What changed in this filing

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Item 1. Financial Statements

2022-04-28 compared with 2021-10-28 · 69 added, 143 removed, 304 unchanged (41% of the section changed)

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Results of review of interim financial statements

We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp, and subsidiaries (the “Company”) as of September 30, 2021, and the related condensed consolidated statements of income, comprehensive income, and changes in shareholders’ equity for the three and nine-months ended September 30, 2021 and 2020, cash flows for the nine-months ended September 30, 2021 and 2020 and the related notes (collectively referred to as the “interim financial statements”).

We have reviewed the accompanying condensed consolidated balance sheet of McGrath RentCorp (a California Corporation), and subsidiaries (the “Company”) as of March 31, 2022, and the related condensed consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three-months ended March 31, 2022 and 2021, and the related notes (collectively referred to as the “interim financial statements”).

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein);

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2021, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein);

and in our report dated February 23, 2022, we expressed an unqualified opinion on those consolidated financial statements.

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San Jose, California

October 28, 2021

April 28, 2022

McGRATH RENTCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per share amounts)

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Interest expense

Foreign currency exchange (loss) gain

Foreign currency exchange gain (loss)

Income before provision for income taxes

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

Other comprehensive income (loss):

Foreign currency translation adjustment

Tax benefit (provision)

Other comprehensive income:

Foreign currency translation adjustment, net of tax impact

Comprehensive income

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

(in thousands)

Accounts receivable, net of allowance for doubtful accounts of $ 2,225 in 2021

and $ 2,100 in 2020

Accounts receivable, net of allowance for credit losses of $ 2,125 in 2022 and 2021

Rental equipment, at cost:

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Common stock, no par value - Authorized 40,000 shares

Issued and outstanding - 24,247 shares as of September 30, 2021 and 24,128 shares as of December 31, 2020

Issued and outstanding - 24,335 shares as of March 31, 2022 and 24,260 shares as

of December 31, 2021

Retained earnings

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Balance at March 31, 2022

Share-based compensation

Common stock issued under stock plans, net of shares

withheld for employee taxes

Taxes paid related to net share settlement of stock awards

Dividends accrued of $ 0.435 per share

Other comprehensive loss

Balance at June 30, 2021

Share-based compensation

Common stock issued under stock plans, net of shares

withheld for employee taxes

Taxes paid related to net share settlement of stock awards

Dividends accrued of $ 0.435 per share

Other comprehensive loss

Balance at September 30, 2021

The accompanying notes are an integral part of these condensed consolidated financial statements.

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withheld for employee taxes

Repurchased common stock

Taxes paid related to net share settlement of stock awards

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Balance at March 31, 2021

Share-based compensation

Common stock issued under stock plans, net of shares

withheld for employee taxes

Repurchased common stock

Taxes paid related to net share settlement of stock awards

Dividends accrued of $ 0.42 per share

Other comprehensive loss

Balance at June 30, 2020

Share-based compensation

Common stock issued under stock plans, net of shares

withheld for employee taxes

Repurchased common stock

Taxes paid related to net share settlement of stock awards

Dividends accrued of $ 0.42 per share

Other comprehensive loss

Balance at September 30, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

1 unchanged sentence

CONDENSED Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

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Depreciation and amortization

Deferred income taxes

Provision for doubtful accounts

1 unchanged sentence

Gain on sale of used rental equipment

Foreign currency exchange loss

Foreign currency exchange (gain) loss

Amortization of debt issuance costs

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Deferred income

Deferred income taxes

Net cash provided by operating activities

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Purchases of property, plant and equipment

Cash paid for acquisition of businesses

Proceeds from sales of used rental equipment

1 unchanged sentence

Cash Flows from Financing Activities:

Net borrowing (repayment) under bank lines of credit

Borrowings under note purchase agreement

Principal payment of Series B senior notes

Repurchase of common stock

Net repayment under bank lines of credit

Taxes paid related to net share settlement of stock awards

Payment of dividends

Net cash provided by (used in) financing activities

Net cash used in financing activities

Effect of foreign currency exchange rate changes on cash

Net increase (decrease) in cash

Net increase in cash

Cash balance, beginning of period

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McGRATH RENTCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2022

CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 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 condensed consolidated financial statements for the three months ended March 31, 2022 and 2021 have not been audited, but in the opinion of management, all adjustments (consisting of normal recurring accruals, consolidating and eliminating entries) necessary for the fair presentation of the consolidated financial position, results of operations and cash flows of McGrath RentCorp (the “Company”) have been made.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations.

The consolidated results for the three and nine months ended September 30, 2021 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year.

The consolidated results for the three months ended March 31, 2022 should not be considered as necessarily indicative of the consolidated results for the entire fiscal year.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest Annual Report on Form 10-K, filed with the SEC on February 23, 2022 for the year ended December 31, 2021 (the “2021 Annual Report”).

IMPLEMENTED ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2021, the Company adopted the Financial Accounting Standards Board’s Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, expected to reduce cost and complexity related to the accounting for income taxes.

The ASU removed specific exceptions to the general principles in Topic 740 (GAAP).

It eliminated the need for an organization to analyze whether the following apply in a given period:

exception to the incremental approach for intra-period tax allocation;

exceptions to accounting for basis differences when there are ownership changes in foreign investments;

and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improved financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:

franchise taxes that are partially based on income;

transactions with a government that result in a step up in the tax basis of goodwill;

separate financial statements of legal entities that are not subject to tax;

and enacted changes in tax laws in interim periods.

The adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

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 Topic 842, Leases.

Revenues determined to be non-lease related are accounted for in accordance with ASU No.

2014-09, Revenue from Contracts with Customers (Topic 606).

The majority of the Company’s revenues are considered lease or lease related and are accounted for in accordance with Accounting Standards Codification (ASC) 842, Leases.

Revenues determined to be non-lease related are accounted for in accordance with ASC 606, Revenue from Contracts with Customers.

The Company accounts for revenues when approval and commitment from both parties have been obtained, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

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The advance payments are not considered a significant financing component because the payments are used to meet working capital needs during the contract and to protect the Company from the customer failing to adequately complete their obligations under the contract.

These contract liabilities are included in Deferred income on the Company’s consolidated balance sheet and totaled $ 27.7 million and $ 11.3 million at September 30, 2021 and December 31, 2020, respectively.

Sales revenues totaling $ 0.6 million and $ 7.8 million were recognized during the three and nine months ended September 30, 2021, respectively, which were included in the contract liability balance at December 31, 2020.

These contract liabilities are included in Deferred income on the Company’s consolidated balance sheet and totaled $ 21.8 million and $ 16.8 million at March 31, 2022 and December 31, 2021, respectively.

Sales revenues totaling $ 2.2 million were recognized during the three months ended March 31, 2022, which were included in the contract liability balance at December 31, 2021.

For certain modular building sales, the customer retains a small portion of the contract price until full completion of the contract, which results in revenue earned in excess of billings.

These unbilled contract assets are included in Accounts receivable on the Company’s consolidated balance sheet and totaled $ 1.8 million and $ 1.4 million at September 30, 2021 and December 31, 2020, respectively.

These unbilled contract assets are included in Accounts receivable on the Company’s consolidated balance sheet and totaled $ 0.9 million and $ 1.3 million at March 31, 2022 and December 31, 2021, respectively.

Lease Revenues

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Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned.

Rental related services revenues are primarily associated with relocatable modular buildings and liquid and solid containment tanks and boxes

Rental related services revenues are primarily associated with relocatable modular buildings and liquid and solid containment tanks and boxes leases.

For modular building leases, rental related services revenues for modifications, delivery, installation, dismantle and return 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.

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Other revenues include interest income on finance leases and rental income on facility leases.

In the three and nine months ended September 30, 2021, the Company’s lease revenues were $ 118.1 million and $ 323.5 million, respectively, consisting of $ 117.8 million and $ 322.2 million of operating lease revenues, respectively and $ 0.3 million and $ 1.3 million of finance lease revenues, respectively.

In the three months ended March 31, 2022, the Company’s lease revenues were $ 118.5 million, consisting of $ 117.8 million of operating lease revenues and $ 0.7 million of finance lease revenues.

The Company has entered into finance leases to finance certain equipment sales to customers.

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For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a straight-line basis, which results in a constant rate of return on the unrecovered lease investment.

The Company’s finance lease revenues for the three and nine months ended September 30, 2021 include $ 0.3 million and $ 1.2 million of sales revenues, respectively, and $ 0.1 million of interest income for both periods.

The Company’s finance lease revenues for the three months ended March 31, 2022 include $ 0.6 million of sales revenues and $ 0.1 million of interest income.

Non-Lease Revenues

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Sales taxes charged to customers are reported on a net basis and are excluded from revenues and expenses.

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 months ended September 30, 2021 and 2020:

The following table disaggregates the Company’s revenues by lease (within the scope of ASC 842) and non-lease revenues (within the scope of ASC 606) and the underlying service provided for the three months ended March 31, 2022 and 2021:

(in thousands)

Three Months Ended September 30,

Rental related services

Total non-lease

Total revenues

Rental related services

Total non-lease

Total revenues

Nine Months Ended September 30,

Three Months Ended March 31,

Rental related services

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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, the Company has not found it necessary to establish such reserves to date as warranty costs have not been significant.

Although the Company’s policy is to provide reserves for warranties when required for specific circumstances, warranty costs have not been significant.

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.

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Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands)

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calculating diluted earnings per share

There were no anti-dilutive securities excluded from the computation of diluted earnings per share in the three and nine months ended September 30, 2021 and 2020.

The Company has 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.

There were no anti-dilutive securities excluded from the computation of diluted earnings per share in the three months ended March 31, 2022 and 2021.

The Company has in the past made purchases of shares of its common stock from time to time in over-the-counter market (NASDAQ) transactions, through privately negotiated, large block transactions and through a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.

In August 2015, the Company’s Board of Directors authorized the Company to repurchase up to 2,000,000 shares of the Company's outstanding common stock (the “Repurchase Plan”).

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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.

The following table presents share repurchase activities during the three and nine months ended September 30, 2021 and 2020.

As of September 30, 2021, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan.

Three Months Ended

September 30,

Nine Months Ended

September 30,

(in thousands, except share and per share amounts)

Number of shares repurchased

Aggregate purchase price

Average price per repurchased share

There were no shares repurchased during the three months ended March 31, 2022 and 2021.

As of March 31, 2022, 1,309,805 shares remained authorized for repurchase under the Repurchase Plan.

INTANGIBLE ASSETS

Intangible assets consist of the following, which includes the intangible assets from the Design Space and Kitchens To Go acquisitions that were completed during the three months ended June 30, 2021.

These acquisitions are discussed more fully below in Note 7.

Acquisitions:

Intangible assets consist of the following:

(dollar amounts in thousands)

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Net book value

September 30, 2021

March 31, 2022

Customer relationships

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Non-compete agreements

Customer backlog

Total amortizing

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The Company last conducted a qualitative analysis of its goodwill and intangible assets in the fourth quarter 2021, with no indicators of impairment.

In addition, no impairment triggering events occurred during the nine months ended September 30, 2021.

In addition, no impairment triggering events occurred during the three months ended March 31, 2022.

Determining fair value of a reporting unit is judgmental and involves the use of significant estimates and assumptions.

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Intangible assets with finite useful lives are amortized over their respective useful lives.

Based on the carrying values at September 30, 2021 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $ 1.7 million for the remainder of fiscal year 2021, $ 5.9 million annually in 2022 through 2024, $ 5.8 million in 2025 and $ 5.4 million in 2026.

Amortization expense in the three months ended March 31, 2022 and 2021, was $ 1.5 million and $ 0.1 million, respectively.

Based on the carrying values at March 31, 2022 and assuming no subsequent impairment of the underlying assets, the amortization expense is expected to be $ 4.4 million for the remainder of fiscal year 2022, $ 5.9 million annually in 2023 through 2025, $ 5.4 million in 2026 and $ 5.2 million in 2027.

SEGMENT REPORTING

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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 2020 A

nnual R eport.

Management focuses on several key measures to evaluate and assess each segment’s performance, including rental revenue growth, gross profit, income from operations and income before provision for income taxes.

Management focuses on several key measures to evaluate and assess each segment’s performance, including rental revenue growth, gross profit and gross margins, income from operations, income before provision for income taxes and adjusted EBITDA.

Excluding interest expense, allocations of revenue and expense not directly associated with one of these segments are generally allocated to Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of direct revenues.

Interest expense is allocated among Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental equipment at cost, intangible assets, accounts receivable, deferred income and customer security deposits.

Interest expense is allocated amongst Mobile Modular, TRS-RenTelco and Adler Tanks based on their pro-rata share of average rental equipment at cost, intangible assets, accounts receivable, deferred income and customer security deposits.

The Company does not report total assets by business segment.

Summarized financial information for the nine months ended September 30 , 20 2 1 and 20 20 for the Company’s reportable segments is shown in the following table:

Summarized financial information for the three months ended March 31, 2022 and 2021 for the Company’s reportable segments is shown in the following table:

(dollar amounts in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Rental revenues

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Selling and administrative expenses

Income from operations

Income (loss) from operations

Interest (expense) income allocation

Income before provision for income taxes

Income (loss) before provision for income taxes

Adjusted EBITDA

Rental equipment acquisitions

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Selling and administrative expenses

Income from operations

Income (loss) from operations

Interest (expense) income allocation

Income before provision for income taxes

Income (loss) before provision for income taxes

Adjusted EBITDA

Rental equipment acquisitions

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Average utilization 2

Gross Enviroplex sales revenues were $ 15,909 and $ 17,892 for the nine months ended September 30, 2021 and 2020, respectively.

There were $ 1,012 and $ 1,276 inter-segment sales to Mobile Modular in the nine months ended September 30, 2021 and 2020, respectively, which required elimination in consolidation.

Gross Enviroplex sales revenues were $ 917 and $ 2,090 for the three months ended March 31, 2022 and 2021, respectively.

There were $ 0 and $ 856 inter-segment sales to Mobile Modular in the three months ended March 31, 2022 and 2021, respectively, which required elimination in consolidation.

Utilization is calculated each month by dividing the cost of rental equipment on rent by the total cost of rental equipment, excluding accessory equipment, and for Mobile Modular and Adler Tanks, excluding new equipment inventory.

The Average utilization for the period is calculated using the average costs of rental equipment.

No single customer accounted for more than 10% of total revenues for the nine months ended September 30, 2021 and 2020.

No single customer accounted for more than 10% of total revenues for the three months ended March 31, 2022 and 2021.

Revenues from foreign country customers accounted for 4 % and 5 % of the Company’s total revenues for the same periods, respectively.

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Design Space provides modular buildings and portable storage containers rental and sale solutions to customers in the West and Pacific Northwest states in the U.S.

The acquisition was accounted for as a purchase of a “business” in accordance with criteria in Accounting Standards Codification (ASC) 805 – “Business Combinations” using the purchase method of accounting.

The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805, Business Combinations, using the purchase method of accounting.

Under the purchase method of accounting, the total purchase price is assigned to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.

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On April 1, 2021 the Company completed the purchase of assets of GRS Holding LLC, DBA Kitchens To Go (“Kitchens To Go”) for $ 18.3 million in cash consideration.

Kitchens To Go provides interim and permanent modular kitchen solutions for foodservice

providers that require flexible facilities to continue or expand operations.

Kitchens To Go provides interim and permanent modular kitchen solutions for foodservice providers that require flexible facilities to continue or expand operations.

The acquisition was accounted for as a purchase of a “business” in accordance with criteria in ASC 805 using the purchase method of accounting.

The financial results of Kitchens To Go were a part of the Mobile Modular segment since April 1, 2021, including $ 0.3 million of transaction costs.

The following tables summarize the preliminary purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Design Space and Kitchens To Go acquisitions, with excess amounts allocated to goodwill.

The estimated fair values of the assets acquired and liabilities assumed on 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 following tables summarize the purchase price allocations reflecting estimated fair values of assets acquired and liabilities assumed in the Design Space and Kitchens To Go acquisitions, with excess amounts allocated to goodwill.

The valuation of intangible assets acquired is based on certain valuation assumptions including cash flow projections, discount rates, contributory asset charges and other valuation model inputs.

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Customer backlog

Accounts receivable, net of allowance for doubtful accounts of $ 125

Accounts receivable

Property, plant and equipment

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Total purchase price

The primary areas of the preliminary purchase price allocations that have not been finalized relate to the finalization of working capital and the valuation of rental equipment, intangible assets and any identified deferred tax liabilities.

Upon completion of the fair value assessment, the ultimate amounts of recorded intangible assets could differ from the preliminary allocation disclosed above.

Any change in working capital will reduce or increase the cash consideration.

Any changes to preliminary estimates of the fair value of rental equipment and intangible assets will result in adjustments to goodwill during the measurement period, with subsequent changes in estimates recorded in the statement of operations.

The preliminary value assigned to identifiable intangible assets have been determined based on discounted estimated future cash flows associated with such assets to their present value.

The value assigned to identifiable intangible assets have been determined based on discounted estimated future cash flows associated with such assets to their present value.

The combined acquired goodwill of $ 104,196 reflects the strategic fit of Design Space and Kitchens to Go with the Company’s modular business operations.

The Company will amortize the acquired customer relationships, tradename, non-compete and customer backlog over their expected useful lives of 8 years, 8 years, 5 years and 6 months,

respectively.

The Company will amortize the acquired customer relationships, tradename, non-compete and customer backlog over their expected useful lives of 8 years, 8 years, 5 years and 6 months, respectively.

Goodwill is expected to have an indefinite life and will be subject to future impairment testing.

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A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the combined federal and state statutory rate of 28 % on the acquisitions’ combined net income.

The pro forma results for the nine months ended September 30, 2021 have been adjusted to include transaction related costs.

The pro forma results for the three months ended March 31, 2021 have been adjusted to include transaction related costs.

This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of the future operations or the results that would have occurred had the acquisitions taken place in the periods noted below:

Nine months ended September 30,

Three months ended March 31,

(dollar amounts in thousands, except for per share amounts)

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Actual diluted earnings per share

On December 31, 2021 the Company completed the purchase of the assets of Titan Storage Containers, LLC (“Titan”) for $ 6.6 million in cash consideration on the closing date and $ 0.3 million remaining liability to the seller.

The acquisition was accounted for as a purchase of “assets” in accordance with criteria in ASC 805 and the initial assessment of the fair value of the purchased assets was allocated primarily to rental equipment totaling $ 6.2 million and rolling stock assets totaling $ 0.8 million, partially offset by accrued liabilities of $ 0.2 million.

The rolling stock assets include delivery trucks, delivery trailers, trucks and forklifts.

Supplemental pro forma prior year information has not been provided as the historical financial results of Titan were not significant.

Incremental transaction costs associated with the asset purchase were not significant.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements