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 June 30, 2023, and the related condensed consolidated statements of income, comprehensive income, shareholders’ equity, for the three-month and six-month periods ended June 30, 2023 and 2022, cash flows for the six-month periods ended June 30, 2023 and 2022 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, 2022, 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 22, 2023, 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, 2022, 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 July 27, 2023 3 MCGRATH RENTCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2023 2022 2023 2022 Revenues Rental $ 117,840 $ 94,667 $ 228,087 $ 184,717 Rental related services 33,857 22,046 60,989 41,078 Rental operations 151,697 116,713 289,076 225,795 Sales 47,801 35,870 71,461 51,089 Other 3,532 785 6,211 1,537 Total revenues 203,030 153,368 366,748 278,421 Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 22,597 20,082 44,430 39,944 Rental related services 23,825 15,780 43,093 29,540 Other 30,560 29,516 61,695 54,370 Total direct costs of rental operations 76,982 65,378 149,218 123,854 Costs of sales 31,438 21,034 45,553 29,576 Total costs of revenues 108,420 86,412 194,771 153,430 Gross profit 94,610 66,956 171,977 124,991 Selling and administrative expenses 47,026 33,809 104,524 66,414 Income from operations 47,584 33,147 67,453 58,577 Other (expense) income: Interest expense ( 9,945 ) ( 2,426 ) ( 17,409 ) ( 4,702 ) Foreign currency exchange (loss) gain ( 18 ) ( 181 ) 208 ( 168 ) Income from continuing operations before provision for income taxes 37,621 30,540 50,252 53,707 Provision for income taxes from continuing operations 9,669 6,996 10,782 12,505 Income from continuing operations 27,952 23,544 39,470 41,202 Discontinued operations: Income from discontinued operations before provision for income taxes — 3,327 1,709 4,715 Provision for income taxes from discontinued operations — 734 453 987 Gain on sale of discontinued operations, net of tax 2,630 — 61,513 — Income from discontinued operations 2,630 2,593 62,769 3,728 Net income $ 30,582 $ 26,137 $ 102,239 $ 44,930 Earnings per share from continuing operations: Basic $ 1.14 $ 0.96 $ 1.61 $ 1.68 Diluted $ 1.14 $ 0.96 $ 1.61 $ 1.68 Earnings per share from discontinued operations: Basic $ 0.11 $ 0.11 $ 2.57 $ 0.15 Diluted $ 0.11 $ 0.11 $ 2.56 $ 0.15 Earnings per share: Basic $ 1.25 $ 1.07 $ 4.18 $ 1.83 Diluted $ 1.25 $ 1.07 $ 4.17 $ 1.83 Shares used in per share calculation: Basic 24,479 24,360 24,448 24,323 Diluted 24,512 24,509 24,527 24,522 Cash dividends declared per share $ 0.465 $ 0.455 $ 0.930 $ 0.910 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 June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net income $ 30,582 $ 26,137 $ 102,239 $ 44,930 Other comprehensive income: Foreign currency translation adjustment, net of tax impact 43 61 25 64 Comprehensive income $ 30,625 $ 26,198 $ 102,264 $ 44,994 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 McGrath RentCorp CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) June 30, December 31, (in thousands) 2023 2022 Assets Cash $ 2,205 $ 957 Accounts receivable, net of allowance for credit losses of $ 2,600 in 2023 and $ 2,300 in 2022 191,676 169,937 Rental equipment, at cost: Relocatable modular buildings 1,457,984 1,123,268 Electronic test equipment 390,832 398,267 1,848,816 1,521,535 Less: accumulated depreciation ( 553,166 ) ( 531,218 ) Rental equipment, net 1,295,650 990,317 Property, plant and equipment, net 146,624 138,713 Prepaid expenses and other assets 81,967 69,837 Intangible assets, net 65,607 35,431 Goodwill 325,354 106,403 Assets of discontinued operations — 196,249 Total assets $ 2,109,083 $ 1,707,844 Liabilities and Shareholders' Equity Liabilities: Notes payable $ 672,631 $ 413,742 Accounts payable and accrued liabilities 219,611 151,208 Deferred income 106,523 82,417 Deferred income taxes, net 229,749 203,361 Liabilities of discontinued operations — 53,171 Total liabilities 1,228,514 903,899 Shareholders’ equity: Common stock, no par value - Authorized 40,000 shares Issued and outstanding - 24,485 shares as of June 30, 2023 and 24,388 shares as of December 31, 2022 107,362 110,080 Retained earnings 773,260 693,943 Accumulated other comprehensive loss ( 53 ) ( 78 ) Total shareholders’ equity 880,569 803,945 Total liabilities and shareholders’ equity $ 2,109,083 $ 1,707,844 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 Loss Equity Balance at December 31, 2022 24,388 $ 110,080 $ 693,943 $ ( 78 ) $ 803,945 Net income — — 71,657 — 71,657 Share-based compensation — 1,493 — — 1,493 Common stock issued under stock plans, net of shares withheld for employee taxes 78 — — — — Taxes paid related to net share settlement of stock awards — ( 6,086 ) — — ( 6,086 ) Dividends accrued of $ 0.465 per share — — ( 11,453 ) — ( 11,453 ) Other comprehensive loss — — — ( 18 ) ( 18 ) Balance at March 31, 2023 24,466 $ 105,487 $ 754,147 $ ( 96 ) $ 859,538 Net income — — 30,582 — 30,582 Share-based compensation — 1,889 — — 1,889 Common stock issued under stock plans, net of shares withheld for employee taxes 19 — — — — Taxes paid related to net share settlement of stock awards — ( 14 ) — — ( 14 ) Dividends accrued of $ 0.465 per share — — ( 11,469 ) — ( 11,469 ) Other comprehensive income — — — 43 43 Balance at June 30, 2023 24,485 $ 107,362 $ 773,260 $ ( 53 ) $ 880,569 The accompanying notes are an integral part of these condensed consolidated financial statements. Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ (in thousands, except per share amounts) Shares Amount Earnings 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 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 McGrath RentCorp CONDENSED Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (in thousands) 2023 2022 Cash Flows from Operating Activities: Net income $ 102,239 $ 44,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 54,958 55,355 Deferred income taxes ( 39,486 ) ( 5,815 ) Provision for credit losses 1,400 49 Share-based compensation 3,382 3,412 Gain on sale of discontinued operations ( 61,513 ) — Gain on sale of used rental equipment ( 14,250 ) ( 16,093 ) Foreign currency exchange (gain) loss ( 208 ) 168 Amortization of debt issuance costs 4 9 Change in: Accounts receivable ( 1,116 ) ( 7,879 ) Prepaid expenses and other assets ( 8,504 ) ( 10,855 ) Accounts payable and accrued liabilities 25,255 ( 73 ) Deferred income 9,290 18,835 Net cash provided by operating activities 71,451 82,043 Cash Flows from Investing Activities: Proceeds from sale of discontinued operations 268,012 — Purchases of rental equipment ( 128,088 ) ( 94,820 ) Purchases of property, plant and equipment ( 11,229 ) ( 6,594 ) Cash paid for acquisition of businesses ( 456,312 ) — Proceeds from sales of used rental equipment 27,410 31,830 Net cash used in investing activities ( 300,207 ) ( 69,584 ) Cash Flows from Financing Activities: Net borrowings under bank lines of credit 258,885 15,000 Taxes paid related to net share settlement of stock awards ( 6,100 ) ( 6,128 ) Payment of dividends ( 22,782 ) ( 22,083 ) Net cash provided by (used in) financing activities 230,003 ( 13,211 ) Effect of foreign currency exchange rate changes on cash 1 135 Net increase (decrease) in cash 1,248 ( 617 ) Cash balance, beginning of period 957 1,491 Cash balance, end of period $ 2,205 $ 874 Supplemental Disclosure of Cash Flow Information: Interest paid, during the period $ 16,802 $ 5,821 Net income taxes paid, during the period $ 6,931 $ 17,078 Dividends accrued during the period, not yet paid $ 11,937 $ 11,009 Rental equipment acquisitions, not yet paid $ 7,612 $ 6,906 The accompanying notes are an integral part of these condensed consolidated financial statements. 8 MCGRATH RENTCORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2023 NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION The condensed consolidated financial statements for the six months ended June 30, 2023 and 2022 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 six months ended June 30, 2023, 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 22, 2023 for the year ended December 31, 2022 (the “2022 Annual Report”). NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS On March 27, 2023, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2023-01, Leases (Topic 842): Common Control Arrangements, which requires a lessee involved in a common control lease agreement to amortize leasehold improvements over the useful life of the improvements to the common control group, regardless of the lease term, as long as the lessee controls the use of the underlying asset. If the lessor obtains the right to control the use of the underlying asset through a lease with another entity not within the same control group, the amortization period cannot exceed the period of the common control group. Furthermore, the ASU requires the accounting for a transfer between entities under common control through an adjustment to equity when the lessee no longer controls the use of the underlying asset. The ASU is effective for fiscal years beginning after December 15, 2023. The Company does not expect the adoption of this ASU to have a material impact on the Company's consolidated financial statements. NOTE 3. IMPLEMENTED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2023, the Company adopted the 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. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements. NOTE 4. ACQUISITIONS On February 1, 2023, the Company completed the acquisition of Vesta Housing Solutions Holdings, Inc. (“Vesta Modular”), a portfolio company of Kinderhook Industries, for $ 437.2 million cash consideration on the closing date, which included certain adjustments, including net working capital and certain qualified capital expenditures. In connection with the acquisition, the Company purchased a representation and warranty insurance policy to provide certain recourse in the event of breaches of representations and warranties of Vesta Modular and the seller of Vesta Modular under the stock purchase agreement. Vesta Modular is a leading provider of temporary and permanent modular space solutions serving customers between its modular leasing and modular construction divisions. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805, Business Combinations , using the purchase method of accounting. Under the purchase method of accounting, the total purchase price is assigned to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date. The excess of the purchase price over those fair values is recorded as goodwill. The financial results of Vesta Modular were a part of the Mobile Modular segment since February 1, 2023, including $ 9.5 million of transaction costs. On March 1, 2023, the Company completed the purchase of assets of Jerald R. Brekke, Inc., DBA Brekke Storage ("Brekke Storage"), for a total purchase price of $ 16.4 million. Brekke Storage is a regional provider of portable storage solutions in the Colorado market. The acquisition expanded the Mobile Modular Portable Storage fleet by approximately 2,700 units and provided a new regional operation to serve the Colorado market. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in 9 ASC 805 using the purchase method of accounting. The financial results of Brekke Storage were a part of the Mobile Modular segment since March 1, 2023, including $ 0.2 million of transaction costs. On April 1, 2023, the Company completed the purchase of assets of Dixie Temporary Storage, LLC ("Dixie Storage"), for a purchase price of $ 4.9 million. Dixie Storage is a regional provider of portable storage solutions in the South Carolina market and is highly complementary to the Company's portable storage business segment. The acquisition expanded the Mobile Modular Portable Storage fleet by approximately 800 units and provided a new regional operation to serve the South Carolina market. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805, Business Combinations , using the purchase method of accounting. The financial results of Dixie Storage were a part of the Mobile Modular segment since April 1, 2023, including $ 0.1 million of transaction costs. The following tables summarize the preliminary purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Vesta Modular, Brekke Storage and Dixie Storage acquisitions, with excess amounts allocated to goodwill. The estimated fair values of the assets acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses. Accordingly, the Company has made provisional estimates for the assets acquired and liabilities assumed. The valuation of intangible assets acquired is based on certain valuation assumptions including cash flow projections, discount rates, contributory asset charges and other valuation model inputs. The valuation of tangible long-lived assets acquired is dependent upon various analyses including an analysis of the condition and estimated remaining economic lives of the assets acquired. Vesta Modular: (dollar amounts in thousands) Rental equipment $ 226,753 Intangible assets: Goodwill 213,313 Customer relationships 26,000 Non-compete 7,100 Trade name 800 Cash 11 Accounts receivable 22,401 Property, plant and equipment 1,437 Prepaid expenses and other assets 3,550 Accounts payable and accrued liabilities ( 27,558 ) Deferred income ( 14,273 ) Deferred income taxes ( 22,324 ) Total purchase price $ 437,210 Brekke Storage: (dollar amounts in thousands) Rental equipment $ 10,798 Intangible assets: Goodwill 4,083 Customer relationships 949 Non-compete 59 Property, plant and equipment 875 Deferred income ( 382 ) Total purchase price $ 16,382 Dixie Storage: (dollar amounts in thousands) Rental equipment $ 2,758 Intangible assets: Goodwill 1,555 Customer relationships 259 Non-compete 22 Property, plant and equipment 318 Deferred income ( 161 ) Total purchase price $ 4,751 10 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 $ 219.0 million reflects the strategic fit of Vesta Modular, Brekke Storage and Dixie Storage with the Company’s modular and portable storage business operations. The Company amortizes the acquired customer relationships over their expected useful lives of 11 years for Vesta Modular, 8 years for Brekke Storage and 9 years for Dixie Storage. The expected useful life for the non-compete agreements is 5 years. The trade name intangible acquired from the Vesta Modular acquisition will be amortized over it's useful life of nine months . Goodwill is expected to have an indefinite life and will be subject to future impairment testing. The goodwill is deductible for tax purposes over 15 years. The following unaudited pro forma financial information shows the combined results of continuing operations of the Company and Vesta Modular as if the acquisition occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of the purchased intangible assets and depreciation expense of acquired rental equipment valuation step up, interest expense on the debt incurred to finance the acquisitions. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the combined federal and state statutory rate of 26.5 % on the acquisitions’ combined net income. The pro forma results for the six months ended June 30, 2023 and 2022, have been adjusted to include transaction related costs. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of the future operations or the results that would have occurred had the acquisitions taken place in the periods noted below: (Unaudited) Six months ended June 30, (dollar amounts in thousands, except for per share amounts) 2023 2022 Pro-forma total revenues $ 374,391 $ 339,638 Pro-forma net income $ 39,174 $ 34,781 Pro-forma basic earnings per share $ 1.60 $ 1.43 Pro-forma diluted earnings per share $ 1.60 $ 1.42 Vesta Modular Actual total revenues $ 47,257 Actual net income $ 9,016 Actual basic earnings per share $ 0.37 Actual diluted earnings per share $ 0.37 NOTE 5. DISCONTINUED OPERATIONS On February 1, 2023, the Company completed the sale of Adler Tank Rentals, LLC to Ironclad Environmental Solutions, Inc. ("Ironclad"), a portfolio company of Kinderhook Industries, for a sale price of $ 268.0 million, which included an additional payment of $ 3.6 million for the final net working capital purchase price adjustment during the quarter ended June 30, 2023. The total transaction costs incurred from the divestiture was $ 8.9 million, with $ 6.7 million incurred during the six months ended June 2023, and $ 2.2 million incurred during the year ended December 31, 2022. The divestiture of the Company's Adler Tanks business represents the Company's strategic shift to concentrate its operations on its core modular and storage businesses. The sale price was subject to certain adjustments, including net working capital, certain qualified capital expenditures and certain transaction expenses to be borne by the Company. In connection with the sale, the Company entered into a number of ancillary agreements, including an escrow agreement associated with net working capital adjustments, a restricted covenant agreement, a transition services agreement, and a number of leases whereby Ironclad or one of its affiliates would be a lessee to certain properties owned by the Company that the Adler Tanks business would continue to utilize after the sale. These ancillary agreements do not provide for continued involvement by the Company in Adler Tanks. In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations and ASC 360 , Property, Plant and Equipment, the Company determined that the criteria for the presentation of discontinued operations and held-for-sale, respectively, were met during the first quarter of 2023. The following table presents the results of Adler Tanks as reported in income from discontinued operations within the condensed consolidated statements of income for the six months ended June 30, 2023 and 2022: 11 (dollar amounts in thousands) Six Months Ended June 30, 2023 2022 Revenues Rental $ 6,520 $ 30,148 Rental related services 2,584 12,058 Rental operations 9,104 42,206 Sales 269 1,258 Other 65 519 Total revenues 9,438 43,983 Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 1,325 7,994 Rental related services 2,020 9,456 Other 1,270 6,278 Total direct costs of rental operations 4,614 23,728 Costs of sales 159 920 Total costs of revenues 4,773 24,648 Gross Profit Rental 3,926 15,876 Rental related services 564 2,602 Rental operations 4,490 18,478 Sales 110 338 Other 65 519 Total gross profit 4,665 19,335 Selling and administrative expenses 2,583 13,501 Income from operations 2,082 5,834 Interest expense allocation ( 374 ) ( 1,119 ) Income from discontinued operations before provision for income taxes 1,709 4,715 Provision for income taxes from discontinued operations 453 987 Income from discontinued operations $ 1,256 $ 3,728 Other Selected Information Adjusted EBITDA $ 3,682 $ 15,327 The following table presents the carrying value of the divested business' assets and liabilities as presented within assets and liabilities of discontinued operations on the condensed consolidated balance sheets as of December 31, 2022: December 31, (in thousands) 2022 Assets Accounts receivable, net of allowance for credit losses of $ 450 $ 20,086 Rental equipment, net 137,738 Property, plant and equipment, net 6,632 Prepaid expenses and other assets 191 Intangible assets, net 5,700 Goodwill 25,902 Total assets of discontinued operations $ 196,249 Liabilities Accounts payable and accrued liabilities $ 9,621 Deferred income taxes, net 43,550 Total liabilities of discontinued operations $ 53,171 For the six months ended June 30, 2023 and 2022, significant operating and investing items related to Adler Tanks were as follows: 12 June 30, June 30, (in thousands) 2023 2022 Operating activities of discontinued operations: Depreciation and amortization $ 1,457 $ 8,864 Gain on sale of used rental equipment ( 111 ) ( 338 ) Investing activities of discontinued operations: Proceeds from sales of used rental equipment 269 1,258 Purchases of rental equipment ( 25 ) ( 1,410 ) Purchases of property, plant and equipment ( 40 ) ( 83 ) The following table presents the reconciliation of income from discontinued operations to Adjusted EBITDA for the six months ended June 30, 2023 and 2022: June 30, June 30, (in thousands) 2023 2022 Income from discontinued operations $ 1,256 $ 3,728 Provision for income taxes from discontinued operations 453 987 Interest expense 374 1,119 Depreciation and amortization 1,457 8,864 EBITDA 3,540 14,698 Share-based compensation 118 629 Transaction costs 24 — Adjusted EBITDA from discontinued operations $ 3,682 $ 15,327 NOTE 6. 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. Revenue from contracts that satisfies the criteria for over time recognition is recognized as work is performed by using the ratio of costs incurred to estimated total contract costs for each contract. The majority of revenue for these contracts is derived from long-term projects which typically span multiple quarters . The timing of revenue recognition, billings, and cash collections results in billed contract receivables and contract assets on the Company's consolidated balance sheet. In the Company’s contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Billings can occur subsequent to revenue recognition, resulting in contract assets, or in advance, resulting in contract liabilities. These contract assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period . The contract liabilities included in Deferred income on the Company’s consolidated balance sheet totaled $ 49.0 million and $ 27.4 million at June 30, 2023 and December 31, 2022. Sales revenues totaling $ 6.6 million and $ 11.0 million were recognized during the three and six months ended June 30, 2023, respectively, which were included in the contract liability balance at December 31, 2022. For certain modular building sales, the customer retains a small portion of the contract price until full completion of the contract, or revenue is recognizable prior to customer billing, which results in revenue earned in excess of billings. These unbilled contract assets are included in Accounts receivable on the Company’s consolidated balance sheet and totaled $ 5.7 million and $ 0.6 million at June 30, 2023 and December 31, 2022, respectively. 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 13 considered a significant financing component because the payments are used to meet working capital needs during the contract and to protect the Company from the customer failing to adequately complete their obligations under the contract. Lease Revenues Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease for all operating segments. Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. Rental related services revenues are primarily associated with relocatable modular buildings. For modular building leases, rental related services revenues for modifications, delivery, installation, dismantle and return delivery are lease related because the payments are considered minimum lease payments that are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line basis over the term of the lease. Certain leases are accounted for as 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. As of the six months ended June 30, 2023, the Company’s future minimum lease payments to be received under non-cancelable finance leases was $ 4.4 million. Of the total investment in sales-type leases, non-current future minimum lease payments are expected to be $ 1.1 million in 2024, $ 0.7 million in 2025, and $ 0.2 million in 2026. The Company’s assessment of current expected losses on these receivables was not material and no credit loss expense was provided as of the six months ended June 30, 2023. Other revenues include interest income on finance leases and rental income on facility leases. In the three and six months ended June 30, 2023, the Company’s lease revenues were $ 140.8 million and $ 277.4 million, respectively, consisting of $ 139.7 million and $ 275.8 million of operating lease revenues, respectively, and $ 1.1 million and $ 1.6 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 six months ended June 30, 2023 include $ 1.0 million and $ 1.4 million of sales revenues, respectively, and $ 0.1 million and $ 0.2 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 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. 14 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 six months ended June 30, 2023 and 2022: (in thousands) Mobile Modular TRS- RenTelco Enviroplex Adler Tanks (Discontinued) Consolidated Three Months Ended June 30, 2023 Leasing $ 110,419 $ 30,337 $ — $ — $ 140,756 Non-lease: Rental related services 13,908 563 — — 14,471 Sales 39,356 6,581 923 — 46,860 Other 579 364 — — 943 Total non-lease 53,843 7,508 923 — 62,274 Total revenues $ 164,262 $ 37,845 $ 923 $ — $ 203,030 2022 Leasing $ 79,671 $ 30,909 $ — $ 16,244 $ 126,824 Non-lease: Rental related services 6,883 683 — 6,636 14,202 Sales 24,816 5,462 4,650 601 35,529 Other 7 287 — 182 476 Total non-lease 31,706 6,432 4,650 7,419 50,207 Total revenues $ 111,377 $ 37,341 $ 4,650 $ 23,663 $ 177,031 Six Months Ended June 30, 2023 Leasing $ 210,078 $ 60,677 $ — $ 6,612 $ 277,367 Non-lease: Rental related services 22,882 1,289 — 2,557 26,728 Sales 56,961 11,204 1,864 269 70,298 Other 998 795 — — 1,793 Total non-lease 80,841 13,288 1,864 2,826 98,819 Total revenues $ 290,919 $ 73,965 $ 1,864 $ 9,438 $ 376,186 2022 Leasing $ 154,265 $ 60,319 $ — $ 30,723 $ 245,307 Non-lease: Rental related services 12,533 1,235 — 11,821 25,589 Sales 35,191 8,741 5,567 1,258 50,757 Other 33 537 — 181 751 Total non-lease 47,757 10,513 5,567 13,260 77,097 Total revenues $ 202,022 $ 70,832 $ 5,567 $ 43,983 $ 322,404 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. 15 NOTE 7. 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 June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Weighted-average number of shares of common stock for calculating basic earnings per share 24,479 24,360 24,448 24,323 Effect of potentially dilutive securities from equity-based compensation 33 149 79 199 Weighted-average number of shares of common stock for calculating diluted earnings per share 24,512 24,509 24,527 24,522 There were 697 anti-dilutive securities excluded from the computation of diluted earnings per share for the six months ended June 30, 2023, and 7,315 anti-dilutive securities excluded from the computation of diluted earnings per share for the same period in 2022. 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 six months ended June 30, 2023 and 2022. As of June 30, 2023, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan. NOTE 8. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill were as follows: (dollar amounts in thousands) Mobile Modular Adler Tanks (Discontinued) Total Balance at December 31, 2021 $ 106,491 $ 25,902 $ 132,393 Changes to Design Space purchase accounting ( 88 ) — ( 88 ) Balance at December 31, 2022 106,403 25,902 132,305 Goodwill acquired through business combination 218,951 — 218,951 Derecognition of goodwill divested — ( 25,902 ) ( 25,902 ) Balance at June 30, 2023 $ 325,354 $ — $ 325,354 16 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 June 30, 2023 Customer relationships 8 to 11 7.4 $ 68,678 $( 12,852 ) $ 55,826 Non-compete agreements 5 4.0 10,477 ( 2,085 ) 8,392 Trade name 0.75 to 8 4.2 2,000 ( 782 ) 1,218 Total amortizing 81,155 ( 15,719 ) 65,436 Trade name - non-amortizing Indefinite 171 — 171 Total $ 81,326 $( 15,719 ) $ 65,607 December 31, 2022 Customer relationships 8 to 11 6.3 $ 50,284 $( 18,098 ) $ 32,186 Non-compete agreements 5 3.2 3,296 ( 1,159 ) 2,137 Customer backlog — — 1,900 ( 1,900 ) — Trade name 8 6.3 1,200 ( 263 ) 937 Total amortizing 56,680 ( 21,420 ) 35,260 Trade name - non-amortizing Indefinite 5,871 — 5,871 Total $ 62,551 $( 21,420 ) $ 41,131 The Company assesses potential impairment of its goodwill and intangible assets when there is evidence that events or circumstances have occurred that would indicate the recovery of an asset’s carrying value is unlikely. The Company also assesses potential impairment of its goodwill and intangible assets with indefinite lives on an annual basis regardless of whether there is evidence of impairment. If indicators of impairment were to be present in intangible assets used in operations and future discounted cash flows were not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss that would be recognized is the excess of the asset’s carrying value over its fair value. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. The Company last conducted a qualitative analysis of its goodwill and intangible assets in the fourth quarter 2022, with no indicators of impairment. In addition, no impairment triggering events occurred during the six months ended June 30, 2023. 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 six months ended June 30, 2023 and 2022, was $ 5.0 million and $ 3.0 million, respectively. Based on the carrying values at June 30, 2023 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $ 5.3 million for the remainder of fiscal year 2023, $ 9.8 million in 2024 and 2025, $ 9.3 million in 2026, $ 9.1 million in 2027 and $ 7.8 million in 2028. 17 NOTE 9. SEGMENT REPORTING The Company historically operated four reportable segments and divested it's Adler Tanks business segment on February 1, 2023, see Note 5 to the consolidated financial statements for more information on the divestiture of Adler Tanks. The three reportable segments from continuing operations are (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); and (3) 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 2022 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 and TRS-RenTelco based on their pro-rata share of direct revenues. Interest expense is allocated amongst Mobile Modular and TRS-RenTelco 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 six months ended June 30, 2023 and 2022 for the Company’s reportable segments and discontinued operations are shown in the following table: (dollar amounts in thousands) Mobile Modular TRS- RenTelco Enviroplex 1 Adler Tanks (Discontinued) 3 Consolidated Six Months Ended June 30, 2023 Rental revenues $ 170,370 $ 57,717 $ — $ 6,520 $ 234,607 Rental related services revenues 59,442 1,547 — 2,584 63,573 Sales and other revenues 61,107 14,701 1,864 334 78,006 Total revenues 290,919 73,965 1,864 9,438 376,186 Depreciation of rental equipment 19,729 24,701 — 1,325 45,755 Gross profit 140,226 31,503 248 4,665 176,642 Selling and administrative expenses 84,810 16,577 3,137 2,583 107,106 Income (loss) from operations 55,416 14,926 ( 2,889 ) 2,082 69,536 Interest (expense) income allocation ( 14,718 ) ( 3,801 ) 1,110 ( 374 ) ( 17,783 ) Income (loss) before provision for income taxes 40,698 11,333 ( 1,779 ) 1,709 51,961 Adjusted EBITDA 99,269 42,173 ( 2,724 ) 3,682 142,400 Rental equipment acquisitions 105,575 16,906 — — 122,481 Accounts receivable, net (period end) 161,927 26,138 3,611 — 191,676 Rental equipment, at cost (period end) 1,457,984 390,832 — — 1,848,816 Rental equipment, net book value (period end) 1,132,778 162,872 — — 1,295,650 Utilization (period end) 2 78.8 % 58.3 % Average utilization 2 79.4 % 58.7 % 2022 Rental revenues $ 126,487 $ 58,230 $ — $ 30,148 $ 214,865 Rental related services revenues 39,594 1,484 — 12,058 53,136 Sales and other revenues 35,941 11,118 5,567 1,777 54,403 Total revenues 202,022 70,832 5,567 43,983 322,404 Depreciation of rental equipment 15,582 24,362 — 7,994 47,938 Gross profit 92,820 30,826 1,345 19,335 144,326 Selling and administrative expenses 50,447 13,204 2,763 13,501 79,915 Income (loss) from operations 42,373 17,622 ( 1,418 ) 5,834 64,411 Interest (expense) income allocation ( 3,821 ) ( 1,232 ) 351 ( 1,119 ) ( 5,821 ) Income (loss) before provision for income taxes 38,552 16,222 ( 1,067 ) 4,715 58,422 Adjusted EBITDA 66,178 42,781 ( 1,276 ) 15,327 123,010 Rental equipment acquisitions 51,575 42,791 — 1,610 95,976 Accounts receivable, net (period end) 118,865 24,796 6,420 17,248 167,329 Rental equipment, at cost (period end) 1,075,898 389,383 — 309,010 1,774,291 Rental equipment, net book value (period end) 776,003 177,038 — 144,484 1,097,525 Utilization (period end) 2 78.6 % 65.3 % Average utilization 2 77.6 % 64.6 % 1. Gross Enviroplex sales revenues were $ 1,871 and $ 6,423 for the six months ended June 30, 2023 and 2022, respectively. There were $ 7 inter-segment sales to Mobile Modular in the six months ended June 30, 2023 and $ 856 inter-segment sales during the same period in 2022, 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 new equipment inventory. The Average utilization for the period is calculated using the average costs of rental equipment. 3. The financial results of Adler Tanks included in this table are through the date of the business divestiture, which occurred on February 1, 2023. 18 No single customer accounted for more than 10% of total revenues for the six months ended June 30, 2023 and 2022. Revenues from foreign country customers accounted for 3 % and 4 % of the Company’s total revenues for the same periods, respectively. NOTE 10. SUBSEQUENT EVENT On July 1, 2023, the Company completed the purchase of assets of Inland Leasing and Storage ("Inland Leasing"), for a purchase price of $ 3.8 million. Inland Leasing is a regional provider of portable storage solutions in the Colorado market and is highly complementary to the Company's portable storage business segment. The acquisition grew the Mobile Modular Portable Storage fleet by approximately 600 units, which will further support the new regional operation acquired from the Brekke Storage acquisition. The acquisition will be accounted for as a purchase of "assets" in accordance with criteria in ASC 805, Business Combinations. Incremental transaction costs associated with the asset purchase were not significant. 19 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, 2022, as filed with the SEC on February 22, 2023 (the “2022 Annual Report”). In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2022 Annual Report, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date of filing of this Form 10-Q to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law. General The Company, incorporated in 1979, is a leading rental provider of relocatable modular buildings for classroom and office space and electronic test equipment for general purpose and communications needs. The Company’s primary emphasis is on equipment rentals. The Company is comprised of three reportable business segments: (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment segment (“TRS-RenTelco”); and (3) 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 13% of the Company’s total revenues from continuing operations in the six months ended June 30, 2023. Mobile Modular Portable Storage offers portable storage units and high security portable office units for rent, lease and purchase. Vesta Modular was acquired on February 1, 2023, with its results included in the Mobile Modular segment since that date. Brekke Storage was acquired on March 1, 2023, with its results included in the Mobile Modular segment since that date. Dixie Storage was acquired on April 1, 2023, with its results included in the Mobile Modular segment since that date. See Note 4 to the consolidated financial statements for the six months ended June 30, 2023, for more details about the acquisitions. In the six months ended June 30, 2023, Mobile Modular, TRS-RenTelco and Enviroplex contributed 81%, 23% and negative 4% of the Company’s income from continuing operations before provision for taxes (the equivalent of “pretax income”), respectively, compared to 72%, 30% and negative 2% for the same period in 2022. The Company generates its revenues primarily from the rental of its equipment on operating leases and from sales of equipment occurring in the normal course of business. The Company requires significant capital outlay to purchase its rental inventory and recovers its investment through rental and sales revenues. Rental revenues and certain other service revenues negotiated as part of lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the leases. Sales revenues and related costs are recognized upon delivery and installation of the equipment to customers. Sales revenues are less predictable and can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Generally, rental revenues less cash operating costs recover the equipment’s capitalized cost in a short period of time relative to the equipment’s potential rental life and when sold, sale proceeds are usually above its net book value. The Company’s modular revenues (consisting of revenues from Mobile Modular, Mobile Modular Portable Storage, Kitchens To Go and Enviroplex) are derived from rentals and sales to commercial and education customers. Modular revenues are affected by demand for classrooms, which in turn is affected by shifting and fluctuating school populations, the levels of state funding to public schools, the need for temporary classroom space during reconstruction of older schools and changes in policies regarding class size. As a result of any reduced funding, lower expenditures by these schools may result in certain planned programs to increase the number of classrooms, such as those that the Company provides, to be postponed or terminated. However, reduced expenditures may also result in schools reducing their long-term facility construction projects in favor of using the Company’s modular classroom solutions. At this time, the Company can provide no assurances as to whether public schools will either reduce or increase their demand for the Company's modular classrooms as a result of fluctuations in state funding of public schools. Looking forward, the Company believes that any interruption in the passage of facility bonds or contraction of class size reduction programs by public schools may have a material adverse effect on both rental and sales revenues of the Company. (For more information, see “ Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12) ” in the Company’s 2022 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 20 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. The Company’s rental operations include rental and rental related service revenues which comprised approximately 79% and 81% of consolidated revenues from continuing operations in the six months ended June 30, 2023 and 2022, respectively. Of the total continuing rental operations revenues for the six months ended June 30, 2023, Mobile Modular and TRS-RenTelco comprised 80% and 20%, respectively, compared to 74% and 26%, respectively, in the same period of 2022. 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 and TRS-RenTelco business segments sell modular units and electronic test equipment, respectively, which are either new or previously rented. In addition, Enviroplex sells new modular buildings used primarily as classrooms in California. For the six months ended June 30, 2023 and 2022, sales and other revenues of modular and electronic test equipment comprised approximately 21% and 19% of the Company’s consolidated revenues from continuing operations, respectively. Of the total sales and other revenues from continuing operations for the six months ended June 30, 2023 and 2022, Mobile Modular and Enviroplex together comprised 81% and 79%, respectively, and TRS-RenTelco comprised 19% and 21%, respectively. The Company’s cost of sales includes the carrying value of the equipment sold and the direct costs associated with the equipment sold, such as delivery, installation, modifications and related site work. 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 Inland Leasing Acquisition On July 1, 2023, the Company completed the purchase of assets of Inland Leasing and Storage ("Inland Leasing"), for a purchase price of $3.8 million. Inland Leasing is a regional provider of portable storage solutions in the Colorado market and is highly complementary to the Company's portable storage business segment. The acquisition grew the Mobile Modular Portable Storage fleet by approximately 600 units, which will further support the new regional operation acquired from the Brekke Storage acquisition. Dividends On June 7, 2023, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.465 per common share for the quarter ended June 30, 2023, an increase of 2% over the prior year’s comparable quarter. 21 Results of Operations Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 Overview Consolidated revenues for the three months ended June 30, 2023, increased 15% to $203.1 million, from $177.0 million in the same period in 2022. Consolidated net income for the three months ended June 30, 2023, excluding the gain on sale of discontinued operations from the divestiture of Adler Tanks, increased 7% to $28.0 million, from $26.1 million for the same period in 2022. The increase in consolidated net income during the current period was primarily attributed to higher gross profit from Mobile Modular, partly offset by higher selling, general and administrative expenses. Earnings per diluted share for the three months ended June 30, 2023, increased by $0.18 to $1.25, compared to $1.07 for the same period in 2022. There were no revenues from discontinued operations for the three months ended June 30, 2023, compared to $23.7 million for the same period in 2022. Income from discontinued operations for the three months ended June 30, 2023, was $2.6 million, primarily attributed to final working capital adjustments from the divestiture of Adler Tanks. Income from discontinued operations for the same period in 2022 was $2.6 million. Earnings per diluted share from discontinued operations for the three months ended June 30, 2023 was $0.11, unchanged from the same period in 2022. For additional information on discontinued operations and the divestiture of Adler Tanks, refer to Note 5 of the consolidated financial statements. For the three months ended June 30, 2023, on a consolidated basis from continuing operations: • Gross profit increased $27.7 million, or 41%, to $94.6 million in 2023. Mobile Modular’s gross profit increased $28.9 million, or 58%, largely due to the Vesta Modular acquisition, which contributed to the higher gross profit on rental, sales, and rental related services revenues. TRS-RenTelco’s gross profit decreased $0.3 million, or 2%, primarily due to lower gross profit on rental and rental related services revenues. Enviroplex’s gross profit decreased $1.0 million, primarily due to lower sales revenue in 2023. • Selling and administrative expenses increased $13.2 million to $47.0 million, primarily due to an increase in employees' salaries and benefit costs of $6.5 million, due in part to the increased employee headcount from the Vesta Modular acquisition and higher marketing and administrative costs of $3.0 million. • Interest expense increased $7.5 million to $9.9 million, which was primarily attributed to $239.3 million higher average debt levels of the Company and a higher effective interest rate in 2023 of 5.94%, compared to 2.79% for the same period in 2022. The increase in average debt during the three-month period was primarily the result of the funding of the Vesta Modular, Brekke Storage and Dixie Storage acquisitions. • Pre-tax income contribution by Mobile Modular and TRS-RenTelco was 85% and 17%, respectively, compared to 72% and 29%, respectively, for the comparable 2022 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was negative 2% and negative 1% in 2023 and 2022, respectively. • The provision for income taxes resulted in an effective tax rate of 25.7% and 22.9%, for the quarters ended June 30, 2023 and 2022, respectively. • Adjusted EBITDA increased $19.3 million, or 33%, to $77.0 million in 2023. 22 Mobile Modular For the three months ended June 30, 2023, Mobile Modular’s total revenues increased $52.9 million, or 47%, to $164.3 million compared to the same period in 2022, largely due to contributions from the Vesta Modular acquisition, which contributed to the higher rental, rental related services, and sales revenues. The revenue increase, together with higher gross profit on rental, rental related services and sales revenues, offset by higher selling and administrative expenses, resulted in a $9.9 million increase in pre-tax income to $31.9 million for the three months ended June 30, 2023, from $21.9 million for the same period in 2022. 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 6/30/23 compared to Three Months Ended 6/30/22 (Unaudited) (dollar amounts in thousands) Three Months Ended June 30, Increase (Decrease) 2023 2022 $ % Revenues Rental $ 89,257 $ 64,949 $ 24,308 37 % Rental related services 33,190 21,233 11,957 56 % Rental operations 122,447 86,182 36,265 42 % Sales 39,357 24,816 14,541 59 % Other 2,458 379 2,079 nm Total revenues 164,262 111,377 52,885 47 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 10,285 7,749 2,536 33 % Rental related services 23,084 15,116 7,968 53 % Other 25,082 24,073 1,009 4 % Total direct costs of rental operations 58,451 46,938 11,513 25 % Costs of sales 27,207 14,760 12,447 84 % Total costs of revenues 85,658 61,698 23,960 39 % Gross Profit Rental 53,890 33,127 20,763 63 % Rental related services 10,106 6,117 3,989 65 % Rental operations 63,996 39,244 24,752 63 % Sales 12,150 10,056 2,094 21 % Other 2,458 379 2,079 nm Total gross profit 78,604 49,679 28,925 58 % Selling and administrative expenses 38,296 25,755 12,541 49 % Income from operations 40,308 23,924 16,384 68 % Interest expense allocation (8,447 ) (2,000 ) (6,447 ) nm Pre-tax income $ 31,861 $ 21,924 $ 9,937 45 % Other Selected Information Adjusted EBITDA $ 56,824 $ 35,773 $ 21,051 59 % Average rental equipment 1 $ 1,321,767 $ 1,019,927 $ 301,840 30 % Average rental equipment on rent $ 1,046,008 $ 796,430 $ 249,578 31 % Average monthly total yield 2 2.25 % 2.12 % 6 % Average utilization 3 79.1 % 78.1 % 1 % Average monthly rental rate 4 2.84 % 2.72 % 4 % Period end rental equipment 1 $ 1,337,961 $ 1,025,645 $ 312,316 30 % Period end utilization 3 78.8 % 78.6 % 0 % 1. Average and Period end rental equipment represents the cost of rental equipment, excluding new equipment inventory and accessory equipment. 2. Average monthly total yield is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment, for the period. 3. Period end utilization is calculated by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding new equipment inventory and accessory equipment. Average utilization for the period is calculated using the average month end costs of rental equipment. 4. Average monthly rental rate is calculated by dividing the averages of monthly rental revenues by the cost of rental equipment on rent, for the period. nm = Not meaningful 23 Mobile Modular’s gross profit for the three months ended June 30, 2023 increased $28.9 million, or 58%, to $78.6 million. For the three months ended June 30, 2023 compared to the same period in 2022: • Gross Profit on Rental Revenues – Rental revenues increased $24.3 million, or 37%, due to 31% higher average rental equipment on rent and 4% higher average monthly rental rates in 2023. As a percentage of rental revenues, depreciation was 12% in both 2023 and 2022, and other direct costs were 28% in 2023 and 37% in 2022, which resulted in gross margin percentages of 60% in 2023, compared to 51% in 2022. The higher rental revenues and higher rental margins, resulted in gross profit on rental revenues increasing $20.8 million, or 63%, to $53.9 million in 2023. Vesta Modular contributed $8.9 million gross profit on rental revenues in 2023. • Gross Profit on Rental Related Services – Rental related services revenues increased $12.0 million, or 56%, compared to 2022. 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 30% in 2023, compared to 29% in 2022, resulted in rental related services gross profit increasing $4.0 million, or 65%, to $10.1 million in 2023. Vesta Modular contributed $1.7 million gross profit on rental related services revenues in 2023. • Gross Profit on Sales – Sales revenues increased $14.5 million, or 59%, compared to 2022, due to higher new equipment sales. The lower gross margin percentage of 31% in 2023 compared to 41% in 2022, and higher sales revenue resulted in gross profit on sales increasing $2.1 million, or 21%, to $12.2 million. The lower gross margin on sales in 2023 was primarily due to a higher mix of new versus used sales. Vesta Modular contributed $2.8 million in gross profit on sales in 2023. 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 June 30, 2023, selling and administrative expenses increased $12.5 million, or 49%, to $38.3 million, primarily due to $6.2 million higher employee salaries and benefit costs, largely due to the addition of Vesta Modular employees, $2.8 million higher allocated corporate expenses, and $1.9 million increased marketing and administrative expenses. 24 TRS-RenTelco For the three months ended June 30, 2023, TRS-RenTelco’s total revenues increased $0.5 million to $37.8 million compared to the same period in 2022, primarily due to higher sales and other revenues. Decreased gross profit and higher selling and administrative expenses, resulted in a 23% decrease in pre-tax income to $6.7 million for the three months ended June 30, 2023, from $8.7 million for the same period in 2022. 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 6/30/23 compared to Three Months Ended 6/30/23 (Unaudited) (dollar amounts in thousands) Three Months Ended June 30, Increase (Decrease) 2023 2022 $ % Revenues Rental $ 28,583 $ 29,718 $ (1,135 ) (4 )% Rental related services 667 813 (146 ) (18 )% Rental operations 29,250 30,531 (1,281 ) (4 )% Sales 7,521 6,404 1,117 17 % Other 1,074 406 668 nm Total revenues 37,845 37,341 504 1 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 12,312 12,333 (21 ) nm Rental related services 741 664 77 12 % Other 5,478 5,443 35 1 % Total direct costs of rental operations 18,531 18,440 91 0 % Costs of sales 3,431 2,765 666 24 % Total costs of revenues 21,962 21,205 757 4 % Gross Profit Rental 10,793 11,942 (1,149 ) (10 )% Rental related services (74 ) 149 (223 ) nm Rental operations 10,719 12,091 (1,372 ) (11 )% Sales 4,090 3,639 451 12 % Other 1,074 406 668 nm Total gross profit 15,883 16,136 (253 ) (2 )% Selling and administrative expenses 7,126 6,614 512 8 % Income from operations 8,757 9,522 (765 ) (8 )% Interest expense allocation (2,059 ) (646 ) 1,413 nm Foreign currency exchange loss (18 ) (181 ) 163 nm Pre-tax income $ 6,680 $ 8,695 $ (2,015 ) (23 )% Other Selected Information Adjusted EBITDA $ 21,538 $ 22,128 $ (590 ) -3 % Average rental equipment 1 $ 393,891 $ 382,068 $ 11,823 3 % Average rental equipment on rent $ 229,304 $ 246,533 $ (17,229 ) (7 )% Average monthly total yield 2 2.40 % 2.59 % (7 )% Average utilization 3 58.2 % 64.5 % (10 )% Average monthly rental rate 4 4.16 % 4.02 % 3 % Period end rental equipment 1 $ 386,828 $ 387,437 $ (609 ) (0 )% Period end utilization 3 58.3 % 65.3 % (11 )% 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 rental 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 25 TRS-RenTelco’s gross profit for the three months ended June 30, 2023 decreased $0.3 million, or 2%, to $15.9 million. For the three months ended June 30, 2023 compared to the same period in 2022: • Gross Profit on Rental Revenues – Rental revenues decreased $1.1 million, or 4%, with depreciation expense and other direct costs comparable to the previous period, resulting in a 10% decrease in gross profit on rental revenues to $10.8 million. As a percentage of rental revenues, depreciation was 43% and 42% in 2023 and 2022, respectively, and other direct costs were 19% and 18%, in 2023 and 2022, respectively, which resulted in a gross margin percentage of 38% and 40% in 2023 and 2022, respectively. The decrease in rental revenues was primarily due to a 7% reduction in average rental equipment on rent, partly offset by 3% higher average monthly rental rates in 2023, as compared to 2022. • Gross Profit on Sales – Sales revenues increased $1.1 million, or 17%, to $7.5 million in 2023. Gross profit on sales increased 12%, to $4.1 million, with a gross margin percentage of 54% in 2023, compared to 57% in 2022. 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 June 30, 2023, selling and administrative expenses increased $0.5 million, or 8%, to $7.1 million. 26 Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 Overview Consolidated revenues for the six months ended June 30, 2023, increased 17% to $376.2 million, from $322.4 million in the same period in 2022. Consolidated net income for the six months ended June 30, 2023, excluding the gain on sale of discontinued operations from the divestiture of Adler Tanks, decreased 9% to $40.7 million, from $44.9 million for the same period in 2022. The decrease in consolidated net income during the current period was primarily attributed to acquisition and divestiture related transaction costs of $14.3 million incurred during 2023. Earnings per diluted share for the six months ended June 30, 2023, increased by $2.34 to $4.17, which was primarily the result of the $61.5 million gain on sale of discontinued operations, compared to $1.83 for the same period in 2022. Revenues from discontinued operations for the six months ended June 30, 2023, was $9.4 million, compared to $44.0 million for the same period in 2022. Income from discontinued operations for the six months ended June 30, 2023, was $62.8 million, which included the net gain on sale of discontinued operations of $61.5 million, compared to $3.7 million for the same period in 2022. Earnings per diluted share from discontinued operations for the six months ended June 30, 2023 was $2.56, compared to $0.15 for the same period in 2022. For additional information on discontinued operations and the divestiture of Adler Tanks, refer to Note 5 of the consolidated financial statements. For the six months ended June 30, 2023, on a consolidated basis from continuing operations: • Gross profit increased $47.0 million, or 38%, to $172.0 million in 2023. Mobile Modular’s gross profit increased $47.4 million, or 51%, largely due to the Vesta Modular acquisition, which contributed to the higher gross profit on rental, sales, and rental related services revenues. TRS-RenTelco’s gross profit increased $0.7 million, or 2%, primarily due to higher gross profit on sales and other revenues. Enviroplex’s gross profit decreased $1.1 million, or 82%, primarily due to $3.7 million lower sales in 2023. • Selling and administrative expenses increased $38.1 million to $104.5 million, primarily due to $19.5 million higher marketing and administrative costs, which included $14.3 million in acquisition and divestiture related transaction costs, and an increase in employees’ salaries and benefit costs of $12.3 million, partly attributable to the increased employee headcount from the Vesta Modular acquisition. • Interest expense increased $12.7 million to $17.4 million, which was primarily attributed to $190.7 million higher average debt levels of the Company and a higher effective interest rate in 2023 of 5.77%, compared to 2.74% for the same period in 2022. The $190.7 million increase in average debt during the six-month period was primarily the result of the funding of the Vesta Modular, Brekke Storage and Dixie Storage acquisitions. • Pre-tax income contribution by Mobile Modular and TRS-RenTelco was 81% and 23%, respectively, compared to 72% and 30%, respectively, for the comparable 2022 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was negative 4% and negative 2% in 2023 and 2022, respectively. • The provision for income taxes resulted in an effective tax rate of 21.5% and 23.3%, for the periods ended June 30, 2023 and 2022, respectively. • Adjusted EBITDA increased $30.9 million, or 29%, to $138.7 million in 2023, compared to $107.8 in 2022. 27 Mobile Modular For the six months ended June 30, 2023, Mobile Modular’s total revenues increased $88.9 million, or 44%, to $290.9 million compared to the same period in 2022, primarily due to higher rental, sales, and rental related services revenues. The revenue increase, together with higher gross profit on rental, rental related services and sales revenues, partly offset by higher selling and administrative expenses resulted in a 6% increase in pre-tax income to $40.7 million for the six months ended June 30, 2023, from $38.6 million for the same period in 2022. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Mobile Modular – Six Months Ended 6/30/23 compared to Six Months Ended 6/30/22 (Unaudited) (dollar amounts in thousands) Six Months Ended June 30, Increase (Decrease) 2023 2022 $ % Revenues Rental $ 170,370 $ 126,487 $ 43,883 35 % Rental related services 59,442 39,594 19,848 50 % Rental operations 229,812 166,081 63,731 38 % Sales 56,962 35,191 21,771 62 % Other 4,145 750 3,395 nm Total revenues 290,919 202,022 88,897 44 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 19,729 15,582 4,147 27 % Rental related services 41,691 28,296 13,395 47 % Other 50,992 44,235 6,757 15 % Total direct costs of rental operations 112,412 88,113 24,299 28 % Costs of sales 38,281 21,089 17,192 82 % Total costs of revenues 150,693 109,202 41,491 38 % Gross Profit Rental 99,649 66,670 32,979 49 % Rental related services 17,751 11,298 6,453 57 % Rental operations 117,400 77,968 39,432 51 % Sales 18,681 14,102 4,579 32 % Other 4,145 750 3,395 nm Total gross profit 140,226 92,820 47,406 51 % Selling and administrative expenses 84,810 50,447 34,363 68 % Income from operations 55,416 42,373 13,043 31 % Interest expense allocation (14,718 ) (3,821 ) 10,897 nm Pre-tax income $ 40,698 $ 38,552 $ 2,146 6 % Other Selected Information Adjusted EBITDA 5 $ 99,269 $ 66,178 $ 33,091 50 % Average rental equipment 1 $ 1,241,287 $ 1,013,361 $ 227,926 22 % Average rental equipment on rent $ 985,914 $ 786,333 $ 199,581 25 % Average monthly total yield 2 2.29 % 2.08 % 10 % Average utilization 3 79.4 % 77.6 % 2 % Average monthly rental rate 4 2.88 % 2.68 % 7 % Period end rental equipment 1 $ 1,337,961 $ 1,025,645 $ 312,316 30 % Period end utilization 3 78.8 % 78.6 % 0 % 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 28 Mobile Modular’s gross profit for the six months ended June 30, 2023 increased $47.4 million, or 51%, to $140.2 million. For the six months ended June 30, 2023 compared to the same period in 2022: • Gross Profit on Rental Revenues – Rental revenues increased $43.9 million, or 35%, primarily due to 25% higher average rental equipment on rent and 7% higher average rental rates in 2023. The increase in rental revenue and average equipment on rent was due in part to the Vesta Modular acquisition. As a percentage of rental revenues, depreciation was 12% in both 2023 and 2022, and other direct costs were 30% in 2023 and 35% in 2022, which resulted in gross margin percentages of 59% in 2023 and 53% in 2022. The higher rental revenues and rental margins resulted in gross profit on rental revenues increasing $33.0 million, or 49%, to $99.6 million in 2023. Vesta Modular contributed $14.4 million gross profit on rental revenues in 2023. • Gross Profit on Rental Related Services – Rental related services revenues increased $19.8 million, or 50%, compared to 2022. 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 return delivery revenues at Portable Storage. The higher revenues and higher gross margin percentage of 30% in 2023, compared to 29% in 2022, resulted in rental related services gross profit increasing $6.5 million, or 57%, to $17.8 million in 2023. Vesta Modular contributed $2.6 million gross profit on rental related services revenues in 2023. • Gross Profit on Sales – Sales revenues increased $21.8 million, or 62%, compared to 2022, due to higher new equipment sales. The lower gross margin percentage of 33% in 2023 compared to 40% in 2022, primarily due to lower margins on new equipment sales revenues and lower used equipment sales, resulted in gross profit on sales increasing $4.6 million, or 32%, to $18.7 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. Vesta Modular contributed $4.6 million gross profit on sales revenues in 2023. For the six months ended June 30, 2023, selling and administrative expenses increased $34.4 million, or 68%, to $84.8 million, primarily due to increased employee salaries and benefit costs of $10.8 million, due in part to the addition of Vesta Modular employees, $10.5 million higher allocated corporate expenses, which includes $5.4 million in allocated divestiture transaction costs, and a $10.3 million increase in marketing and administrative expenses, which includes $7.6 million in acquisition related transaction costs. 29 TRS-RenTelco For the six months ended June 30, 2023, TRS-RenTelco’s total revenues increased $3.1 million, to $74.0 million compared to the same period in 2022, primarily due to higher sales and other revenues. Pre-tax income decreased $4.9 million, or 30%, to $11.3 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to lower gross profit on rental revenues and $3.4 million higher selling and administrative expenses, partly offset by higher other and sales revenues. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. TRS-RenTelco – Six Months Ended 6/30/23 compared to Six Months Ended 6/30/22 (Unaudited) (dollar amounts in thousands) Six Months Ended June 30, Increase (Decrease) 2023 2022 $ % Revenues Rental $ 57,717 $ 58,230 $ (513 ) (1 )% Rental related services 1,547 1,484 63 4 % Rental operations 59,264 59,714 (450 ) (1 )% Sales 12,635 10,331 2,304 22 % Other 2,066 787 1,279 nm Total revenues 73,965 70,832 3,133 4 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 24,701 24,362 339 1 % Rental related services 1,402 1,244 158 13 % Other 10,703 10,135 568 6 % Total direct costs of rental operations 36,806 35,741 1,065 3 % Costs of sales 5,656 4,265 1,391 33 % Total costs of revenues 42,462 40,006 2,456 6 % Gross Profit Rental 22,313 23,733 (1,420 ) (6 )% Rental related services 145 240 (95 ) nm Rental operations 22,458 23,973 (1,515 ) (6 )% Sales 6,979 6,066 913 15 % Other 2,066 787 1,279 nm Total gross profit 31,503 30,826 677 2 % Selling and administrative expenses 16,577 13,204 3,373 26 % Income from operations 14,926 17,622 (2,696 ) (15 )% Interest expense allocation (3,801 ) (1,232 ) 2,569 nm Foreign currency exchange loss 208 (168 ) 376 nm Pre-tax income $ 11,333 $ 16,222 $ (4,889 ) (30 )% Other Selected Information Adjusted EBITDA 5 $ 42,173 $ 42,781 $ (608 ) (1 )% Average rental equipment 1 $ 395,049 $ 374,364 $ 20,685 6 % Average rental equipment on rent $ 231,703 $ 241,655 $ (9,952 ) (4 )% Average monthly total yield 2 2.42 % 2.59 % (7 )% Average utilization 3 58.7 % 64.6 % (9 )% Average monthly rental rate 4 4.15 % 4.02 % 3 % Period end rental equipment 1 $ 386,828 $ 387,437 $ (609 ) (0 )% Period end utilization 3 58.3 % 65.3 % (11 )% 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 30 TRS-RenTelco’s gross profit for the six months ended June 30, 2023 increased $0.7 million, or 2%, to $31.5 million. For the six months ended June 30, 2023 compared to the same period in 2022: • Gross Profit on Rental Revenues – Rental revenues decreased $0.5 million, or 1%, and depreciation expense increased $0.3 million, or 1%, resulting in a 6% decrease in gross profit on rental revenues to $22.3 million. As a percentage of rental revenues, depreciation was 43% and 42% in 2023 and 2022, respectively, and other direct costs were 19% and 17% in 2023 and 2022, respectively, which resulted in a gross margin percentage of 39% and 41% in 2023 and 2022, respectively. The rental revenues decrease was due to 4% lower average rental equipment on rent, partly offset by 3% higher average monthly rental rates in 2023 as compared to 2022. 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 $2.3 million, or 22%, to $12.6 million in 2023. Gross profit on sales increased $0.9 million, or 15%, to $7.0 million with a gross margin percentage of 55% in 2023, compared to 59% in 2022. 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 six months ended June 30, 2023, selling and administrative expenses increased $3.4 million, or 26%, to $16.6 million, primarily due to higher allocated corporate expenses. Adjusted EBITDA To supplement the Company’s financial data presented on a basis consistent with accounting principles generally accepted 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, share-based compensation and transaction costs. The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the Company. Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, compliance with financial covenants in the Company’s revolving lines of credit and senior notes and the Company’s ability to meet future capital expenditure and working capital requirements. Management believes the exclusion of non-cash charges, including share-based compensation, and transaction costs is useful in measuring the Company’s cash available for operations and performance of the Company. Because management finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance. Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity. Adjusted EBITDA is not in accordance with or an alternative for GAAP, and may be different from non−GAAP measures used by other companies. Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include share-based compensation charges and transaction costs. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison. The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation. Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance. Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP. 31 Reconciliation of Income from Continuing Operations to Adjusted EBITDA (dollar amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, Twelve Months Ended June 30, 2023 2022 2023 2022 2023 2022 Income from continuing operations $ 27,952 $ 23,544 $ 39,470 $ 41,202 $ 101,577 $ 89,756 Provision for income taxes from continuing operations 9,669 6,996 10,782 12,505 29,654 31,885 Interest expense 9,945 2,426 17,409 4,702 24,937 9,828 Depreciation and amortization 27,368 23,357 53,501 46,491 100,650 93,469 EBITDA 74,934 56,323 121,162 104,900 256,818 224,938 Share-based compensation 1,889 1,271 3,264 2,783 7,228 6,296 Transaction costs 3 145 — 14,292 — 18,345 1,141 Adjusted EBITDA 1 $ 76,968 $ 57,594 $ 138,718 $ 107,683 $ 282,391 $ 232,375 Adjusted EBITDA margin 2 38 % 38 % 38 % 39 % 39 % 40 % 1. Adjusted EBITDA is defined as income from operations before interest expense, provision for income taxes, depreciation, amortization, share-based compensation and transaction costs. 2. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenues for the period. 3. Transaction costs include acquisition and divestiture related legal and professional fees and other costs specific to these transactions. For the six months ended June 30, 2023, total Adjusted EBITDA from both continuing and discontinued operations was $142.4 million, compared to $123.0 million for the same period in 2022, excluding the gain on divestiture of Adler Tanks. For the six months ended June 30, 2023 and 2022, the total Adjusted EBITDA from continuing operations was $138.7 million and $107.8 million, respectively, and the total Adjusted EBITDA from discontinued operations was $3.7 million and $15.2 million, respectively. The reconciliation of income from discontinued operations to Adjusted EBITDA can be found in Note 5 of the consolidated financial statements. The following table reconciles Adjusted EBITDA on a combined basis, including both continuing and discontinued operations, to the net cash provided by operating activities on the Company's condensed consolidated statement of cash flows. Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities (dollar amounts in thousands) Three Months Ended June 30, Six Months Ended June 30, Twelve Months Ended June 30, 2023 2022 2023 2022 2023 2022 Adjusted EBITDA 1 $ 76,968 $ 66,291 $ 142,400 $ 123,010 $ 308,256 $ 263,074 Interest paid (8,985 ) (3,684 ) (16,802 ) (5,821 ) (25,756 ) (12,160 ) Income taxes paid, net of refunds received (6,518 ) (16,658 ) (6,931 ) (17,078 ) (17,215 ) (19,175 ) Gain on sale of used rental equipment (11,161 ) (10,729 ) (14,250 ) (16,093 ) (36,136 ) (29,664 ) Foreign currency exchange (gain) loss 18 181 (208 ) 168 2 321 Amortization of debt issuance costs 2 5 4 9 11 18 Change in certain assets and liabilities: Accounts receivable, net (16,669 ) (15,765 ) 284 (7,830 ) (22,410 ) (26,420 ) Prepaid expenses and other assets (1,159 ) (15,068 ) (8,504 ) (10,855 ) (14,133 ) (8,286 ) Accounts payable and other liabilities (2,828 ) 12,115 (33,832 ) (2,302 ) (22,935 ) (8,362 ) Deferred income 6,072 13,612 9,290 18,835 14,156 20,459 Net cash provided by operating activities $ 35,740 $ 30,300 $ 71,451 $ 82,043 $ 183,840 $ 179,805 1. Adjusted EBITDA is defined as income from operations before interest expense, provision for income taxes, depreciation, amortization, share-based compensation and transaction costs. Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, the Note Purchase Agreement, 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 32 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 June 30, 2023, the actual ratio was 3.82 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 June 30, 2023, the actual ratio was 2.18 to 1. At June 30, 2023, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although, significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. Liquidity and Capital Resources The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company for the six months ended June 30, 2023 compared to the same period in 2022 are summarized as follows: Cash Flows from Operating Activities: The Company’s operations provided net cash of $71.5 million in 2023, compared to net cash provided of $82.0 million in 2022. The $10.6 million decrease in net cash provided by operating activities was primarily attributable to $33.7 million lower deferred income taxes, partially offset by a $25.3 million increase in accounts payable and accrued liabilities, primarily due to higher income taxes payable. Cash Flows from Investing Activities: Net cash used in investing activities was $300.2 million in 2023, compared to $69.6 million in 2022. The $230.6 million increase in cash used was primarily due to the $456.3 million paid for the acquisitions of Vesta Modular, Brekke Storage and Dixie Storage in 2023, partly offset by $268.0 million in proceeds from the sale of discontinued operations from the divestiture of Adler Tanks. Cash Flows from Financing Activities: Net cash provided by financing activities was $230.0 million in 2023, compared to net cash used of $13.2 million in 2022. The $243.2 million change in net cash during 2023 was primarily attributable to increased borrowings under bank lines of credit and note purchase agreements, as the borrowings were primarily attributed to the funding of the Vesta Modular, Brekke Storage and Dixie Storage 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 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, 2022, the Company entered into an amended and restated credit agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender, L/C Issuer and lender, and other lenders named therein (the “Credit Facility”). The Credit Facility provides for a $650.0 million unsecured revolving credit facility (which may be further increased to $950.0 million by adding one or more tranches of term loans and/or increasing the aggregate revolving commitments), which includes a $40.0 million sublimit for the issuance of standby letters of credit and a $20.0 million sublimit for swingline loans. The proceeds of the Credit Facility are available to be used for general corporate purposes, including permitted acquisitions. The Credit Facility permits the Company’s existing indebtedness to remain, which includes the Company’s $20.0 million Treasury Sweep Note due July 15, 2027, the Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as of April 21, 2011 (as amended): (i) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015 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 33 (“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 March 31, 2023, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up to $650.0 million of which $572.7 million was outstanding and had capacity to borrow up to an additional $77.3 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 June 30, 2023, the actual ratio was 3.82 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 June 30, 2023, the actual ratio was 2.18 to 1. At June 30, 2023, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. Note Purchase and Private Shelf Agreement On June 8, 2023, the Company entered into a Second Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series D and Series E Notes previously issued pursuant to the Prior Amended and Restated NPA, among the Company and the other parties to the Note Purchase Agreement. The Note Purchase Agreement amended and restated, and superseded in its entirety, the Prior NPA. Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 2.57% Series D Senior Notes, due March 17, 2028, and (ii) $60.0 million aggregate principal amount of its 2.35% Series E Senior Notes, due June 16, 2026, to which the terms of the Note Purchase Agreement shall apply. In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf Notes”) in the aggregate principal amount of (x) $300 million minus (y) the amount of other notes (such as the Series D Senior Notes and Series E Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes may be issued and sold from time to time at the discretion of the Company’s Board of Directors and in such amounts as the Board of Directors may determine, subject to prospective purchasers’ agreement to purchase the Shelf Notes. The Company will sell the Shelf Notes directly to such purchasers. 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. 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 June 30, 2023, the principal balance outstanding under the Series D Senior Notes was $40.0 million. 2.35% Senior Notes Due in 2026 On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto. The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026. Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing 34 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 June 30, 2023, the principal balance outstanding under the Series E Senior Notes was $60.0 million. Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series D Senior Notes and Series E Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement): • Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At June 30, 2023, the actual ratio was 3.82 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 June 30, 2023, the actual ratio was 2.18 to 1. At June 30, 2023, the Company was in compliance with each of the aforementioned covenants. There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants. Although no assurance can be given, the Company believes it will continue to be able to negotiate general bank lines of credit and issue senior notes adequate to meet capital requirements not otherwise met by operational cash flows and proceeds from sales of rental equipment. 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 six months ended June 30, 2023 and 2022. As of June 30, 2023, 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 2022 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 June 30, 2023. Refer to our 2022 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 2022 Annual Report.