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, 2024, and the related condensed consolidated statements of income, comprehensive income, and shareholders’ equity, for the three-month and six-month periods ended June 30, 2024 and 2023, cash flows for the six month periods ended June 30, 2024 and 2023, 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, 2023, 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 21, 2024, 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, 2023, 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 25, 2024 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) 2024 2023 2024 2023 Revenues Rental $ 121,176 $ 117,840 $ 241,508 $ 228,087 Rental related services 34,358 33,857 63,938 60,989 Rental operations 155,534 151,697 305,446 289,076 Sales 54,414 47,801 89,483 71,461 Other 2,663 3,532 5,509 6,211 Total revenues 212,611 203,030 400,438 366,748 Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 22,165 22,597 44,531 44,430 Rental related services 24,990 23,825 45,776 43,093 Other 27,920 30,560 56,930 61,695 Total direct costs of rental operations 75,075 76,982 147,237 149,218 Costs of sales 34,121 31,438 56,518 45,553 Total costs of revenues 109,196 108,420 203,755 194,771 Gross profit 103,415 94,610 196,683 171,977 Expenses: Selling and administrative expenses 61,370 47,026 121,188 104,524 Other income, net — — ( 9,281 ) — Income from operations 42,045 47,584 84,776 67,453 Interest expense 13,037 9,945 25,741 17,409 Foreign currency exchange loss (gain) 31 18 163 ( 208 ) Income from continuing operations before provision for income taxes 28,977 37,621 58,872 50,252 Provision for income taxes from continuing operations 8,359 9,669 15,406 10,782 Income from continuing operations 20,618 27,952 43,466 39,470 Discontinued operations: Income from discontinued operations before provision for income taxes — — — 1,709 Provision for income taxes from discontinued operations — — — 453 Gain on sale of discontinued operations, net of tax — 2,630 — 61,513 Income from discontinued operations — 2,630 — 62,769 Net income $ 20,618 $ 30,582 $ 43,466 $ 102,239 Earnings per share from continuing operations: Basic $ 0.84 $ 1.14 $ 1.77 $ 1.61 Diluted $ 0.84 $ 1.14 $ 1.77 $ 1.61 Earnings per share from discontinued operations: Basic $ — $ 0.11 $ — $ 2.57 Diluted $ — $ 0.11 $ — $ 2.56 Earnings per share: Basic $ 0.84 $ 1.25 $ 1.77 $ 4.18 Diluted $ 0.84 $ 1.25 $ 1.77 $ 4.17 Shares used in per share calculation: Basic 24,549 24,479 24,531 24,448 Diluted 24,560 24,512 24,562 24,527 Cash dividends declared per share $ 0.475 $ 0.465 $ 0.950 $ 0.930 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) 2024 2023 2024 2023 Net income $ 20,618 $ 30,582 $ 43,466 $ 102,239 Other comprehensive income: Foreign currency translation adjustment, net of tax impact 11 43 78 25 Comprehensive income $ 20,629 $ 30,625 $ 43,544 $ 102,264 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) 2024 2023 Assets Cash $ 9,396 $ 877 Accounts receivable, net of allowance for credit losses of $ 2,866 at June 30, 2024 and $ 2,801 at December 31, 2023 217,379 227,368 Rental equipment, at cost: Relocatable modular buildings 1,398,475 1,291,093 Portable storage containers 242,107 236,123 Electronic test equipment 368,324 377,587 2,008,906 1,904,803 Less: accumulated depreciation ( 601,584 ) ( 575,480 ) Rental equipment, net 1,407,322 1,329,323 Property, plant and equipment, net 191,801 169,114 Inventories 28,213 15,425 Prepaid expenses and other assets 81,547 87,364 Intangible assets, net 59,453 64,588 Goodwill 323,224 323,224 Total assets $ 2,318,335 $ 2,217,283 Liabilities and Shareholders' Equity Liabilities: Notes payable $ 794,271 $ 762,975 Accounts payable 73,132 58,760 Accrued liabilities 108,928 108,763 Deferred income 134,624 111,428 Deferred income taxes, net 253,147 241,555 Total liabilities 1,364,102 1,283,481 Shareholders’ equity: Common stock, no par value - Authorized 40,000 shares Issued and outstanding - 24,550 shares as of June 30, 2024 and 24,496 shares as of December 31, 2023 111,596 111,122 Retained earnings 842,675 822,796 Accumulated other comprehensive loss ( 38 ) ( 116 ) Total shareholders’ equity 954,233 933,802 Total liabilities and shareholders’ equity $ 2,318,335 $ 2,217,283 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 McGrath RentCorp CONDENSED Consolidated Statements OF SHAREHOLDERS’ EQUITY (unaudited) Common Stock Retained Accumulated Other Comprehensive Total Shareholders’ (in thousands, except per share amounts) Shares Amount Earnings Income (Loss) Equity Balance at December 31, 2023 24,496 $ 111,122 $ 822,796 $ ( 116 ) 933,802 Net income — — 22,848 — 22,848 Share-based compensation — 2,209 — — 2,209 Common stock issued under stock plans, net of shares withheld for employee taxes 45 — — — — Taxes paid related to net share settlement of stock awards — ( 4,082 ) — — ( 4,082 ) Dividends accrued of $ 0.475 per share — — ( 11,824 ) — ( 11,824 ) Other comprehensive income — — — 67 67 Balance at March 31, 2024 24,541 $ 109,249 $ 833,820 $ ( 49 ) $ 943,020 Net income — — 20,618 — 20,618 Share-based compensation — 2,347 — — 2,347 Common stock issued under stock plans, net of shares withheld for employee taxes 9 — — — — Dividends accrued of $ 0.475 per share — — ( 11,763 ) — ( 11,763 ) Other comprehensive income — — — 11 11 Balance at June 30, 2024 24,550 $ 111,596 $ 842,675 $ ( 38 ) $ 954,233 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 Income (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. 7 McGrath RentCorp CONDENSED Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (in thousands) 2024 2023 Cash Flows from Operating Activities: Net income $ 43,466 $ 102,239 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 54,131 54,958 Deferred income taxes 11,592 ( 39,486 ) Provision for credit losses 873 1,400 Share-based compensation 4,556 3,382 Gain on sale of property, plant and equipment ( 9,281 ) — Gain on sale of discontinued operations — ( 61,513 ) Gain on sale of used rental equipment ( 15,537 ) ( 14,250 ) Foreign currency exchange loss (gain) 163 ( 208 ) Amortization of debt issuance costs 4 4 Change in: Accounts receivable 9,116 ( 1,116 ) Inventories ( 12,788 ) ( 6,594 ) Prepaid expenses and other assets 5,817 ( 1,910 ) Accounts payable 23,155 19,209 Accrued liabilities 166 6,046 Deferred income 23,196 9,290 Net cash provided by operating activities 138,629 71,451 Cash Flows from Investing Activities: Proceeds from sale of discontinued operations — 268,012 Purchases of rental equipment ( 145,345 ) ( 128,088 ) Purchases of property, plant and equipment ( 30,125 ) ( 11,229 ) Cash paid for acquisition of businesses — ( 456,312 ) Proceeds from sales of used rental equipment 29,334 27,410 Proceeds from sales of property, plant and equipment 12,251 — Net cash used in investing activities ( 133,885 ) ( 300,207 ) Cash Flows from Financing Activities: Net (payments) borrowings under bank lines of credit ( 43,708 ) 258,885 Borrowings under term note agreement 75,000 — Taxes paid related to net share settlement of stock awards ( 4,082 ) ( 6,100 ) Payment of dividends ( 23,435 ) ( 22,782 ) Net cash provided by financing activities 3,775 230,003 Effect of foreign currency exchange rate changes on cash — 1 Net increase in cash 8,519 1,248 Cash balance, beginning of period 877 957 Cash balance, end of period $ 9,396 $ 2,205 Supplemental Disclosure of Cash Flow Information: Interest paid, during the period $ 26,394 $ 16,802 Net income taxes (refunded) paid, during the period $ ( 4,599 ) $ 6,931 Dividends accrued during the period, not yet paid $ 12,150 $ 11,937 Rental equipment acquisitions, not yet paid $ 7,634 $ 7,612 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, 2024 NOTE 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION The condensed consolidated financial statements for the six months ended June 30, 2024 and 2023 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, 2024, 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 21, 2024 for the year ended December 31, 2023 (the “2023 Annual Report”). Agreement and Plan of Merger with WillScot Mobile Mini Holdings Corp. On January 28, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with WillScot Mobile Mini Holdings Corp., a Delaware corporation ("WillScot Mobile Mini”), Brunello Merger Sub I, Inc., a California corporation and a direct wholly owned subsidiary of WillScot Mobile Mini (“Merger Sub I”), and Brunello Merger Sub II, LLC, a Delaware limited liability company and direct wholly owned subsidiary of WillScot Mobile Mini (“Merger Sub II”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub I will merge with and into the Company (the “First-Step Merger”), with the Company surviving the First-Step Merger and, immediately thereafter, the Company will merge with and into Merger Sub II (the “Second-Step Merger” and together with the First-Step Merger, the “Transaction”), with Merger Sub II surviving the Second-Step Merger as a wholly owned subsidiary of WillScot Mobile Mini. Each of the parties to the Merger Agreement intends that the Transaction will be treated as a single integrated transaction that qualifies as a “reorganization” within the meaning of Section 368(a) of the U.S. Internal Revenue Code of 1986, as amended. Consummation of the Transaction is subject to the approval of the Company’s shareholders, the receipt of required regulatory approvals, and satisfaction or waiver of other customary closing conditions. The First-Step Merger and the Second-Step Merger will be consummated on the same day. On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the First-Step Merger (the “Effective Time”), each share of common stock, no par value, of the Company (the “Company Common Stock”) issued and outstanding immediately prior to the Effective Time, other than shares of Company Common Stock owned by WillScot Mobile Mini or any subsidiary of WillScot Mobile Mini or the Company, and shares held by shareholders who did not vote in favor of the Transaction (or consent thereto in writing) and who are entitled to demand and properly demands appraisal of such shares, will be automatically converted into the right to receive either (1) $ 123 in cash (the “Per Share Cash Consideration”) or (2) 2.8211 (the “Exchange Ratio”) shares of validly issued, fully paid and nonassessable shares of common stock, par value $ 0.0001 , of WillScot Mobile Mini (the “WillScot Mobile Mini Common Stock”) (the “Per Share Stock Consideration” together with the Per Share Cash Consideration, the “Merger Consideration”), as determined pursuant to the election and allocation procedures in the Merger Agreement. The Company’s shareholders will have the opportunity to elect to receive either the Per Share Cash Consideration or the Per Share Stock Consideration in respect of their Company Common Stock, provided that 60 % of the Company Common Stock will be converted into the cash consideration and 40 % of the Company Common Stock will be converted into the stock consideration. Pursuant to the terms of the Merger Agreement, the closing of the Merger Agreement is subject to the satisfaction of customary closing conditions, including adoption of the Merger Agreement by the Company’s shareholders, which was approved by the Company's shareholders on July 11, 2024, and receipt of regulatory approvals. The closing of the Transaction is not subject to any financing condition. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes—Improvements to Income Tax Disclosures (Topic 740), which will require Companies to disclose annually the specific categories in income tax rate reconciliations, provide additional information for reconciling items which meet a quantitative threshold, and disaggregate domestic and foreign income or loss from continuing operations. Additionally, this ASU will also require the disclosure of income tax expense or benefit from continuing operations disaggregated by federal, state and foreign. This ASU is effective for fiscal years beginning after December 15, 2024, and applied on a prospective basis. The Company is in the process of evaluating the financial statement impact of this ASU. In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280), which will require public companies to provide more transparency in both quarterly and 9 annual reports about the expenses they incur from revenue generating reportable business segments. In addition, the ASU requires that a public entity disclose significant segment expenses that are regularly provided to the chief operating decision maker, an amount for other segment items by reportable business segment, including a description of its composition, and the primary measures of a business segment's profit or loss in assessing segment performance. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the financial statement impact of this ASU. NOTE 3. IMPLEMENTED ACCOUNTING PRONOUNCEMENTS Effective January 1, 2024, the Company adopted the 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 adoption of this new guidance did not have a material impact on the Company's consolidated financial statements. NOTE 4. ACQUISITIONS On February 1, 2023, the Company completed the acquisition of Vesta Housing Solutions Holdings, Inc. (“Vesta Modular”), a portfolio company of Kinderhook Industries, for $ 437.2 million cash consideration on the closing date, which included certain adjustments, including net working capital and certain qualified capital expenditures. In connection with the acquisition, the Company purchased a representation and warranty insurance policy to provide certain recourse in the event of breaches of representations and warranties of Vesta Modular and the seller of Vesta Modular under the stock purchase agreement. Vesta Modular was a leading provider of temporary and permanent modular space solutions serving customers between its modular leasing and modular construction divisions. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in Accounting Standards Codification ("ASC") 805, Business Combinations , using the purchase method of accounting. Under the purchase method of accounting, the total purchase price is assigned to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date. The excess of the purchase price over those fair values is recorded as goodwill. The financial results of Vesta Modular were a part of the Mobile Modular segment since February 1, 2023, including $ 7.7 million of acquisition related transaction costs. On March 1, 2023, the Company completed the acquisition of Jerald R. Brekke, Inc., DBA Brekke Storage ("Brekke Storage"), for a total purchase price of $ 16.4 million. Brekke Storage was a regional provider of portable storage solutions in the Colorado market. The acquisition expanded the Portable Storage fleet by approximately 2,700 units and provided a new regional operation to serve the Colorado market. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805 using the purchase method of accounting. The financial results of Brekke Storage were a part of the Portable Storage segment since March 1, 2023, including $ 0.2 million of transaction costs. On April 1, 2023, the Company completed the acquisition of Dixie Temporary Storage, LLC ("Dixie Storage"), for a purchase price of $ 4.9 million. Dixie Storage was a regional provider of portable storage solutions in the South Carolina market and is highly complementary to the Company's Portable Storage business segment. The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805 using the purchase method of accounting. The financial results of Dixie Storage were a part of the Portable Storage segment since April 1, 2023, including $ 0.1 million of transaction costs. On July 1, 2023, the Company completed the purchase of assets of Inland Leasing and Storage, LLC ("Inland Leasing"), for a purchase price of $ 3.8 million. Inland Leasing was a regional provider of portable storage solutions in the Colorado market and is highly complementary to the Company's Portable Storage business segment. The acquisition was accounted for as a purchase of "assets" in accordance with criteria in ASC 805 and the assessment of the fair value of the purchased assets was allocated primarily to rental equipment totaling $ 3.0 million and intangible assets totaling $ 0.7 million. Supplemental pro forma information has not been provided as the historical financial results of Inland Leasing were not significant. Incremental transaction costs associated with the asset purchase were not significant. The following tables summarize the purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Vesta Modular, Brekke Storage and Dixie Storage business acquisitions, with excess amounts allocated to goodwill. The estimated fair values of the assets acquired and liabilities assumed at the acquisition date are determined based on preliminary valuations and analyses. Accordingly, the Company has made provisional estimates for the assets acquired and liabilities assumed. The valuation of intangible assets acquired is based on certain valuation assumptions including cash flow projections, discount rates, contributory asset 10 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 $ 212,639 Intangible assets: Goodwill 211,178 Customer relationships 29,900 Non-compete 7,100 Trade name 800 Cash 11 Accounts receivable 22,666 Property, plant and equipment 1,437 Prepaid expenses and other assets 3,550 Accounts payable and accrued liabilities ( 26,202 ) Deferred income ( 14,273 ) Deferred income taxes ( 11,596 ) 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 The value assigned to identifiable intangible assets was determined based on discounted estimated future cash flows associated with such assets to their present value. The combined acquired goodwill of $ 216.8 million reflects the strategic fit of Vesta Modular, Brekke Storage and Dixie Storage with the Company’s modular and portable storage business operations. The Company amortizes the acquired customer relationships over their expected useful lives of 11 years for Vesta Modular, 8 years for Brekke Storage and 9 years for Dixie Storage. The expected useful life for the non-compete agreements is 5 years. The trade name intangible acquired from the Vesta Modular acquisition will be amortized over its 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 table reports the actual results of the Company for the six months ended June 30, 2024, and the unaudited pro forma financial information for the six months ended June 30, 2023. The 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 period 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, have been adjusted to include 11 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) 2024 2023 (Actual) (Pro Forma) Pro-forma total revenues $ 400,438 $ 374,391 Pro-forma net income $ 43,466 $ 39,174 Pro-forma basic earnings per share $ 1.77 $ 1.60 Pro-forma diluted earnings per share $ 1.77 $ 1.60 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. The total transaction costs incurred from the divestiture were $ 8.8 million, with $ 6.7 million and $ 2.1 million incurred during the years ended December 31, 2023 and 2022, respectively. The divestiture of the Company's Adler Tanks business represents the Company's strategic shift to concentrate its operations on its core modular and storage businesses. The sale price was subject to certain adjustments, including net working capital, certain qualified capital expenditures and certain transaction expenses to be borne by the Company. In connection with the sale, the Company entered into a number of ancillary agreements, including an escrow agreement associated with net working capital adjustments, a restricted covenant agreement, a transition services agreement, and a number of leases whereby Ironclad or one of its affiliates would be a lessee to certain properties owned by the Company that the Adler Tanks business would continue to utilize after the sale. These ancillary agreements do not provide for continued involvement by the Company in Adler Tanks. In accordance with ASC 205-20, Presentation of Financial Statements - Discontinued Operations and ASC 360 , Property, Plant and Equipment, the Company determined that the criteria for the presentation of discontinued operations and held-for-sale, respectively, were met during the first quarter of 2023. The following table presents the results of Adler Tanks as reported in income from discontinued operations within the condensed consolidated statements of income for the six months ended June 30, 2023: 12 (dollar amounts in thousands) Six Months Ended June 30, 2023 Revenues Rental $ 6,520 Rental related services 2,584 Rental operations 9,104 Sales 269 Other 65 Total revenues 9,438 Costs and Expenses Direct costs of rental operations: Depreciation of rental equipment 1,325 Rental related services 2,020 Other 1,270 Total direct costs of rental operations 4,614 Costs of sales 159 Total costs of revenues 4,773 Gross Profit Rental 3,926 Rental related services 564 Rental operations 4,490 Sales 110 Other 65 Total gross profit 4,665 Expenses: Selling and administrative expenses 2,583 Income from operations 2,082 Interest expense allocation 374 Income from discontinued operations before provision for income taxes 1,709 Provision for income taxes from discontinued operations 453 Income from discontinued operations $ 1,256 The following table presents the carrying value of the divested business' assets and liabilities as presented within assets and liabilities of discontinued operations on the consolidated balance sheets as of December 31, 2022, which was the most recently audited period prior to divestiture: 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, significant operating and investing items related to Adler Tanks were as follows: 13 June 30, (in thousands) 2023 Operating activities of discontinued operations: Depreciation and amortization $ 1,457 Gain on sale of used rental equipment ( 111 ) Investing activities of discontinued operations: Proceeds from sales of used rental equipment 269 Purchases of rental equipment ( 25 ) Purchases of property, plant and equipment ( 40 ) The following table presents the reconciliation of income from discontinued operations to Adjusted EBITDA for the six months ended June 30, 2023: June 30, (in thousands) 2023 Income from discontinued operations $ 1,256 Provision for income taxes from discontinued operations 453 Interest expense 374 Depreciation and amortization 1,457 EBITDA 3,540 Share-based compensation 118 Transaction costs 24 Adjusted EBITDA from discontinued operations $ 3,682 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 842, Leases (Topic 842). Revenues determined to be non-lease related are accounted for in accordance with ASC 606, Revenue from Contracts with Customers (Topic 606). The Company accounts for revenues when approval and commitment from both parties have been obtained, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. The Company typically recognizes non-lease related revenues at a point in time because the customer does not simultaneously consume the benefits of the Company’s promised goods and services, or performance obligations, and 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 satisfy the criteria for over time recognition are recognized as work is performed by using the ratio of costs incurred to estimated total contract costs for each contract. The majority of revenue for these contracts is derived from long-term projects which typically span multiple quarters . The timing of revenue recognition, billings, and cash collections results in billed contract receivables and contract assets on the Company's Consolidated Balance Sheets. In the Company’s contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Billings can occur subsequent to revenue recognition, resulting in contract assets, or in advance, resulting in contract liabilities. These contract assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. The contract liabilities included in Deferred income on the Company’s Consolidated Balance Sheets totaled $ 65.8 million and $ 40.7 million at June 30, 2024 and December 31, 2023, respectively. Sales revenues totaling $ 7.7 million and $ 17.4 million were recognized during the three and six months ended June 30, 2024, respectively, which were included in the contract liability balance at December 31, 2023. For certain modular building sales, the customer retains a small portion of the contract price until full completion of the contract, or revenue is recognizable prior to customer billing, which results in revenue earned in excess of billings. These unbilled contract assets are included in Accounts receivable on the Company’s Consolidated Balance Sheets and totaled $ 9.6 million and $ 8.7 million at June 30, 2024 and December 31, 2023, respectively. The Company did not recognize any material contract asset impairments during the periods ended June 30, 2024 and December 31, 2023, respectively. The Company's uncompleted contracts with customers which meet the criteria for over-time revenue recognition have unsatisfied or partially satisfied performance obligations. As of June 30, 2024, approximately $ 51.7 million of revenue is expected to be recognized for unsatisfied or partially satisfied obligations. The Company expects to recognize revenue for approximately one half of these 14 unsatisfied or partially satisfied performance obligations over the next 12 months, with the remaining balance recognized thereafter. For the three and six months ended June 30, 2024, approximately $ 61.8 million and $ 102.0 million of revenue was recognized for sales and non-lease services transferred at a point in time, respectively, and approximately $ 4.2 million and $ 11.6 million of revenue was recognized for sales and non-lease services transferred over time, 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 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, 2024, the Company’s future minimum lease payments to be received under non-cancelable finance leases were $ 2.7 million. Of the total investment in sales-type leases, future minimum lease payments are expected to be $ 1.9 million in 2025, $ 0.6 million in 2026, and $ 0.2 million in 2027. The Company’s assessment of current expected losses on these receivables was not material and therefore no credit loss expense was provided as of the six months ended June 30, 2024. Other revenues include interest income on finance leases and rental income on facility leases. In the three and six months ended June 30, 2024, the Company’s lease revenues were $ 146.6 million and $ 286.8 million, respectively, consisting of $ 145.9 million and $ 285.7 million of operating lease revenues, respectively, and $ 0.7 million and $ 1.1 million of finance lease revenues, respectively. The Company has entered into finance leases to finance certain equipment sales to customers. The lease agreements have a bargain purchase option at the end of the lease term. For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a straight-line basis, which results in a constant rate of return on the unrecovered lease investment. The Company’s finance lease revenues for the three and six months ended June 30, 2024 include $ 0.6 million and $ 0.9 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. 15 The following table disaggregates the Company’s revenues by lease (within the scope of Topic 842) and non-lease revenues (within the scope of Topic 606) and the underlying service provided for the three and six months ended June 30, 2024 and 2023: (in thousands) Mobile Modular Portable Storage TRS- RenTelco Enviroplex Consolidated Three Months Ended June 30, 2024 Leasing $ 101,864 $ 18,366 $ 26,411 $ — $ 146,641 Non-lease: Rental related services 6,727 4,347 709 — 11,783 Sales 35,930 1,266 5,218 11,373 53,787 Other 25 43 332 — 400 Total non-lease 42,682 5,656 6,259 11,373 65,970 Total revenues $ 144,546 $ 24,022 $ 32,670 $ 11,373 $ 212,611 2023 Leasing $ 91,123 $ 19,296 $ 30,337 $ — $ 140,756 Non-lease: Rental related services 8,919 4,989 563 — 14,471 Sales 38,247 1,109 6,581 923 46,860 Other 549 30 364 — 943 Total non-lease 47,715 6,128 7,508 923 62,274 Total revenues $ 138,838 $ 25,424 $ 37,845 $ 923 $ 203,030 Six Months Ended June 30, 2024 Leasing $ 196,754 $ 37,395 $ 52,656 $ — $ 286,805 Non-lease: Rental related services 10,999 8,738 1,332 — 21,069 Sales 61,256 2,478 11,757 13,092 88,583 Other 3,122 171 688 — 3,981 Total non-lease 75,377 11,387 13,777 13,092 113,633 Total revenues $ 272,131 $ 48,782 $ 66,433 $ 13,092 $ 400,438 2023 Leasing $ 173,127 $ 36,951 $ 60,677 $ — $ 270,755 Non-lease: Rental related services 13,469 9,413 1,289 — 24,171 Sales 55,214 1,747 11,204 1,864 70,029 Other 943 55 795 — 1,793 Total non-lease 69,626 11,215 13,288 1,864 95,993 Total revenues $ 242,753 $ 48,166 $ 73,965 $ 1,864 $ 366,748 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 and electronic test equipment 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. Other Income, net Other income, net consists of the net gain on sales of property, plant and equipment. These sales are generally recognized at a point in time, with contractually defined performance obligations that are typically transferred upon the closing date of the sale. These 16 types of sales are infrequent in occurrence and reported on the condensed consolidated statements of income within the scope of ASC 610, Other Income . Proceeds to be received from the sale of property, plant and equipment are included in Accounts receivable on the Company's condensed consolidated balance sheets. 17 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) 2024 2023 2024 2023 Weighted-average number of shares of common stock for calculating basic earnings per share 24,549 24,479 24,531 24,448 Effect of potentially dilutive securities from equity-based compensation 11 33 31 79 Weighted-average number of shares of common stock for calculating diluted earnings per share 24,560 24,512 24,562 24,527 There were 73,190 and 697 anti-dilutive securities excluded from the computation of diluted earnings per share for the six months ended June 30, 2024 and 2023, respectively. The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. In August 2015, the Company’s Board of Directors authorized the Company to repurchase 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, 2024 and 2023. As of June 30, 2024, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan. NOTE 8. INVENTORIES Inventories consist of raw materials, supplies and work-in-process. Inventories are measured at the lower of actual cost or net realizable value for acquired units and estimated standard costs for manufactured units. The costs include expenditures incurred in acquiring the inventories, manufacturing, production costs, and other costs incurred in bringing them to their existing location and condition. The following table presents the carrying value of inventories: (dollar amounts in thousands) June 30, December 31, 2024 2023 Raw materials $ 4,112 $ 3,806 Work-in-process 24,101 11,619 Inventories $ 28,213 $ 15,425 18 NOTE 9. GOODWILL AND INTANGIBLE ASSETS Intangible assets consist of the following: (dollar amounts in thousands) Estimated useful life in years Average remaining life in years Cost Accumulated amortization Net book value June 30, 2024 Customer relationships 8 to 11 7.3 $ 73,217 $( 21,006 ) $ 52,211 Non-compete agreements 5 3.3 10,556 ( 4,197 ) 6,359 Trade name 0.75 to 8 4.8 2,000 ( 1,288 ) 712 Total amortizing 85,773 ( 26,491 ) 59,282 Trade name - non-amortizing Indefinite 171 — 171 Total $ 85,944 $( 26,491 ) $ 59,453 December 31, 2023 Customer relationships 8 to 11 7.8 $ 73,217 $( 17,003 ) $ 56,214 Non-compete agreements 5 3.7 10,556 ( 3,141 ) 7,415 Trade name 0.75 to 8 5.3 2,000 ( 1,212 ) 788 Total amortizing 85,773 ( 21,356 ) 64,417 Trade name - non-amortizing Indefinite 171 — 171 Total $ 85,944 $( 21,356 ) $ 64,588 The Company assesses potential impairment of its goodwill and intangible assets when there is evidence that events or circumstances have occurred that would indicate the recovery of an asset’s carrying value is unlikely. The Company also assesses potential impairment of its goodwill and intangible assets with indefinite lives on an annual basis regardless of whether there is evidence of impairment. If indicators of impairment were to be present in intangible assets used in operations and future discounted cash flows were not expected to be sufficient to recover the asset’s carrying amount, an impairment loss would be charged to expense in the period identified. The amount of an impairment loss that would be recognized is the excess of the asset’s carrying value over its fair value. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. The Company last conducted a qualitative analysis of its goodwill and intangible assets in the fourth quarter 2023, with no indicators of impairment. In addition, no impairment triggering events occurred during the six months ended June 30, 2024, and there were no changes to the carrying value of goodwill during this period. 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, 2024 and 2023, was $ 5.1 million and $ 5.0 million, respectively. Based on the carrying values at June 30, 2024 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $ 5.1 million for the remainder of fiscal year 2024, $ 10.2 million in 2025, $ 9.8 million in 2026, $ 9.6 million in 2027, $ 8.2 million in 2028 and $ 4.7 million in 2029. 19 NOTE 10. SEGMENT REPORTING During the quarter ended December 31, 2023, the Company determined that its Portable Storage business segment met the criteria for separate recognition as defined in the Accounting Standards Codification ("ASC") Topic 280, Segment Reporting. The guidance under this topic requires a public business entity to evaluate both quantitative and qualitative thresholds to determine the significance of a business segment and whether the separate reporting of a business segment enhances the users' understanding of the reporting entity's performance, future net cash flows and judgments. The Company evaluated the guidance within Topic 280 and made its determination to separately report the Portable Storage segment primarily due to the Company's continued growth in container fleet purchases and related increased revenues and improved profitability performance when compared to previously reported periods. In addition to this determination, the Company also divested its Adler Tanks business segment during the year ended December 31, 2023. Additional information regarding the divestiture of Adler Tanks can be found in Note 5 of the condensed consolidated financial statements. At June 30, 2024, the Company was comprised of four reportable 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 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 2023 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 and income before provision for income taxes. Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are generally allocated to Mobile Modular, Portable Storage and TRS-RenTelco based on their pro-rata share of direct revenues. Interest expense is allocated amongst Mobile Modular, Portable Storage and TRS-RenTelco based on their pro-rata share of average rental equipment at cost, 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, 2024 and 2023 for the Company’s reportable segments are shown in the following table: 20 (dollar amounts in thousands) Mobile Modular Portable Storage TRS- RenTelco Enviroplex 1 Consolidated Six Months Ended June 30, 2024 Rental revenues $ 154,535 $ 36,230 $ 50,743 $ — $ 241,508 Rental related services revenues 53,053 9,363 1,522 — 63,938 Sales and other revenues 64,543 3,189 14,168 13,092 94,992 Total revenues 272,131 48,782 66,433 13,092 400,438 Depreciation of rental equipment 19,870 1,965 22,696 — 44,531 Gross profit 133,131 33,405 26,846 3,301 196,683 Selling and administrative expenses 82,354 17,885 17,433 3,517 121,188 Other income ( 6,220 ) ( 1,319 ) ( 1,742 ) — ( 9,281 ) Income (loss) from operations 56,999 16,840 11,155 ( 216 ) 84,776 Interest expense (income) allocation 19,971 2,867 4,121 ( 1,218 ) 25,741 Income before provision for income taxes 37,028 13,973 6,871 1,002 58,872 Rental equipment acquisitions 118,300 7,403 10,623 — 136,326 Accounts receivable, net (period end) 170,966 12,231 20,333 13,849 217,379 Rental equipment, at cost (period end) 1,398,475 242,107 368,324 — 2,008,906 Rental equipment, net book value (period end) 1,058,041 221,486 127,795 — 1,407,322 Utilization (period end) 2 78.1 % 64.5 % 55.8 % Average utilization 2 78.6 % 67.8 % 56.4 % 2023 Rental revenues $ 134,826 $ 35,544 $ 57,717 $ — $ 228,087 Rental related services revenues 49,370 10,072 1,547 — 60,989 Sales and other revenues 58,557 2,550 14,701 1,864 77,672 Total revenues 242,753 48,166 73,965 1,864 366,748 Depreciation of rental equipment 18,072 1,657 24,701 — 44,430 Gross profit 107,244 32,982 31,503 248 171,977 Selling and administrative expenses 69,548 15,262 16,577 3,137 104,524 Other income — — — — — Income (loss) from operations 37,696 17,720 14,926 ( 2,889 ) 67,453 Interest expense (income) allocation 12,592 2,126 3,801 ( 1,110 ) 17,409 Income (loss) before provision for income taxes 25,104 15,594 11,333 ( 1,779 ) 50,252 Rental equipment acquisitions 90,933 14,642 16,906 — 122,481 Accounts receivable, net (period end) 144,640 17,287 26,138 3,611 191,676 Rental equipment, at cost (period end) 1,237,221 220,763 390,832 — 1,848,816 Rental equipment, net book value (period end) 928,997 203,781 162,872 — 1,295,650 Utilization (period end) 2 79.2 % 77.0 % 58.3 % Average utilization 2 79.4 % 79.4 % 58.7 % 1. Gross Enviroplex sales revenues were $ 13,093 and $ 1,871 for the six months ended June 30, 2024 and 2023, respectively. There were $ 2 and $ 7 of inter-segment sales to Mobile Modular in the six months ended June 30, 2024 and 2023, respectively, which required elimination in consolidation. 2. Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment, and new equipment inventory. The Average utilization for the period is calculated using the average costs of rental equipment. No single customer accounted for more than 10% of total revenues for the six months ended June 30, 2024 and 2023. Revenues from foreign country customers accounted for 2 % and 3 % of the Company’s total revenues for the same periods, respectively. 21