MCGRATH RENTCORP 10-Q

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, 2023, as filed with the SEC on February 21, 2024 (the “2023 Annual Report”). In preparing the following MD&A, we presume that readers have access to and have read the MD&A in our 2023 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 four reportable business segments: (1) its modular building segment (“Mobile Modular”); (2) its portable storage container segment (“Portable Storage”); (3) its electronic test equipment segment (“TRS-RenTelco”); and (4) its classroom manufacturing business selling modular buildings used primarily as classrooms in California (“Enviroplex”). In the three months ended March 31, 2024, Mobile Modular, Portable Storage, TRS-RenTelco and Enviroplex contributed 61%, 27%, 15% and negative 3% of the Company’s income from continuing operations before provision for taxes (the equivalent of “pretax income”), respectively, compared to 18%, 52%, 37% and negative 7% for the same period in 2023. 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, 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 2023 Annual Report and “ Item 1a. Risk Factors – Significant reductions of, or delays in, funding to public schools have caused the demand and pricing for our modular classroom units to decline, which has in the past caused, and may cause in the future, a reduction in our revenues and profitability ” in Part II – Other Information of this Form 10-Q.) Revenues of Portable Storage consists of the rental and sale of steel containers and ground level offices to provide a temporary storage solution that is delivered to the customer’s location and addresses the need for secure temporary storage with immediate access to the unit. The portable storage container rental market in the U.S. has a large and diverse number of market segments including construction, retail, commercial and industrial, energy and petrochemical, manufacturing, education and healthcare. 22 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 80% and 84% of consolidated revenues from continuing operations in the three months ended March 31, 2024 and 2023, respectively. Of the total continuing rental operations revenues for the three months ended March 31, 2024, Mobile Modular, Portable Storage and TRS-RenTelco comprised 67%, 15% and 18%, respectively, compared to 62%, 16% and 22%, respectively, in the same period of 2023. 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, Portable Storage and TRS-RenTelco business segments sell modular units, storage containers 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 three months ended March 31, 2024 and 2023, sales and other revenues of modular, container and electronic test equipment comprised approximately 20% and 16% of the Company’s consolidated revenues from continuing operations, respectively. Of the total sales and other revenues from continuing operations for the three months ended March 31, 2024 and 2023, Mobile Modular and Enviroplex together comprised 74% and 73%, respectively, Portable Storage comprised 6% and 4%, respectively, and TRS-RenTelco comprised 20% and 23%, 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 Dividends On February 21, 2024, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.475 per common share for the quarter ended March 31, 2024, an increase of 2% over the prior year’s comparable quarter. Proposed Acquisition by WillScot Mobile Mini On January 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WillScot Mobile Mini Holdings Corp., a Delaware corporation (“WillScot Mobile Mini”), Brunello Merger Sub I, Inc., a California corporation and a direct wholly owned subsidiary of WillScot Mobile Mini and Brunello Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of WillScot Mobile Mini. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub I will merge with and into the Company (the “First-Step Merger”), with the Company surviving the First-Step Merger and, immediately thereafter, the Company will merge with and into Merger Sub II (the “Second-Step Merger” and together with the First-Step Merger, the “Transaction”), with Merger Sub II surviving the Second-Step Merger as a wholly owned subsidiary of WillScot Mobile Mini. On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”), each share of common stock, no par value, of the Company (“Company Common Stock”) issued and outstanding immediately prior to the Effective Time, other than shares of Company Common Stock owned by WillScot Mobile Mini or any subsidiary of WillScot Mobile Mini or the Company, and shares held by shareholders who did not vote in favor of the Transaction (or consent thereto in writing) and who are entitled to demand and properly demands appraisal of such shares, will be automatically converted into the right to receive either (1) $123 in cash or (2) 2.8211 shares of validly issued, fully paid and nonassessable shares of common stock, par value $0.0001, of WillScot Mobile Mini (“WillScot Mobile Mini Common Stock”), as determined pursuant to the election and allocation procedures set forth in the Merger Agreement. The consummation of the Transaction is subject to certain closing conditions, including (i) the approval of the Company’s shareholders, (ii) the expiration or termination of all waiting periods applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), (iii) the absence of any order by any governmental authorities or other legal restraint or prohibition preventing the consummation of the transactions contemplated by the Merger Agreement, (iv) the effectiveness of the Merger Proxy Statement (as defined below) filed with SEC relating to the registration of shares of WillScot Mobile Mini Common Stock to be issued to the Company’s shareholders pursuant to the Merger Agreement and (v) other customary conditions specified in the Merger Agreement. The parties have submitted their respective filings under the HSR Act with the U.S. Department of Justice and the Federal 23 Trade Commission as contemplated by the Merger Agreement. The closing of the Transaction is not subject to any financing condition. For additional information regarding the Transaction, please refer to the Company’s current report on Form 8-K and Amendment No. 1 on Form 8-K/A, each filed with the SEC on January 29, 2024, as well as the preliminary Registration Statement on S-4/Proxy Statement filed by WillScot Mobile Mini with the SEC on April 8, 2024 (the “Merger Proxy Statement”). Because the Transaction is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this Form 10-Q assume the continuation of the Company as a public company. 24 Results of Operations Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 Overview Consolidated revenues for the three months ended March 31, 2024, increased 8% to $187.8 million, from $173.2 million for the same period in 2023. Consolidated net income for the three months ended March 31, 2024, increased 79% to $22.8 million, from $12.8 million for the same period in 2023, excluding the gain on sale of discontinued operations from the divestiture of Adler Tanks. Earnings per diluted share for the three months ended March 31, 2024, decreased by $1.99 to $0.93, compared to $2.92 for the same period in 2023. The reduction in earnings per diluted share during the current period was attributed to the prior period gain on sale of discontinued operations, which previously contributed $2.40 to the earnings per diluted share in 2023. During the three months ended March 31, 2024, the Company sold a property, resulting in a net gain of $9.3 million, which was recorded in Other income, net, and contributed $0.28 in earnings per diluted share. The increase in consolidated net income during the current period was primarily attributed to the property sale and higher gross profit from Mobile Modular. There were no revenues from discontinued operations for the three months ended March 31, 2024, compared to $9.4 million for the same period in 2023. There was no income or earnings per diluted share from discontinued operations for the three months ended March 31, 2024. Income from discontinued operations for the same period in 2023 was $60.1 million, which included the $58.9 million gain on sale of discontinued operations, and earnings per diluted share from discontinued operations for the three months ended March 31, 2023 was $2.45. For additional information on discontinued operations and the divestiture of Adler Tanks, refer to Note 5 of the condensed consolidated financial statements. For the three months ended March 31, 2024, on a consolidated basis from continuing operations: • Gross profit increased $15.9 million, or 21%, to $93.3 million in 2024. Mobile Modular’s gross profit increased $15.7 million, or 34%, largely due to higher gross profit on rental revenues. Portable Storage's gross profit increased $1.7 million, or 11%, primarily due to higher gross profit on rental revenues. TRS-RenTelco’s gross profit decreased $1.7 million, or 11%, primarily due to lower gross profit on rental revenues. Enviroplex’s gross profit increased $0.3 million, due to higher sales revenue and an increase in sales margins in 2024. • Selling and administrative expenses increased $2.3 million to $59.8 million, primarily due to an increase in employees' salaries and benefit costs of $3.8 million, partly offset by a $2.2 million decrease in marketing and administrative costs. Included in marketing and administrative costs was $14.1 million in Vesta acquisition and Adler divestiture related transaction costs in 2023 and $9.4 million in transaction costs attributed to the pending merger with WillScot Mobile Mini in 2024. • Interest expense increased $5.2 million to $12.7 million, which was primarily attributed to $215.2 million higher average debt levels of the Company and a higher effective interest rate in 2024 of 6.53%, compared to 5.57% for the same period in 2023. The 38% increase in average debt when compared to 2023 was primarily the result of the funding of business acquisitions during 2023, net of proceeds from the sale of discontinued operations. • Pre-tax income contribution by Mobile Modular, Portable Storage and TRS-RenTelco was 61%, 27% and 15%, respectively, compared to 18%, 52% and 37%, respectively, for the comparable 2023 period. These results are discussed on a segment basis below. Enviroplex pre-tax income contribution was negative 3% and negative 7% in 2024 and 2023, respectively. • The provision for income taxes resulted in an effective tax rate of 23.6% and 23.8%, for the quarters ended March 31, 2024 and 2023, respectively. • Adjusted EBITDA increased $10.3 million, or 17%, to $72.1 million in 2024. 25 Mobile Modular For the three months ended March 31, 2024, Mobile Modular’s total revenues increased $23.7 million, or 23%, to $127.6 million compared to the same period in 2023, primarily due to higher rental, sales and rental related services revenues. The revenue increase, together with higher gross profit on rental, sales and rental related services revenues, and a $6.2 million allocated net gain on the sale of a corporate property, resulted in a $15.9 million increase in pre-tax income to $18.2 million for the three months ended March 31, 2024, from $2.3 million for the same period in 2023. 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 3/31/24 compared to Three Months Ended 3/31/23 (Unaudited) (dollar amounts in thousands) Three Months Ended March 31, Increase (Decrease) 2024 2023 $ % Revenues Rental $ 76,496 $ 64,056 $ 12,440 19 % Rental related services 24,133 21,534 2,599 12 % Rental operations 100,629 85,590 15,039 18 % Sales 25,326 16,967 8,359 49 % Other 1,630 1,370 260 19 % Total revenues 127,585 103,927 23,658 23 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 9,874 8,657 1,217 14 % Rental related services 15,780 14,226 1,554 11 % Other 22,673 24,127 (1,454 ) (6 )% Total direct costs of rental operations 48,327 47,009 1,318 3 % Costs of sales 17,413 10,747 6,666 62 % Total costs of revenues 65,740 57,756 7,984 14 % Gross Profit Rental 43,949 31,273 12,676 41 % Rental related services 8,353 7,308 1,045 14 % Rental operations 52,302 38,581 13,721 36 % Sales 7,913 6,220 1,693 27 % Other 1,630 1,370 260 nm Total gross profit 61,845 46,171 15,674 34 % Expenses: Selling and administrative expenses 40,087 38,456 1,631 4 % Other income, net (6,220 ) — 6,220 nm Income from operations 27,978 7,715 20,263 nm Interest expense allocation 9,799 5,387 (4,412 ) nm Pre-tax income $ 18,179 $ 2,328 $ 15,851 nm Other Selected Information Adjusted EBITDA $ 43,327 $ 32,425 $ 10,902 34 % Average rental equipment 1 $ 1,174,327 $ 987,526 $ 186,801 19 % Average rental equipment on rent $ 924,517 $ 783,847 $ 140,670 18 % Average monthly total yield 2 2.17 % 2.16 % 0 % Average utilization 3 78.7 % 79.4 % (1 )% Average monthly rental rate 4 2.76 % 2.72 % 1 % Period end rental equipment 1 $ 1,189,168 $ 1,105,689 $ 83,479 8 % Period end utilization 3 78.5 % 78.8 % (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 26 Mobile Modular’s gross profit for the three months ended March 31, 2024, increased $15.7 million, or 34%, to $61.8 million. For the three months ended March 31, 2024, compared to the same period in 2023: • Gross Profit on Rental Revenues – Rental revenues increased $12.4 million, or 19%, due to 18% higher average rental equipment on rent and 1% higher average monthly rental rates in 2024. As a percentage of rental revenues, depreciation was 13% and 14% in 2024 and 2023, respectively, and other direct costs were 30% in 2024 and 38% in 2023, which resulted in gross margin percentages of 57% in 2024, compared to 49% in 2023. The higher rental revenues and higher rental margins, resulted in gross profit on rental revenues increasing $12.7 million, or 41%, to $43.9 million in 2024. • Gross Profit on Rental Related Services – Rental related services revenues increased $2.6 million, or 12%, compared to 2023. The increase in rental related services revenues was primarily attributable to higher delivery, return delivery and dismantle revenues and higher site related services. The increase in revenues accompanied by higher gross margin percentage of 35% in 2024, compared to 34% in 2023, resulted in rental related services gross profit increasing $1.0 million, or 14%, to $8.4 million in 2024. • Gross Profit on Sales – Sales revenues increased $8.4 million, or 49%, compared to 2023, due to higher new equipment sales. The lower gross margin percentage of 31% in 2024 compared to 37% in 2023, together with higher sales revenue, resulted in gross profit on sales increasing $1.7 million, or 27%, to $7.9 million. The lower gross margin on sales in 2024 was primarily due to a higher mix of new versus used sales. Sales occur routinely as a normal part of Mobile Modular’s rental business; however, these sales and related gross margins can fluctuate from quarter to quarter and year to year depending on customer requirements, the scope of work to be performed, equipment availability and funding. For the three months ended March 31, 2024, selling and administrative expenses increased $1.6 million, or 4%, to $40.1 million. Included within selling and administrative expenses was $5.3 million higher allocated corporate costs, which included $6.5 million in allocated transaction costs from the pending merger with WillScot Mobile Mini. In addition, 2023 included $7.5 million in Vesta acquisition related transaction costs, which did not recur in 2024. Employee salaries and benefit costs increased $2.0 million, or 16%, in 2024. 27 Portable Storage For the three months ended March 31, 2024, Portable Storage’s total revenues increased $2.0 million, or 9%, to $24.8 million compared to the same period in 2023, primarily due to higher rental and sales revenues. Higher gross profit on rental and sales revenues, and a $1.7 million allocated net gain on the sale of a corporate property, partly offset by $1.0 million higher selling and administrative expenses, resulted in an increase in pre-tax income of $1.5 million, or 23%, to $8.0 million in 2024. The following table summarizes results for each revenue and gross profit category, income from operations, pre-tax income and other selected information. Portable Storage – Three Months Ended 3/31/24 compared to Three Months Ended 3/31/23 (Unaudited) (dollar amounts in thousands) Three Months Ended March 31, Increase (Decrease) 2024 2023 $ % Revenues Rental $ 18,407 $ 17,057 $ 1,350 8 % Rental related services 4,723 4,718 5 0 % Rental operations 23,130 21,775 1,355 6 % Sales 1,212 638 574 90 % Other 418 317 101 nm Total revenues 24,760 22,730 2,030 9 % Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 965 787 178 23 % Rental related services 4,456 4,381 75 2 % Other 1,468 1,783 (315 ) (18 )% Total direct costs of rental operations 6,889 6,952 (63 ) (1 )% Costs of sales 768 327 441 nm Total costs of revenues 7,657 7,279 378 5 % Gross Profit Rental 15,974 14,486 1,488 10 % Rental related services 267 337 (70 ) (21 )% Rental operations 16,241 14,823 1,418 10 % Sales 444 311 133 43 % Other 418 317 101 nm Total gross profit 17,103 15,451 1,652 11 % Expenses: Selling and administrative expenses 9,010 8,058 952 12 % Other income, net (1,319 ) — 1,319 nm Income from operations 9,412 7,393 2,019 27 % Interest expense allocation 1,420 884 (536 ) nm Pre-tax income $ 7,992 $ 6,509 $ 1,483 23 % Other Selected Information Adjusted EBITDA $ 11,522 $ 10,020 $ 1,502 15 % Average rental equipment 1 $ 223,285 $ 189,348 $ 33,937 18 % Average rental equipment on rent $ 155,872 $ 153,056 $ 2,816 2 % Average monthly total yield 2 2.75 % 3.01 % (9 )% Average utilization 3 69.8 % 80.8 % (14 )% Average monthly rental rate 4 3.94 % 3.71 % 6 % Period end rental equipment 1 $ 224,984 $ 199,864 $ 25,120 13 % Period end utilization 3 68.8 % 79.8 % (14 )% 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 28 Portable Storage’s gross profit for the three months ended March 31, 2024, increased $1.7 million, or 11%, to $17.1 million. For the three months ended March 31, 2024, compared to the same period in 2023: • Gross Profit on Rental Revenues – Rental revenues increased $1.4 million, or 8%, due to 2% higher average rental equipment on rent and 6% higher average monthly rental rates in 2024. As a percentage of rental revenues, depreciation was 5% in both 2024 and 2023, and other direct costs were 8% and 10% in 2024 and 2023, respectively, which resulted in gross margin percentage of 87% in 2024 compared to 85% in 2023. The higher rental revenues and higher rental margins resulted in gross profit on rental revenues increasing $1.5 million, or 10%, to $16.0 million in 2024. • Gross Profit on Rental Related Services – Rental related services revenues was $4.7 million, unchanged from 2023. The gross margin on rental related services revenues was 6% in 2024, compared to 7% in 2023. The comparable revenues coupled with lower gross margins in 2024, resulted in rental related services gross profit decreasing $0.1 million, when compared to 2023. • Gross Profit on Sales – Sales revenues increased $0.6 million, primarily due to higher used equipment sales. The higher sales revenues and lower gross margins of 37% in 2024, compared to 49% in 2023, resulted in sales gross profit increasing $0.1 million, or 43%, to $0.4 million in 2024. Sales occur routinely as a normal part of Portable Storage’s rental business; however, these sales can fluctuate from period to period depending on customer requirements, equipment availability and funding. For the three months ended March 31, 2024, Portable Storage’s selling and administrative expenses increased $1.0 million, or 12%, to $9.0 million, primarily due to $0.3 million higher allocated corporate costs and $0.3 million higher marketing and administrative costs. 29 TRS-RenTelco For the three months ended March 31, 2024, TRS-RenTelco’s total revenues decreased $2.4 million to $33.8 million, compared to the same period in 2023, primarily due to lower rental revenues, partly offset by higher sales revenues. Lower gross profit on rental revenues and higher gross profit on sales revenues and a $1.7 million allocated net gain on the sale of a corporate property, resulted in a 3% decrease in pre-tax income to $4.5 million for the three months ended March 31, 2024, from $4.7 million for the same period in 2023. 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 3/31/24 compared to Three Months Ended 3/31/23 (Unaudited) (dollar amounts in thousands) Three Months Ended March 31, Increase (Decrease) 2024 2023 $ % Revenues Rental $ 25,429 $ 29,134 $ (3,705 ) (13 )% Rental related services 724 880 (156 ) (18 )% Rental operations 26,153 30,014 (3,861 ) (13 )% Sales 6,812 5,114 1,698 33 % Other 798 992 (194 ) nm Total revenues 33,763 36,120 (2,357 ) (7 )% Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 11,527 12,389 (862 ) (7 )% Rental related services 550 661 (111 ) (17 )% Other 4,869 5,225 (356 ) (7 )% Total direct costs of rental operations 16,946 18,275 (1,329 ) (7 )% Costs of sales 2,942 2,225 717 32 % Total costs of revenues 19,888 20,500 (612 ) (3 )% Gross Profit Rental 9,033 11,520 (2,487 ) (22 )% Rental related services 174 219 (45 ) (21 )% Rental operations 9,207 11,739 (2,532 ) (22 )% Sales 3,870 2,889 981 34 % Other 798 992 (194 ) nm Total gross profit 13,875 15,620 (1,745 ) (11 )% Expenses: Selling and administrative expenses 8,918 9,451 (533 ) (6 )% Other income (1,742 ) — 1,742 nm Income from operations 6,699 6,169 530 9 % Interest expense allocation 2,062 1,742 (320 ) (18 )% Foreign currency exchange loss (gain) 132 (226 ) (358 ) nm Pre-tax income $ 4,505 $ 4,653 $ (148 ) (3 )% Other Selected Information Adjusted EBITDA $ 18,480 $ 20,635 $ (2,155 ) (10 )% Average rental equipment 1 $ 372,081 $ 396,835 $ (24,754 ) (6 )% Average rental equipment on rent $ 210,134 $ 234,829 $ (24,695 ) (11 )% Average monthly total yield 2 2.18 % 2.40 % (9 )% Average utilization 3 56.5 % 59.2 % (5 )% Average monthly rental rate 4 4.03 % 4.14 % (3 )% Period end rental equipment 1 $ 369,325 $ 397,565 $ (28,240 ) (7 )% Period end utilization 3 56.8 % 59.0 % (4 )% 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 30 TRS-RenTelco’s gross profit for the three months ended March 31, 2024 decreased $1.8 million, or 11%, to $13.9 million. For the three months ended March 31, 2024 compared to the same period in 2023: • Gross Profit on Rental Revenues – Rental revenues decreased $3.7 million, or 13%, depreciation expense decreased $0.9 million, or 7%, and other direct costs decreased by $0.4 million, or 7%, resulting in a 22% decrease in gross profit on rental revenues to $9.0 million. As a percentage of rental revenues, depreciation was 45% and 43% in 2024 and 2023, respectively, and other direct costs were 19% and 18%, in 2024 and 2023, respectively, which resulted in a gross margin percentage of 36% and 40% in 2024 and 2023, respectively. The decrease in rental revenues was primarily due to a 11% reduction in average rental equipment on rent and 3% lower average monthly rental rates in 2024, as compared to 2023. • Gross Profit on Sales – Sales revenues increased $1.7 million, or 33%, to $6.8 million in 2024. Gross profit on sales increased $1.0 million, or 34%, to $3.9 million, with a higher gross margin percentage of 57% in 2024, compared to 56% in 2023. 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 March 31, 2024, selling and administrative expenses decreased $0.5 million, or 6%, to $8.9 million. The decrease was primarily due to $0.4 million lower allocated corporate expenses. 31 Adjusted EBITDA To supplement the Company’s financial data presented on a basis consistent with accounting principles generally accepted in the United States of America (“GAAP”), the Company presents “Adjusted EBITDA”, which is defined by the Company as net income before interest expense, provision for income taxes, depreciation, amortization, non-cash impairment costs, share-based compensation, transaction costs and gains on property sales. 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 and non-recurring transactions, including share-based compensation, transaction costs and gains on property sales 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, transaction costs and gains on property sales. The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow. In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison. The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation. Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance. Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP. Reconciliation of Income from Continuing Operations to Adjusted EBITDA (dollar amounts in thousands) Three Months Ended March 31, Twelve Months Ended March 31, 2024 2023 2024 2023 Income from continuing operations $ 22,848 $ 11,518 $ 123,182 $ 97,169 Provision for income taxes from continuing operations 7,047 1,113 43,544 26,981 Interest expense 12,704 7,464 45,800 17,418 Depreciation and amortization 27,187 26,133 108,972 96,489 EBITDA 69,786 46,228 321,498 238,057 Share-based compensation 2,209 1,375 8,991 6,764 Transaction costs 3 9,354 14,147 11,084 18,200 Other income, net 4 (9,281 ) — (12,899 ) — Adjusted EBITDA 1 $ 72,068 $ 61,750 $ 328,674 $ 263,171 Adjusted EBITDA margin 2 37 % 38 % 38 % 39 % 1. Adjusted EBITDA is defined as income from operations before interest expense, provision for income taxes, depreciation, amortization, share-based compensation, transaction costs and other income, net. 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. 4. Other income, net consists of net gains on property, plant and equipment sales that are infrequent in nature and excluded from Adjusted EBITDA. As of March 31, 2024, total Adjusted EBITDA from both continuing and discontinued operations was $72.1 million, compared to $65.4 million for the same period in 2023, excluding the gain on sale of the divestiture of Adler Tanks. For the three months ended March 31, 2024 and 2023, the total Adjusted EBITDA from continuing operations was $72.1 million and $61.8 million, respectively. There were no adjusted earnings from discontinued operations during the first quarter of 2024 and total Adjusted EBITDA from discontinued operations of $3.7 million during the comparable period in 2023. 32 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 March 31, Twelve Months Ended March 31, 2024 2023 2024 2023 Adjusted EBITDA 1 $ 72,068 $ 65,432 $ 328,674 $ 297,579 Interest paid (14,184 ) (7,817 ) (44,970 ) (20,455 ) Income taxes paid, net of refunds received (479 ) (413 ) (91,631 ) (27,355 ) Gain on sale of used rental equipment (7,355 ) (3,089 ) (35,908 ) (35,704 ) Foreign currency exchange loss 132 (226 ) 48 165 Amortization of debt issuance costs 2 2 8 14 Change in certain assets and liabilities: Accounts receivable, net 15,418 16,953 (36,678 ) (21,506 ) Prepaid expenses and other assets 5,298 (7,345 ) (16,683 ) (28,042 ) Accounts payable and other liabilities (22,748 ) (31,004 ) (9,570 ) (7,992 ) Deferred income 11,268 3,218 22,144 21,696 Net cash provided by operating activities $ 59,420 $ 35,711 $ 115,434 $ 178,400 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, Series E Senior Notes and Series F Senior Notes (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A). These instruments contain financial covenants requiring the Company to not: • Permit the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Facility and the Note Purchase Agreement (as defined and more fully described under the heading “Liquidity and Capital Resources” in this MD&A)) of Adjusted EBITDA (as defined in the Credit Facility and the Note Purchase Agreement) to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At March 31, 2024, the actual ratio was 3.11 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 March 31, 2024, the actual ratio was 2.43 to 1. At March 31, 2024, 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 three months ended March 31, 2024 compared to the same period in 2023 are summarized as follows: Cash Flows from Operating Activities: The Company’s operations provided net cash of $59.4 million in 2024, compared to net cash provided of $35.7 million in 2023. The $23.7 million increase in net cash provided by operating activities was primarily attributable to a $50.2 million change in deferred income taxes, partly offset by a $22.4 million decrease in accounts payable, primarily due to lower income taxes payable. Cash Flows from Investing Activities: Net cash used in investing activities was $78.1 million in 2024, compared to $263.5 million in 2023. The $185.4 million decrease in net cash used was primarily due to the $453.6 million paid for the business acquisitions of Vesta Modular and Brekke Storage in the first quarter of 2023, which was partly offset by $262.4 million in proceeds from the sale of discontinued operations during the same period. The net effect of these transactions in 2023 was $191.2 million in net cash used by investing activities. Cash Flows from Financing Activities: Net cash provided by financing activities was $19.7 million in 2024, compared to $227.5 million in 2023. The $207.8 million change was primarily attributable to reduced borrowings under bank lines of credit and note 33 purchase agreements in 2024, as during 2023 the net borrowings were required for the funding of the Vesta Modular and Brekke Storage business 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 (“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, 2024, 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 $623.6 million was outstanding and had capacity to borrow up to an additional $26.4 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 March 31, 2024, the actual ratio was 3.11 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 March 31, 2024, the actual ratio was 2.43 to 1. At March 31, 2024, 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. 34 In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf Notes”) in the aggregate principal amount of (x) $300 million minus (y) the amount of other notes (such as the Series D Senior Notes, Series E Senior Notes and Series F Senior Notes, each defined below) then outstanding, to be dated the date of issuance thereof, to mature, in case of each Shelf Note so issued, no more than 15 years after the date of original issuance thereof, to have an average life, in the case of each Shelf Note so issued, of no more than 15 years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Shelf Note so issued, in accordance with the Note Purchase Agreement. Shelf Notes may be issued and sold from time to time at the discretion of the Company’s Board of Directors and in such amounts as the Board of Directors may determine, subject to prospective purchasers’ agreement to purchase the Shelf Notes. The Company will sell the Shelf Notes directly to such purchasers. The full net proceeds of each Shelf Note will be used in the manner described in the applicable Request for Purchase with respect to such Shelf Note. 6.25% Senior Notes Due in 2030 On September 27, 2023, the Company issued and sold to the purchasers $75.0 million aggregate principal amount of 6.25% Series F Notes (the “Series F Senior Notes”) pursuant to the terms of the Second Amended and Restated Note Purchase and Private Shelf Agreement, dated June 8, 2023 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto. The Series F Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 6.25% per annum and mature on September 27, 2030. Interest on the Series F Senior Notes is payable semi-annually beginning on March 27, 2024 and continuing thereafter on September 27 and March 27 of each year until maturity. The principal balance is due when the notes mature on September 27, 2030. The full net proceeds from the Series F Senior Notes will primarily be used to fulfill the income tax obligations incurred from the divestiture of Adler Tanks. At March 31, 2024, the principal balance outstanding under the Series F Senior Notes was $75.0 million. 2.57% Senior Notes Due in 2028 On March 17, 2021, the Company issued and sold to the purchasers $40.0 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 March 31, 2024, 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 $60.0 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto. The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026. Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of each year until maturity. The principal balance is due when the notes mature on June 16, 2026. The full net proceeds from the Series E Senior Notes were used to pay down the Company’s credit facility. At March 31, 2024, the principal balance outstanding under the Series E Senior Notes was $60.0 million. Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series D Senior Notes, Series E Senior Notes and Series F Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement): • Permit the Consolidated Fixed Charge Coverage Ratio of EBITDA to fixed charges as of the end of any fiscal quarter to be less than 2.50 to 1. At March 31, 2024, the actual ratio was 3.11 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 March 31, 2024, the actual ratio was 2.43 to 1. 35 At March 31, 2024, 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 three months ended March 31, 2024 and 2023. As of March 31, 2024, 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 2023 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 March 31, 2024. Refer to our 2023 Annual Report for a discussion of our critical accounting policies and estimates. Subsequent Events On April 23, 2024, the Company entered into a first incremental facility amendment with Bank of America, N.A., as Administrative Agent and the first incremental lender (“BoA”) and the guarantors named therein (the “First Incremental Amendment”). The First Incremental Amendment amends the Second Amended and Restated Credit Agreement, dated as of July 15, 2022, as amended, by and among the Company, BoA, the other lenders named therein, and the guarantors named therein (the “Credit Agreement”) to institute an incremental term loan “A” facility in an aggregate principal amount of $75.0 million (the “Incremental Credit Facility”). The proceeds from the Incremental Credit Facility will be used for general corporate purposes. Concurrently with entry into the First Incremental Amendment, the Company repaid revolving loans issued under the Credit Agreement in an aggregate amount equal to approximately $75.0 million. 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 2023 Annual Report.