746,184 $ 78,945 11 % Average monthly total yield 2 2.23 % 2.02 % 10 % Average utilization 3 80.1 % 76.5 % 5 % Average monthly rental rate 4 2.79 % 2.65 % 5 % Period end rental equipment 1 $ 1,036,770 $ 981,231 $ 55,539 6 % Period end utilization 3 81.2 % 76.7 % 6 % 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. 22 Mobile Modular’s gross profit for the three months ended September 30, 2022 increased $6.9 million, or 14%, to $56.6 million. For the three months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $9.9 million, or 17%, due to 11% higher average rental equipment on rent and 5% higher average monthly rental rates in 2022. As a percentage of rental revenues, depreciation was 11% in 2022 and 13% in 2021, and other direct costs were 33% in 2022 and 28% in 2021, which resulted in gross margin percentages of 56% in 2022 compared to 59% in 2021. The higher rental revenues and lower rental margins, resulted in gross profit on rental revenues increasing $3.4 million, or 10%, to $38.5 million in 2022. • Gross Profit on Rental Related Services – Rental related services revenues increased $2.9 million, or 12%, compared to 2021. 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 and higher gross margin percentage of 27% in 2022, compared to 24% in 2021, resulted in rental related services gross profit increasing $1.4 million, or 24%, to $7.4 million in 2022. • Gross Profit on Sales – Sales revenues increased $2.6 million, or 10%, compared to 2021, due to higher used equipment sales. The higher gross margin percentage of 35% in 2022 compared to 31% in 2021, and higher sales revenue resulted in gross profit on sales increasing $2.0 million, or 24%, to $10.2 million. The higher gross margin on sales in 2022 was primarily due to increased margins on used sales. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding. For the three months ended September 30, 2022, selling and administrative expenses increased $2.7 million, or 10%, to $28.8 million, primarily due to $1.6 million higher allocated corporate expenses and increased employee salaries and benefit costs totaling $1.2 million. 23 TRS-RenTelco For the three months ended September 30, 2022, TRS-RenTelco’s total revenues increased $3.5 million to $38.5 million compared to the same period in 2021, primarily due to higher rental and sales revenues. Higher selling and administrative expenses and an increase in gross profit resulted in a 16% increase in pre-tax income to $10.1 million for the three months ended September 30, 2022, from $8.7 million for the same period in 2021. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. TRS-RenTelco – Three Months Ended 9/30/22 compared to Three Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 31,760 $ 29,204 $ 2,556 9 % Rental related services 845 699 146 21 % Rental operations 32,605 29,903 2,702 9 % Sales 5,514 4,773 741 16 % Other 408 398 10 3 % Total revenues 38,527 35,074 3,453 10 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 12,427 12,151 276 2 % Rental related services 603 663 (60 ) (9 )% Other 5,366 5,015 351 7 % Total direct costs of rental operations 18,396 17,829 567 3 % Costs of sales 2,133 1,743 390 22 % Total costs of revenues 20,529 19,572 957 5 % Gross Profit Rental 13,967 12,038 1,929 16 % Rental related services 242 36 206 nm Rental operations 14,209 12,074 2,135 18 % Sales 3,381 3,030 351 12 % Other 408 398 10 3 % Total gross profit 17,998 15,502 2,496 16 % Selling and administrative expenses 6,726 6,010 716 12 % Income from operations 11,272 9,492 1,780 19 % Interest expense allocation (928 ) (668 ) 260 39 % Foreign currency exchange loss (236 ) (128 ) 108 nm Pre-tax income $ 10,108 $ 8,696 $ 1,412 16 % Other Selected Information Adjusted EBITDA $ 23,894 $ 21,967 $ 1,927 9 % Average rental equipment 1 $ 389,675 $ 362,104 $ 27,571 8 % Average rental equipment on rent $ 254,471 $ 242,301 $ 12,170 5 % Average monthly total yield 2 2.71 % 2.69 % 1 % Average utilization 3 65.3 % 66.9 % (2 )% Average monthly rental rate 4 4.16 % 4.02 % 3 % Period end rental equipment 1 $ 392,916 $ 363,892 $ 29,024 8 % Period end utilization 3 65.2 % 66.9 % (2 )% 1. Average and Period end rental equipment represents the cost of rental equipment, excluding accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. nm = Not meaningful 24 TRS-RenTelco’s gross profit for the three months ended September 30, 2022 increased $2.5 million, or 16%, to $18.0 million. For the three months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $2.6 million, or 9%, depreciation expense increased $0.3 million, or 2%, and other direct costs increased $0.4 million or 7%, resulting in a 16% increase in gross profit on rental revenues to $14.0 million. As a percentage of rental revenues, depreciation was 39% and 42% in 2022 and 2021, respectively, and other direct costs were 17% for both periods, which resulted in a gross margin percentage of 44% and 41% in 2022 and 2021, respectively. The rental revenues increase was due to 5% higher average rental equipment on rent and 3% higher average monthly rental rates in 2022 as compared to 2021. • Gross Profit on Sales – Sales revenues increased $0.7 million, or 16%, to $5.5 million in 2022. Gross profit on sales increased 12%, to $3.4 million, with a gross margin percentage of 61% in 2022, compared to 63% in 2021. Sales occur as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements and related mix of equipment sold, equipment availability and funding. For the three months ended September 30, 2022, selling and administrative expenses increased $0.7 million, or 12%, to $6.7 million, primarily due to higher allocated corporate expenses. 25 Adler Tanks For the three months ended September 30, 2022, Adler Tanks’ total revenues increased $3.9 million, or 18%, to $26.2 million compared to the same period in 2021, due to higher rental, rental related services, and other revenues. Higher gross profit on rental, rental related services and other revenues, partly offset by an increase in selling and administrative expenses, resulted in a $2.5 million increase in pre-tax income to $4.6 million for the three months ended September 30, 2022, compared to the same period in 2021. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Adler Tanks – Three Months Ended 9/30/22 compared to Three Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Three Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 17,490 $ 14,842 $ 2,648 18 % Rental related services 7,163 6,346 817 13 % Rental operations 24,653 21,188 3,465 16 % Sales 977 960 17 2 % Other 563 135 428 nm Total revenues 26,193 22,283 3,910 18 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 4,002 4,107 (105 ) (3 )% Rental related services 5,395 5,185 210 4 % Other 3,505 3,163 342 11 % Total direct costs of rental operations 12,902 12,455 447 4 % Costs of sales 693 680 13 2 % Total costs of revenues 13,595 13,135 460 4 % Gross Profit Rental 9,983 7,572 2,411 32 % Rental related services 1,768 1,161 607 52 % Rental operations 11,751 8,733 3,018 35 % Sales 284 280 4 1 % Other 563 135 428 nm Total gross profit 12,598 9,148 3,450 38 % Selling and administrative expenses 7,141 6,333 808 13 % Income from operations 5,457 2,815 2,642 94 % Interest expense allocation (822 ) (638 ) 184 29 % Pre-tax income $ 4,635 $ 2,177 $ 2,458 113 % Other Selected Information Adjusted EBITDA $ 10,192 $ 7,708 $ 2,484 32 % Average rental equipment 1 $ 307,153 $ 311,876 $ (4,723 ) (2 )% Average rental equipment on rent $ 168,659 $ 150,005 $ 18,654 12 % Average monthly total yield 2 1.90 % 1.59 % 19 % Average utilization 3 54.9 % 48.1 % 14 % Average monthly rental rate 4 3.46 % 3.30 % 5 % Period end rental equipment 1 $ 307,430 $ 310,691 $ (3,261 ) (1 )% Period end utilization 3 58.3 % 50.4 % 16 % 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period . nm = Not meaningful 26 Adler Tanks’ gross profit for the three months ended September 30, 2022 increased $3.5 million, or 38%, to $12.6 million. For the three months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $2.6 million, or 18%, primarily due to 12% higher average equipment on rent and 5% higher average rental rates in 2022 compared to 2021. As a percentage of rental revenues, depreciation was 23% in 2022 and 28% in 2021, and other direct costs were 20% and 21% in 2022 and 2021, respectively, which resulted in gross margin percentages of 57% and 51% in 2022 and 2021, respectively. The higher rental revenues and higher rental margins resulted in an increase in gross profit on rental revenues of $2.4 million, or 32%, to $10.0 million in 2022 compared to 2021. • Gross Profit on Rental Related Services – Rental related services revenues increased $0.8 million, or 13%, to $7.2 million compared to 2021. The higher rental related services revenues with higher gross margin percentage of 25% in 2022 compared to 18% in 2021, resulted in rental related services gross profit increasing 52% to $1.8 million in 2022. For the three months ended September 30, 2022, selling and administrative expenses increased $0.8 million, or 13%, to $7.1 million compared to the same period in 2021, primarily due to higher allocated corporate expenses and higher employee salaries and benefit costs. 27 Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Overview Consolidated revenues for the nine months ended September 30, 2022 increased to $522.9 million from $440.9 million for the same period in 2021. Consolidated net income for the nine months ended September 30, 2022 increased 23% to $75.5 million, from $61.3 million for the same period in 2021. Earnings per diluted share for the nine months ended September 30, 2022 increased 23% to $3.08 from $2.50 for the same period in 2021. For the nine months ended September 30, 2022, on a consolidated basis: • Gross profit increased $35.0 million, or 18%, to $233.8 million in 2022. Mobile Modular’s gross profit increased $24.0 million, or 19%, primarily due to higher gross profit on rental, sales and rental related services revenues. TRS-RenTelco’s gross profit increased $4.0 million, or 9%, primarily due to higher gross profit on rental and sales revenues. Adler Tanks’ gross profit increased $7.8 million, or 32%, primarily due to higher gross profit on rental, rental related services and other revenues. Enviroplex’s gross profit decreased $0.8 million, primarily due to lower gross profit margins on sales revenues. • Selling and administrative expenses increased 14% to $124.0 million from $109.3 million for the same period in 2021, primarily due to increased employee salaries and benefit costs of $10.0 million, primarily due to the addition of Design Space and Kitchens To Go employees, and $4.1 million higher marketing and administrative costs. • Interest expense increased $2.8 million to $10.0 million, due to 23% higher average debt levels of the Company and 13% higher net average interest rates of 3.11% in 2022, compared to 2.75% in 2021. • Pre-tax income contribution by Mobile Modular, TRS-RenTelco and Adler Tanks was 64%, 26% and 9%, respectively, compared to 64%, 30% and 5%, respectively, for the comparable 2021 period. These results are discussed on a segment basis below. Pre-tax income contribution by Enviroplex was 1% for both the 2022 and 2021 periods. • The provision for income taxes resulted in an effective tax rate of 24.0% and 25.3% for the nine months ended September 30, 2022 and 2021, respectively. • Adjusted EBITDA increased $24.1 million, or 14%, to $197.8 million in 2022. 28 Mobile Modular For the nine months ended September 30, 2022, Mobile Modular’s total revenues increased $64.2 million, or 24%, to $327.9 million compared to the same period in 2021, primarily due to higher rental, sales, and rental related services revenues. The revenue increase, together with higher gross profit on rental, sales and rental related services revenues, partly offset by higher selling and administrative expenses resulted in a 20% increase in pre-tax income to $63.5 million for the nine months ended September 30, 2022, from $53.0 million for the same period in 2021. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Mobile Modular – Nine Months Ended 9/30/22 compared to Nine Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 195,598 $ 159,118 $ 36,480 23 % Rental related services 66,947 54,726 12,221 22 % Rental operations 262,545 213,844 48,701 23 % Sales 64,113 48,766 15,347 31 % Other 1,202 1,004 198 20 % Total revenues 327,860 263,614 64,246 24 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 23,329 20,437 2,892 14 % Rental related services 48,269 40,384 7,885 20 % Other 67,072 45,309 21,763 48 % Total direct costs of rental operations 138,670 106,130 32,540 31 % Costs of sales 39,785 32,127 7,658 24 % Total costs of revenues 178,455 138,257 40,198 29 % Gross Profit Rental 105,197 93,373 11,824 13 % Rental related services 18,678 14,340 4,338 30 % Rental operations 123,875 107,713 16,162 15 % Sales 24,328 16,640 7,688 46 % Other 1,202 1,004 198 20 % Total gross profit 149,405 125,357 24,048 19 % Selling and administrative expenses 79,245 67,977 11,268 17 % Income from operations 70,160 57,380 12,780 22 % Interest expense allocation (6,616 ) (4,401 ) 2,215 50 % Pre-tax income $ 63,544 $ 52,979 $ 10,565 20 % Other Selected Information Adjusted EBITDA $ 105,912 $ 89,634 $ 16,278 18 % Average rental equipment 1 $ 1,019,105 $ 906,633 $ 112,472 12 % Average rental equipment on rent $ 799,911 $ 688,694 $ 111,217 16 % Average monthly total yield 2 2.13 % 1.95 % 9 % Average utilization 3 78.5 % 76.0 % 3 % Average monthly rental rate 4 2.72 % 2.57 % 6 % Period end rental equipment 1 $ 1,036,770 $ 981,231 $ 55,539 6 % Period end utilization 3 81.2 % 76.7 % 6 % 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. 29 Mobile Modular’s gross profit for the nine months ended September 30, 2022 increased $24.0 million, or 19%, to $149.4 million. For the nine months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $36.5 million, or 23%, primarily due to 16% higher average rental equipment on rent and 6% higher average rental rates in 2022. The increase in rental revenue and average equipment on rent was due in part to the Design Space and Kitchens To Go acquisitions. As a percentage of rental revenues, depreciation was 12% and 13% in 2022 and 2021, respectively, and other direct costs were 34% in 2022 and 28% in 2021, which resulted in gross margin percentages of 54% in 2022 and 59% in 2021. The higher rental revenues, partly offset by lower rental margins resulted in gross profit on rental revenues increasing $11.8 million, or 13%, to $105.2 million in 2022. • Gross Profit on Rental Related Services – Rental related services revenues increased $12.2 million, or 22%, compared to 2021. The increase in rental related services revenues was primarily attributable to higher amortization of modular building delivery and return delivery and dismantle revenues, higher site related revenues and revenues derived from other services performed during the lease and increased delivery and return delivery revenues at Portable Storage. The higher revenues and higher gross margin percentage of 28% in 2022, compared to 26% in 2021, resulted in rental related services gross profit increasing $4.3 million, or 30%, to $18.7 million in 2022. • Gross Profit on Sales – Sales revenues increased $15.3 million, or 31%, compared to 2021, due to higher new and used equipment sales. The higher gross margin percentage of 38% in 2022 compared to 34% in 2021, primarily due to higher margins on used equipment sales revenues, resulted in gross profit on sales increasing $7.7 million, or 46%, to $24.3 million. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, equipment availability and funding. For the nine months ended September 30, 2022, selling and administrative expenses increased $11.3 million, or 17%, to $79.2 million, primarily due to increased employee salaries and benefit costs of $5.5 million, primarily due to the addition of Design Space and Kitchens To Go employees, and $4.5 million higher allocated corporate expenses. 30 TRS-RenTelco For the nine months ended September 30, 2022, TRS-RenTelco’s total revenues increased $6.9 million, to $109.4 million compared to the same period in 2021, primarily due to higher rental and sales revenues. Pre-tax income increased $1.6 million, or 7%, to $26.3 million for the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to higher gross profit on rental, sales, and rental related services revenues, partly offset by higher selling and administrative expenses. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. TRS-RenTelco – Nine Months Ended 9/30/22 compared to Nine Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 89,990 $ 84,340 $ 5,650 7 % Rental related services 2,329 2,149 180 8 % Rental operations 92,319 86,489 5,830 7 % Sales 15,845 14,679 1,166 8 % Other 1,195 1,292 (97 ) (8 )% Total revenues 109,359 102,460 6,899 7 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 36,789 35,429 1,360 4 % Rental related services 1,847 2,061 (214 ) (10 )% Other 15,501 14,267 1,234 9 % Total direct costs of rental operations 54,137 51,757 2,380 5 % Costs of sales 6,398 5,836 562 10 % Total costs of revenues 60,535 57,593 2,942 5 % Gross Profit Rental 37,700 34,643 3,057 9 % Rental related services 482 90 392 nm Rental operations 38,182 34,733 3,449 10 % Sales 9,447 8,842 605 7 % Other 1,195 1,292 (97 ) (8 )% Total gross profit 48,824 44,867 3,957 9 % Selling and administrative expenses 19,930 18,381 1,549 8 % Income from operations 28,894 26,486 2,408 9 % Interest expense allocation (2,160 ) (1,588 ) 572 36 % Foreign currency exchange loss (404 ) (185 ) 219 nm Pre-tax income $ 26,330 $ 24,713 $ 1,617 7 % Other Selected Information Adjusted EBITDA $ 66,675 $ 63,378 $ 3,297 5 % Average rental equipment 1 $ 379,181 $ 348,749 $ 30,432 9 % Average rental equipment on rent $ 245,641 $ 235,189 $ 10,452 4 % Average monthly total yield 2 2.63 % 2.69 % (2 )% Average utilization 3 64.8 % 67.4 % (4 )% Average monthly rental rate 4 4.07 % 3.98 % 2 % Period end rental equipment 1 $ 392,916 $ 363,892 $ 29,024 8 % Period end utilization 3 65.2 % 66.9 % (2 )% 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. nm = Not meaningful 31 TRS-RenTelco’s gross profit for the nine months ended September 30, 2022 increased $4.0 million, or 9%, to $48.8 million. For the nine months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $5.7 million, or 7%, and depreciation expense increased $1.4 million, or 4%, resulting in a 9% increase in gross profit on rental revenues to $37.7 million. As a percentage of rental revenues, depreciation was 41% and 42% in 2022 and 2021, respectively, and other direct costs were 17% in 2022 and 2021, which resulted in a gross margin percentage of 42% and 41% in 2022 and 2021, respectively. The rental revenues increase was due to 4% higher average rental equipment on rent and 2% higher average monthly rental rates in 2022 as compared to 2021. The higher rental rates were reflective of higher rates for both general purpose and telecommunication equipment on rent compared to the prior year. • Gross Profit on Sales – Sales revenues increased $1.2 million, or 8%, to $15.8 million in 2022. Gross profit on sales increased $0.6 million, or 7%, to $9.4 million with a gross margin percentage of 60% in 2022, unchanged from 2021. Sales occur as a normal part of TRS-RenTelco’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter depending on customer requirements and related mix of equipment sold, equipment availability and funding. For the nine months ended September 30, 2022, selling and administrative expenses increased $1.5 million, or 8%, to $19.9 million, primarily due to increased employee salaries and benefit costs and higher allocated corporate expenses. 32 Adler Tanks For the nine months ended September 30, 2022, Adler Tanks’ total revenues increased $10.2 million, or 17%, to $70.2 million compared to the same period in 2021, primarily due to higher rental and rental related services revenues. Higher gross profit on rental and rental related services, partly offset by higher selling and administrative expenses, resulted in a $5.6 million increase in pre-tax income to $9.4 million for the nine months ended September 30, 2022, compared to the same period in 2021. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Adler Tanks – Nine Months Ended 9/30/22 compared to Nine Months Ended 9/30/21 (Unaudited) (dollar amounts in thousands) Nine Months Ended September 30, Increase (Decrease) 2022 2021 $ % Revenues Rental $ 47,638 $ 40,479 $ 7,159 18 % Rental related services 19,221 16,995 2,226 13 % Rental operations 66,859 57,474 9,385 16 % Sales 2,235 2,161 74 3 % Other 1,082 316 766 nm Total revenues 70,176 59,951 10,225 17 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 11,996 12,350 (354 ) (3 )% Rental related services 14,851 13,791 1,060 8 % Other 9,783 8,120 1,663 20 % Total direct costs of rental operations 36,630 34,261 2,369 7 % Costs of sales 1,613 1,523 90 6 % Total costs of revenues 38,243 35,784 2,459 7 % Gross Profit Rental 25,859 20,009 5,850 29 % Rental related services 4,370 3,204 1,166 36 % Rental operations 30,229 23,213 7,016 30 % Sales 622 638 (16 ) (3 )% Other 1,082 316 766 nm Total gross profit 31,933 24,167 7,766 32 % Selling and administrative expenses 20,642 18,853 1,789 9 % Income from operations 11,291 5,314 5,977 112 % Interest expense allocation (1,941 ) (1,560 ) 381 24 % Pre-tax income $ 9,350 $ 3,754 $ 5,596 149 % Other Selected Information Adjusted EBITDA $ 25,520 $ 20,144 $ 5,376 27 % Average rental equipment 1 $ 307,731 $ 312,928 $ (5,197 ) (2 )% Average rental equipment on rent $ 159,132 $ 137,797 $ 21,335 15 % Average monthly total yield 2 1.72 % 1.44 % 19 % Average utilization 3 51.7 % 44.0 % 17 % Average monthly rental rate 4 3.33 % 3.26 % 2 % Period end rental equipment 1 $ 307,430 $ 310,691 $ (3,261 ) (1 )% Period end utilization 3 58.3 % 50.4 % 16 % 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period . nm = Not meaningful 33 Adler Tanks’ gross profit for the nine months ended September 30, 2022 increased $7.8 million, or 32%, to $31.9 million. For the nine months ended September 30, 2022 compared to the same period in 2021: • Gross Profit on Rental Revenues – Rental revenues increased $7.2 million, or 18%, due to 15% higher average rental equipment on rent and 2% higher average monthly rental rates in 2022 compared to 2021. Stronger business activity levels in multiple geographic and market segments resulted in increased rental revenues when compared to 2021. As a percentage of rental revenues, depreciation was 25% in 2022 and 31% in 2021, and other direct costs were 21% and 20% in 2022 and 2021, respectively, which resulted in gross margin percentages of 54% and 49% in 2022 and 2021, respectively. The higher rental revenues and rental margins resulted in a 29% increase in gross profit on rental revenues to $25.9 million in 2022. • Gross Profit on Rental Related Services – Rental related services revenues increased $2.2 million, or 13%, to $19.2 million compared to 2021. Higher rental related services revenues and higher gross margin percentage of 23% in 2022, compared to 19% in 2021, resulted in rental related services gross profit increasing 36% to $4.4 million in 2022. For the nine months ended September 30, 2022, selling and administrative expenses increased 9% to $20.6 million compared to the same period in 2021, primarily due to increased employee salaries and benefit costs and higher allocated corporate expenses. 34 Adjusted EBITDA To supplement the Company’s financial data presented on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”), the Company presents “Adjusted EBITDA”, which is defined by the Company as net income before interest expense, provision for income taxes, depreciation, amortization and share-based compensation. The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the Company. Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, compliance with financial covenants in the Company’s revolving lines of credit and senior notes and the Company’s ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including share-based compensation, is useful in measuring the Company’s cash available for operations and performance of the Company. Because management finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non−GAAP measures used by other companies. Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include share-based compensation charges. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison. The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation. Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance. Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP. Reconciliation of Net Income to Adjusted EBITDA (dollar amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, Twelve Months Ended September 30, 2022 2021 2022 2021 2022 2021 Net income $ 30,567 $ 23,252 $ 75,497 $ 61,258 $ 103,944 $ 92,433 Provision for income taxes 10,365 9,350 23,857 20,797 35,111 28,931 Interest expense 4,177 3,168 9,998 7,208 13,245 9,191 Depreciation and amortization 27,917 28,488 83,272 79,047 110,920 102,441 EBITDA 73,026 64,258 192,624 168,310 263,220 232,996 Share-based compensation 1,694 1,705 5,106 5,302 7,470 5,957 Adjusted EBITDA 1 $ 74,720 $ 65,963 $ 197,730 $ 173,612 $ 270,690 $ 238,953 Adjusted EBITDA margin 2 37 % 38 % 38 % 39 % 39 % 41 % 35 Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities (dollar amounts in thousands) Three Months Ended September 30, Nine Months Ended September 30, Twelve Months Ended September 30, 2022 2021 2022 2021 2022 2021 Adjusted EBITDA 1 $ 74,720 $ 65,963 $ 197,730 $ 173,612 $ 270,690 $ 238,953 Interest paid (3,161 ) (2,490 ) (8,982 ) (6,477 ) (12,831 ) (8,698 ) Income taxes paid, net of refunds received (7,807 ) (1,084 ) (24,885 ) (8,074 ) (25,898 ) (18,273 ) Gain on sale of used rental equipment (10,612 ) (5,918 ) (26,705 ) (17,788 ) (34,358 ) (23,007 ) Foreign currency exchange loss (gain) 236 128 404 185 429 (82 ) Amortization of debt issuance costs 4 5 13 11 17 14 Change in certain assets and liabilities: Accounts receivable, net (22,630 ) (27,922 ) (30,460 ) (33,278 ) (21,128 ) (27,161 ) Prepaid expenses and other assets (6,458 ) (2,024 ) (17,313 ) (11,409 ) (12,720 ) (6,288 ) Accounts payable and other liabilities 12,399 (1,023 ) 10,097 19,377 6,201 22,248 Deferred income 14,564 12,670 33,399 20,128 22,353 7,548 Net cash provided by operating activities $ 51,255 $ 38,305 $ 133,298 $ 136,287 $ 192,755 $ 185,254 1. Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, depreciation, amortization and share-based compensation. 2. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenues for the period. Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, the Note Purchase Agreement, Series C Senior Notes, Series D Senior Notes and Series E Senior Notes (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A). These instruments contain financial covenants requiring the Company to not: • Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Facility and the Note Purchase Agreement (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A)) of Adjusted EBITDA (as defined in the Credit Facility and the Note Purchase Agreement) to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At September 30, 2022, the actual ratio was 4.14 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 September 30, 2022, the actual ratio was 1.55 to 1. At September 30, 2022, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although, significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. Liquidity and Capital Resources The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company for the nine months ended September 30, 2022 compared to the same period in 2021 are summarized as follows: Cash Flows from Operating Activities: The Company’s operations provided net cash of $133.3 million in 2022, compared to $136.3 million in 2021. The 2% decrease in net cash provided by operating activities was primarily attributable to lower deferred income taxes and increased gain on sale of used rental equipment, partly offset by higher deferred income. Cash Flows from Investing Activities: Net cash used in investing activities was $86.8 million in 2022, compared to $335.4 million in 2021. The $248.6 million decrease was primarily due to the $285.6 million acquisition of Design Space and Kitchens To Go in 2021, partly offset by $40.0 million higher purchases of rental equipment in 2022. Cash Flows from Financing Activities: Net cash used in financing activities was $46.4 million in 2022, compared to net cash provided of $200.3 million in 2021. The change in net cash during 2022 was primarily attributable to reduced borrowings under bank lines of credit and note purchase agreements as the borrowings were primarily related to the funding of the Design Space and Kitchens to Go acquisitions. Significant capital expenditures are required to maintain and grow the Company’s rental assets. During the last three years, the Company has financed its working capital and capital expenditure requirements through cash flow from operations, proceeds from the sale of rental equipment and from borrowings. Sales occur routinely as a normal part of the Company’s rental business. However, these 36 sales can fluctuate from period to period depending on customer requirements and funding. Although the net proceeds received from sales may fluctuate from period to period, the Company believes its liquidity will not be adversely impacted from lower sales in any given year because it believes it has the ability to increase its bank borrowings and conserve its cash in the future by reducing the amount of cash it uses to purchase rental equipment, pay dividends, or repurchase the Company’s common stock. Unsecured Revolving Lines of Credit On July 15 th , 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 $12.0 million Treasury Sweep Note due March 31, 2025, the Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as of April 21, 2011 (as amended): (i) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015 and due 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 September 30, 2022, 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 $259.5 million was outstanding and had capacity to borrow up to an additional $390.5 million. The Credit Facility contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Credit Facility): • Permit the Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter to be less than 2.50 to 1. At September 30, 2022, the actual ratio was 4.14 to 1. • Permit the Consolidated Leverage Ratio at any time during any period of four consecutive fiscal quarters to be greater than 2.75 to 1. At September 30, 2022, the actual ratio was 1.55 to 1. At September 30, 2022, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. Note Purchase and Private Shelf Agreement On March 31, 2020, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series B and Series C Notes previously issued pursuant to the Prior NPA, among the Company and the other parties to the Note Purchase Agreement. The Note Purchase Agreement amended and restated, and superseded in its entirety, the Prior NPA. Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 3.68% Series B Senior Notes, which were repaid on March 17, 2021, and (ii) $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes due November 5, 2022, to which the terms of the Note Purchase Agreement shall apply. In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf Notes”) in the aggregate principal amount of (x) $250 million minus (y) the amount of other notes (such as the Series C Senior Notes, Series D Senior Notes and Series E Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes may be issued and sold from 37 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. 3.84% Senior Notes Due in 2022 On November 5, 2015, the Company issued and sold to the purchasers a $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes (the “Series C Senior Notes”) pursuant to the terms of the Prior NPA. The Series C Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 3.84% per annum and mature on November 5, 2022. Interest on the Series C Senior Notes is payable semi-annually beginning on May 5, 2016 and continuing thereafter on November 5 and May 5 of each year until maturity. The principal balance is due when the notes mature on November 5, 2022. The full net proceeds from the Series C Senior Notes were used to reduce the outstanding balance on the Company’s revolving credit line. At September 30, 2022, the principal balance outstanding under the Series C Senior Notes was $60.0 million. 2.57% Senior Notes Due in 2028 On March 17, 2021, the Company issued and sold to the purchasers $40 million aggregate principal amount of 2.57% Series D Notes (the “Series D Senior Notes”) pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto. The Series D Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.57% per annum and mature on March 17, 2028. Interest on the Series D Senior Notes is payable semi-annually beginning on September 17, 2021 and continuing thereafter on March 17 and September 17 of each year until maturity. The principal balance is due when the notes mature on March 17, 2028. The full net proceeds from the Series D Senior Notes were used to pay off the Company’s $40 million Series B Senior Notes. At September 30, 2022, the principal balance outstanding under the Series D Senior Notes was $40.0 million. 2.35% Senior Notes Due in 2026 On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto. The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026. Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of each year until maturity. The principal balance is due when the notes mature on June 16, 2026. The full net proceeds from the Series E Senior Notes were used to pay down the Company’s credit facility. At September 30, 2022, the principal balance outstanding under the Series E Senior Notes was $60.0 million. Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series C Senior Notes, Series D Senior Notes and Series E Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement): • Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At September 30, 2022, the actual ratio was 4.14 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 September 30, 2022, the actual ratio was 1.55 to 1. At September 30, 2022, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. 38 Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit and issue senior notes adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment. Furthermore, the Company believes it has the financial resources to weather any short-term impacts of COVID-19. However, the Company has limited insight into the extent to which its business may be impacted by COVID-19, and there are many uncertainties, including how long and how severely the Company will be impacted. An extended and severe impact may materially and adversely affect the Company’s future operations, financial position and liquidity. Common Stock Purchase The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares of the Company's outstanding common stock (the “Repurchase Plan”). The amount and time of the specific repurchases are subject to prevailing market conditions, applicable legal requirements and other factors, including management’s discretion. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued shares of common stock. There can be no assurance that any authorized shares will be repurchased and the Repurchase Plan may be modified, extended or terminated by the Company’s Board of Directors at any time. There were no shares repurchased in the nine months ended September 30, 2022 and 2021. As of September 30, 2022, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan. Contractual Obligations and Commitments We believe that our contractual obligations and commitments have not changed materially from those included in our 2021 Annual Report. Critical Accounting Estimates There were no material changes in our judgments and assumptions associated with the development of our critical accounting estimates during the period ended September 30, 2022. Refer to our 2021 Annual Report for a discussion of our critical accounting policies and estimates. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the Company’s market risk exposures from those reported in our 2021 Annual Report.