MCGRATH RENTCORP (MGRC) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section as well as those discussed under Part I, “Item 1A. Risk Factors” and elsewhere in this document. This discussion should be read together with the financial statements and the related notes thereto set forth in “Item 8. Financial Statements and Supplementary Data.”

Results of Operations

General

The Company, incorporated in 1979, is a leading rental provider of relocatable modular buildings for classroom and office space, electronic test equipment for general purpose and communications needs, and liquid and solid containment tanks and boxes.  The Company’s primary emphasis is on equipment rentals.  The Company is comprised of four reportable business segments: (1) its modular building and portable storage container rental segment (“Mobile Modular”); (2) its electronic test equipment rental segment (“TRS-RenTelco”); (3) its containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (“Adler Tanks”); and (4) its classroom manufacturing segment selling modular buildings used primarily as classrooms in California (“Enviroplex”).  In 2021, Mobile Modular, TRS-RenTelco, Adler Tanks and Enviroplex contributed 63%, 28%, 5% and 4%, respectively, of the Company’s income before provision for taxes (the equivalent of “pre-tax income”), compared to 62%, 26%, 6% and 6%, respectively, for 2020.

The Company generates its revenues primarily from the rental of its equipment on operating leases with 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 revenue and certain other service revenues negotiated as part of the lease agreements with customers and related costs are recognized on a straight-line basis over the terms of the lease.  Sales revenue and related costs are recognized upon delivery and installation of the equipment to the customers. Sales revenues are less predictable and can fluctuate from period to period depending on customer demands and requirements.  Generally, rental revenues less cash operating costs recover the equipment’s capitalized cost in a shorter 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 rental operations include rental and rental related services revenues which comprised approximately 79% of the Company’s total revenues in 2021 and for the three years ended December 31, 2021.  Over the past three years, modulars, electronic test equipment and tanks and boxes comprised approximately 58%, 24% and 18%, respectively, of the cumulative rental operations revenues. The Company’s direct costs of rental operations include depreciation of rental equipment, rental related service costs, impairment of rental equipment, and other direct costs of rental operations (which include direct labor, supplies, repairs, insurance, property taxes, license fees and amortization of certain lease costs).

The Company sells modular, electronic test equipment and liquid and solid containment tanks and boxes that are new, or previously rented. The Company’s Enviroplex subsidiary manufactures and sells modular classrooms. The renting and selling of some modular equipment requires a dealer’s license, which the Company has obtained from the appropriate governmental agencies.  Sales and other revenues of modulars, electronic test equipment and tanks and boxes have comprised approximately 21% of the Company’s consolidated revenues in 2021 and for the three years ended December 31, 2021. Over the past three years, modulars, electronic test equipment and tanks and boxes comprised approximately 77%, 21% and 2% of sales and other revenues, 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.

The rental and sale of modulars to public school districts comprised 21%, 23% and 25% of the Company’s consolidated rental and sales revenues for 2021, 2020 and 2019, respectively.  (For more information, see “Item 1. Business – Relocatable Modular Buildings – Classroom Rentals and Sales to Public Schools (K-12)” above.)

Selling and administrative expenses primarily include personnel and benefit costs, which includes share-based compensation, depreciation and amortization of property, plant and equipment and intangible assets, 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 assurance as to the Company’s ability to maintain a large installed customer base or ability to sustain its historical operating margins.

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Recent Developments

Acquisitions

On December 31, 2021 the Company completed the purchase of the assets of Titan Storage Containers, LLC (“Titan”) for $6.9 million cash consideration. Titan is a regional provider of portable storage solutions in the Texas market. The acquisition added approximately 1,150 portable storage containers to the existing Mobile Modular division fleet located in the Texas region.  Titan became part of the Mobile Modular reporting segment.

On May 17, 2021, the Company completed the purchase of the assets of Design Space Modular Buildings PNW, LP (“Design Space”) for $267.3 million cash consideration on the closing date.  Design Space provides modular buildings and portable storage containers rental and sale solutions to customers in the West and Pacific Northwest states in the U.S.  Design Space became part of the Mobile Modular reporting segment.

On April 1, 2021 the Company completed the purchase of the assets of GRS Holding LLC, DBA Kitchens to Go (“Kitchens To Go”) for $18.3 million 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 became part of the Mobile Modular division, providing temporary foodservice facilities nationwide.

Dividends

In February 2022, the Company announced that its Board of Directors declared a cash dividend of $0.455 per common share for the quarter ending March 31, 2022, an increase of 5% over the prior year’s comparable quarter.

Note Purchase Agreement

In June 2021, the Company issued and sold to Prudential Retirement Insurance and Annuity Company, The Prudential Insurance Company of America and The Prudential Insurance Company of America (collectively, the “Purchasers”) $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.

The Series E Notes are an unsecured obligation of the Company. The Notes bear interest at a rate of 2.35% per annum and mature on June 16, 2026.  Interest on the Series E 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 Company may at any time prepay all or any portion of the Series D Notes; provided that such portion is at least $5,000,000 (and increments of $100,000 in excess thereof). In the event of a prepayment, the Company will pay an amount equal to 100% of the principal amount so prepaid, plus a make-whole amount. The full net proceeds from the Series E Notes was used to pay down the Company’s Credit Facility.

In March 2021, the Company issued and sold to Prudential Retirement Insurance and Annuity Company, The Prudential Insurance Company of America and The Prudential Insurance Company of America (collectively, the “Purchasers”) $40 million aggregate principal amount of 2.57% Series D Notes (the "Series D 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 Notes are an unsecured obligation of the Company. The Notes bear interest at a rate of 2.57% per annum and mature on March 17, 2028.  Interest on the Series D 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 Company may at any time prepay all or any portion of the Series D Notes; provided that such portion is at least $5,000,000 (and increments of $100,000 in excess thereof). In the event of a prepayment, the Company will pay an amount equal to 100% of the principal amount so prepaid, plus a make-whole amount. The full net proceeds from the Series D Notes was used to pay off the Company’s $40 million Series B Senior Notes.

COVID-19

The outbreak of a new strain of coronavirus, COVID-19, which began in December 2019, has continued to spread globally including to every state in the United States.  The Center for Disease Control (“CDC”) and World Health Organization (“WHO”) recognized this outbreak as a pandemic, which has caused shutdowns to businesses and cities worldwide while disrupting supply chains, business operations, travel, consumer confidence and business sentiment.  Each of the states in which the Company operates, and in some cases the localities as well, have previously issued orders requiring the closure of non-essential business and/or requiring residents to stay at home, however, currently none of the Company’s locations are required to be closed by local or state order.  The Company is following guidelines established by the CDC and WHO and orders issued by state and local governments where the Company operates.  The Company has taken a number of precautionary health and safety measures to safeguard its employees and customers, while maintaining business continuity to enable each of its operating segments and branch locations to continue providing services to customers identified as essential businesses under the relevant state and local rules.  The Company has implemented remote work policies, restricted travel, separated work groups, enhanced cleaning and hygiene protocols in all of its facilities, products and vehicles, and requires distancing protocols for production and logistical personnel.  The Company is continuing to monitor and assess orders

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issued by federal, state and local governments to ensure compliance with evolving COVID-19 guidelines.  The Company also continues to monitor the impact of COVID-19 on its existing customers who themselves may be impacted by governmental shutdowns and other impacts due to the governmental orders.

As of the date of this filing, significant uncertainty continues to exist concerning the magnitude of the impact and duration of the COVID-19 pandemic.  While the Company's operating segments and branch locations currently continue to operate, the Company’s results of operations may be negatively impacted by project delays; early returns of equipment currently on rent with customers; overall decreased customer demand for new rental orders, rental related services and sales of new and used rental equipment; and payment delay, or non-payment, by customers who are significantly impacted by COVID-19. In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, the Company has taken a number of precautionary measures to manage its resources conservatively by reducing and/or deferring non-essential capital expenditures and operating expenses to mitigate the adverse impact of the pandemic.  The Company will continue to assess its capital expenditure needs against its cash availability during the crisis to make the most strategic decisions for its business.  Furthermore, the Company believes that its existing $420 million credit facility, coupled with its ability to access additional capital through the issuance of additional senior notes, would strengthen the Company’s liquidity position and serve to mitigate the operational risk related to potential decreased customer demand for new rental orders and sales resulting from the COVID-19 pandemic.

While the Company has not seen a significant impact from COVID-19 in the financial results for the year ended December 31, 2021 as set forth in the below section discussing the results of operations for the year ended December 31, 2021, the Company is currently unable to determine or predict the full nature, duration or scope of the overall impact the COVID-19 pandemic will have on its business, results of operations, liquidity or capital resources.  The Company will continue to actively monitor the situation and may take further actions that alter its business operations as may be required by federal, state or local authorities or that the Company determines are in the best interests of employees, customers and shareholders.

Percentage of Revenue Table

The following table sets forth for the periods indicated the results of operations as a percentage of the Company’s total revenues and the percentage of changes in the amount of such of items as compared to the amount in the indicated prior period:

nm = not meaningful

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Twelve Months Ended December 31, 2021 Compared to

Twelve Months Ended December 31, 2020

Overview

Consolidated revenues in 2021 increased to $616.8 million from $572.6 million in 2020.  Consolidated net income in 2021 decreased to $89.7 million, or $3.66 per diluted share in 2021, compared to $102.0 million, or $4.16 per diluted share, in 2020.  The Company’s year over year total revenue increase was primarily due to higher rental and rental related services revenues as more fully described below.

For 2021 compared to 2020, on a consolidated basis:

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Mobile Modular

For 2021, Mobile Modular’s total revenues increased $41.8 million, or 13%, to $363.3 million compared to 2020, primarily due to higher rental, rental related services and sales revenues.  The $24.1 million higher selling and administrative expenses, partly offset by the revenue increase, together with higher gross profit on rental, rental related services and sales revenues, resulted in a decrease in pre-tax income of $5.3 million, or 6%, to $77.0 million in 2021.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

Mobile Modular – 2021 compared to 2020

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Mobile Modular’s gross profit for 2021 increased $20.2 million, or 13%, to $176.0 million.  For the year ended December 31, 2021 compared to the year ended December 31, 2020:

For 2021, Mobile Modular’s selling and administrative expenses increased $24.1 million, or 35%, to $92.6 million, primarily due to increased employee salaries and benefit costs totaling $7.4 million, primarily due to the addition of Design Space and Kitchens To Go employees, $5.8 million higher amortization of intangible assets due to the Design Space and Kitchens To Go acquisitions, $4.3 million higher allocated corporate expenses and $2.0 million acquisition related costs in 2021.

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TRS-RenTelco

For 2021, TRS-RenTelco’s total revenues decreased $0.6 million to $140.2 million compared to 2020, primarily due to lower sales revenues, partly offset by higher rental revenues.  Pre-tax income decreased $0.7 million, or 2%, to $33.8 million for 2021, primarily due to higher selling and administrative expenses.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

TRS-RenTelco – 2021 compared to 2020

nm = Not meaningful

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TRS-RenTelco’s gross profit for 2021 increased $0.5 million to $61.4 million.  For the year ended December 31, 2021 compared to the year ended December 31, 2020:

For 2021, TRS-RenTelco’s selling and administrative expenses increased $0.8 million, or 3%, to $25.2 million, primarily due to higher corporate allocated expenses compared to 2020.

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Adler Tanks

For 2021, Adler Tanks’ total revenues increased $4.8 million, or 6%, to $82.2 million compared to 2020, primarily due to higher rental, rental related services and sales revenues.  Pre-tax income decreased $1.3 million, primarily due to lower gross profit on rental and rental related services revenues, and higher selling and administrative expenses, partly offset by higher gross profit on sales revenues.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.

Adler Tanks – 2021 compared to 2020

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Adler Tanks’ gross profit for 2021 decreased $0.4 million, or 1%, to $33.7 million.  For the year ended December 31, 2021 compared to year ended December 31, 2020:

For 2021, Adler Tanks’ selling and administrative expenses increased $0.8 million, or 3%, to $25.5 million, primarily due to higher salaries and employee benefit costs and higher corporate allocated expenses.

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Twelve Months Ended December 31, 2020 Compared to

Twelve Months Ended December 31, 2019

Overview

Consolidated revenues in 2020 increased to $572.6 million from $570.2 million in 2019.  Consolidated net income in 2020 increased to $102.0 million, or $4.16 per diluted share in 2020, compared to $96.8 million, or $3.93 per diluted share, in 2019.  The Company’s year over year total revenue increase was primarily due to higher sales revenues, partly offset by lower rental and rental related services revenues as more fully described below.

For 2020 compared to 2019, on a consolidated basis:

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Mobile Modular

For 2020, Mobile Modular’s total revenues increased $20.5 million, or 7%, to $321.5 million compared to 2019, primarily due to higher sales and rental revenues, partly offset by lower rental related services.  The revenue increase, together with higher gross profit on rental, rental related services and sales revenues, partly offset by higher selling and administrative expenses, resulted in an increase in pre-tax income of $12.3 million, or 18%, to $82.3 million in 2020.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

Mobile Modular – 2020 compared to 2019

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Mobile Modular’s gross profit for 2020 increased $12.3 million, or 9%, to $155.9 million.  For the year ended December 31, 2020 compared to the year ended December 31, 2019:

For 2020, Mobile Modular’s selling and administrative expenses increased $2.8 million, or 4%, to $68.5 million, primarily due to higher allocated corporate expenses and increased salaries and benefit costs, partly offset by lower travel, meals and meeting costs.

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TRS-RenTelco

For 2020, TRS-RenTelco’s total revenues increased $9.3 million, or 7%, to $140.8 million compared to 2019, primarily due to higher rental and sales revenues.  Pre-tax income increased $0.3 million, or 1%, to $34.5 million for 2020, primarily due to higher gross profit on sales and rental related services revenues and lower selling and administrative expenses.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income, and other selected information.

TRS-RenTelco – 2020 compared to 2019

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TRS-RenTelco’s gross profit for 2020 increased $0.1 million to $60.9 million.  For the year ended December 31, 2020 compared to the year ended December 31, 2019:

For 2020, TRS-RenTelco’s selling and administrative expenses decreased $0.3 million, or 1%, to $24.3 million, primarily due to lower salaries and benefit costs and lower travel, meals and meeting expenses, partly offset by higher allocated corporate expenses.

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Adler Tanks

For 2020, Adler Tanks’ total revenues decreased $20.4 million, or 21%, to $77.5 million compared to 2019, primarily due to lower rental and rental related services revenues.  Pre-tax income decreased $7.0 million, primarily due to lower gross profit on rental, rental related services and sales, partly offset by lower selling and administrative expenses.

The following table summarizes year-to-year results for each revenue and gross profit category, income from operations, pre-tax income and other selected information.

Adler Tanks – 2020 compared to 2019

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Adler Tanks’ gross profit for 2020 decreased $12.9 million, or 28%, to $34.1 million.  For the year ended December 31, 2020 compared to year ended December 31, 2019:

For 2020, Adler Tanks’ selling and administrative expenses decreased $4.6 million, or 16%, to $24.8 million, primarily due to lower salaries and employee benefit costs, travel, meals and meeting expenses and lower corporate allocated expenses.

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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 and share-based compensation.  The Company presents Adjusted EBITDA as a financial measure as management believes it provides useful information to investors regarding the Company’s liquidity and financial condition and because management, as well as the Company’s lenders, use this measure in evaluating the performance of the Company.

Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, compliance with financial covenants in the Company’s revolving lines of credit and senior notes and the Company’s ability to meet future capital expenditure and working capital requirements.  Management believes the exclusion of non-cash charges, including share-based compensation, is useful in measuring the Company’s cash available for operations and performance of the Company.  Because management finds Adjusted EBITDA useful, the Company believes its investors will also find Adjusted EBITDA useful in evaluating the Company’s performance.

Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with GAAP or as a measure of the Company’s profitability or liquidity.  Adjusted EBITDA is not in accordance with or an alternative for GAAP and may be different from non−GAAP measures used by other companies.  Unlike EBITDA, which may be used by other companies or investors, Adjusted EBITDA does not include share-based compensation charges.  The Company believes that Adjusted EBITDA is of limited use in that it does not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and does not accurately reflect real cash flow.  In addition, other companies may not use Adjusted EBITDA or may use other non-GAAP measures, limiting the usefulness of Adjusted EBITDA for purposes of comparison.  The Company’s presentation of Adjusted EBITDA should not be construed as an inference that the Company will not incur expenses that are the same as or similar to the adjustments in this presentation.  Therefore, Adjusted EBITDA should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures.  The Company compensates for the limitations of Adjusted EBITDA by relying upon GAAP results to gain a complete picture of the Company’s performance.  Because Adjusted EBITDA is a non-GAAP financial measure, as defined by the SEC, the Company includes in the tables below reconciliations of Adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP.

Reconciliation of Net Income to Adjusted EBITDA

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Reconciliation of Adjusted EBITDA to Net Cash Provided by Operating Activities

Adjusted EBITDA is a component of two restrictive financial covenants for the Company’s unsecured Credit Facility, the Note Purchase Agreement, Series C Senior Notes, Series D Senior Notes and Series E Senior Notes (as defined and more fully described under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”).  These instruments contain financial covenants requiring the Company to not:

At December 31, 2021, the Company was in compliance with each of these aforementioned covenants.  There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, though, significant deterioration in our financial performance could impact the Company's ability to comply with these covenants.

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Liquidity and Capital Resources

The Company’s rental businesses are capital intensive and generate significant cash flows. Cash flows for the Company in 2021 as compared to 2020 are summarized as follows:

Cash Flows from Operating Activities: The Company’s operations provided net cash flow of $195.7 million for 2021 as compared to $180.5 million in 2020.  The 8% increase was primarily attributable to increased deferred income and deferred income taxes, a higher increase in accounts payable and accrued liabilities and other balance sheet changes.

Cash Flows from Investing Activities: Net cash used in investing activities was $351.7 million for 2021 as compared to $53.0 million in 2020.  The $298.7 million increase was primarily due to $27.8 million higher purchases of rental equipment of $114.1 million in 2021, compared to 2020, and $292.2 million cash paid for acquisition of businesses, partly offset by $11.0 million lower purchases of property, plant and equipment and $10.3 million higher proceeds from sales of used rental equipment.

Cash Flows from Financing Activities: Net cash provided by financing activities was $156.2 million in 2021 as compared to $128.5 million net cash used in 2020. The $284.7 million increase was primarily due to $214.4 million higher net borrowings under bank lines of credit to fund the Design Space and Kitchens To Go acquisitions, $60.0 million higher net borrowings under note purchase agreements, and partly offset by $13.6 million lower repurchase of common stock in 2021.

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 flows from operations, proceeds from the sale of rental equipment and from borrowings. Sales occur routinely as a normal part of the Company’s rental businesses.  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, offer additional notes 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.

As the following table indicates, cash flow provided by operating activities and proceeds from sales of used rental equipment have been greater than rental equipment purchases over the past three years.

Funding of Rental Asset Growth

In addition to increasing its rental assets, the Company has made acquisitions of businesses and business assets totaling $292.2 million in 2021 and $7.8 million in 2019.  The Company had other capital expenditures for property, plant and equipment of $2.7 million in 2021, $13.7 million in 2020 and $12.1 million in 2019, and has used cash to provide returns to its shareholders in the form of cash dividends. The Company paid cash dividends of $42.2 million, $39.8 million and $35.5 million in the years ended December 31, 2021, 2020 and 2019, 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 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 program may be modified, extended or terminated by the Board of Directors at any time.  There were no shares of common stock repurchased during the twelve months ended December 31, 2021. There were 282,221 shares of common stock repurchased during the twelve months ended December 31, 2020, for the aggregate purchase price of $13.6 million or an average price of $48.25 per repurchased share. As of December 31, 2021, 1,309,805 shares remain authorized for repurchase under the Repurchase Plan.

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Unsecured Revolving Lines of Credit

On March 31, 2020, 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 $420.0 million unsecured revolving credit facility (which may be further increased to $670.0 million by adding one or more tranches of term loans and/or increasing the aggregate revolving commitments), which includes a $25.0 million sublimit for the issuance of standby letters of credit and a $10.0 million sublimit for swingline loans. The proceeds of the Credit Facility are available to be used for general corporate purposes, including permitted acquisitions. The Credit Facility permits the Company’s existing indebtedness to remain, which includes the Company’s $12.0 million Treasury Sweep Note due March 31, 2025, the Company’s existing senior notes issued pursuant to the Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc., dated as of April 21, 2011 (as amended, the “the Prior NPA”): (i) the $40.0 million aggregate outstanding principal of notes issued March 17, 2014 which were repaid on March 17, 2021, and (ii) the $60.0 million aggregate outstanding principal of notes issued November 5, 2015 and due November 5, 2022. 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 March 31, 2025 and replaced the Company’s prior $420.0 million credit facility dated March 31, 2016 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 March 31, 2020.

On March 30, 2020, 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 $12.0 million line of credit facility related to its cash management services (“Sweep Service Facility”). The Sweep Service Facility matures on the earlier of March 31, 2025, 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 31, 2016.

At December 31, 2021, under the Credit Facility and Sweep Service Facility, the Company had unsecured lines of credit that permit it to borrow up to $432.0 million of which $266.5 million was outstanding. 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 Amended Credit Facility):

At December 31, 2021, the Company was in compliance with each of the aforementioned covenants.  There are no anticipated trends that the Company is aware of that would indicate non-compliance with these covenants, although significant deterioration in our financial performance could impact the Company’s ability to comply with these covenants.

Note Purchase and Private Shelf Agreement

On March 31, 2020, the Company entered into an Amended and Restated Note Purchase and Private Shelf Agreement (the “Note Purchase Agreement”) with PGIM, Inc. (“PGIM”) and the holders of Series B and Series C Notes previously issued pursuant to the Prior NPA, among the Company and the other parties to the Note Purchase Agreement.  The Note Purchase Agreement amended and restated, and superseded in its entirety, the Prior NPA.  Pursuant to the Prior NPA, the Company issued (i) $40.0 million aggregate principal amount of its 3.68% Series B Senior Notes, which were repaid on March 17, 2021, and (ii) $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes due November 5, 2022, to which the terms of the Note Purchase Agreement shall apply.

In addition, pursuant to the Note Purchase Agreement, the Company may authorize the issuance and sale of additional senior notes (the “Shelf Notes”) in the aggregate principal amount of (x) $250 million minus (y) the amount of other notes (such as the Series B Senior Notes and Series C 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.

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3.84% Senior Notes Due in 2022

In November 2015, the Company issued and sold to the purchasers a $60.0 million aggregate principal amount of its 3.84% Series C Senior Notes (the “Series C Senior Notes”) pursuant to the terms of the Note Purchase Agreement, as amended. The Series C Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 3.84% per annum and mature on November 5, 2022. Interest on the Series C Senior Notes is payable semi-annually beginning on May 5, 2016 and continuing thereafter on November 5 and May 5 of each year until maturity. The principal balance is due when the notes mature in 2022. The full net proceeds from the Series C Senior Notes were used to reduce the outstanding balance on the Company’s revolving credit line. At December 31, 2021, the principal balance outstanding under the Series C Senior Notes was $60.0 million.

2.57% Senior Notes Due in 2028

On March 17, 2021, the Company issued and sold to the purchasers $40 million aggregate principal amount of 2.57% Series D Notes (the “Series D Senior Notes”) pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.

The Series D Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.57% per annum and mature on March 17, 2028.  Interest on the Series D Senior Notes is payable semi-annually beginning on September 17, 2021 and continuing thereafter on March 17 and September 17 of each year until maturity. The principal balance is due when the notes mature on March 17, 2028. The full net proceeds from the Series D Senior Notes were used to pay off the Company’s $40 million Series B Senior Notes.  At December 31, 2021, the principal balance outstanding under the Series D Senior Notes was $40.0 million.

2.35% Senior Notes Due in 2026

On June 16, 2021, the Company issued and sold to the purchasers $60 million aggregate principal amount of 2.35% Series E Notes (the "Series E Notes") pursuant to the terms of the Amended and Restated Note Purchase and Private Shelf Agreement, dated March 31, 2020 (the “Note Purchase Agreement”), among the Company, PGIM, Inc. and the noteholders party thereto.

The Series E Senior Notes are an unsecured obligation of the Company and bear interest at a rate of 2.35% per annum and mature on June 16, 2026.  Interest on the Series E Senior Notes is payable semi-annually beginning on December 16, 2021 and continuing thereafter on June 16 and December 16 of each year until maturity.  The principal balance is due when the notes mature on June 16, 2026.  The full net proceeds from the Series E Senior Notes were used to pay down the Company’s credit facility.  At December 31, 2021, the principal balance outstanding under the Series E Senior Notes was $60.0 million.

Among other restrictions, the Note Purchase Agreement, which has superseded in its entirety the Prior NPA, under which the Series C Senior Notes, Series D Senior Notes and Series E Senior Notes were sold, contains financial covenants requiring the Company to not (all defined terms used below not otherwise defined herein have the meaning assigned to such terms in the Note Purchase Agreement):

At December 31, 2021, 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.  Furthermore, the Company believes it has the financial resources to weather any short term impacts of COVID-19.  However, the Company has limited insight into the extent to which its business may be impacted by COVID-19, and there are many uncertainties, including how long and how severely the Company will be impacted.  An extended and severe impact may materially and adversely affect the Company’s future operations, financial position and liquidity.

Contractual Obligations and Commitments

At December 31, 2021, the Company’s material contractual obligations and commitments consisted of outstanding borrowings under our credit facilities expiring in 2025, outstanding amounts under our 3.84%, 2.35% and 2.57% senior notes due in 2022, 2026 and 2028, respectively, and operating leases for facilities.  The operating lease amounts exclude property taxes and insurance.  The table

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below provides a summary of the Company’s contractual obligations and reflects expected payments due as of December 31, 2021 and does not reflect changes that could arise after that date.

Payments Due by Period

The Company believes that its needs for working capital and capital expenditures through 2022 and beyond will be adequately met by operating cash flow, proceeds from the sale of rental equipment, and bank borrowings.

Please see the Company's Consolidated Statements of Cash Flows on page 64 for a more detailed presentation of the sources and uses of the Company's cash.

Critical Accounting Policies

The Company prepares its consolidated financial statements in accordance with GAAP.  A summary of the Company’s significant accounting policies are in Note 1 to the Company’s consolidated financial statements.  The Company determined its critical accounting policies by considering those policies that involve the most complex or subjective assumptions, estimates, and/or judgement.  Material changes in these assumptions, estimates or judgments could have the potential to have a material impact on the Company’s financial results. The Company has identified below the accounting policies that it believes could potentially have a material impact on operating results if a change in assumption, estimate and/or judgment were to occur.

Depreciation - The estimated useful lives and estimated residual values used for rental equipment are based on the Company’s experience as to the economic useful life and sale value of its products.  Additionally, to the extent information is publicly available, the Company also compares its depreciation policies to other companies with similar rental products for reasonableness.

The lives and residual values of rental equipment are subject to periodic evaluation.  For modular equipment, external factors to consider may include, but are not limited to, changes in legislation, regulations, building codes, local permitting, and supply or demand.  Internal factors for modulars may include, but are not limited to, change in equipment specifications, condition of equipment, or maintenance policies.  For electronic test equipment, external factors to consider may include, but are not limited to, technological advances, changes in manufacturers’ selling prices, and supply or demand.  Internal factors for electronic test equipment may include, but are not limited to, change in equipment specifications, condition of equipment, or maintenance policies.  For liquid and solid containment tanks and boxes, external factors to consider may include, but are not limited to, changes in Federal and State legislation, the types of materials stored and the frequency of movements and uses. Internal factors for liquid and solid containment tanks and boxes may include, but are not limited to, change in equipment specifications and maintenance policies.

To the extent that the useful lives of all of our rental equipment were to decrease or increase by one year, the Company estimates the annual depreciation expense would increase or decrease by approximately $6 million.  If the estimated residual values of all of our rental equipment were to change one percentage point, the Company estimates the annual depreciation expense would change by approximately $1 million. Any changes in depreciation expense as a result of a change in useful lives or residual values would result in a proportional increase or decrease in the gross profit the Company would recognize upon the ultimate sale of the equipment.

Maintenance, repair and refurbishment - Maintenance and repairs are expensed as incurred.  The direct material and labor costs of value-added additions or major refurbishment of modular buildings are capitalized to the extent the refurbishment significantly improves the quality and adds value or life to the equipment.  Judgment is involved as to when these costs should be capitalized.  The Company’s policies narrowly limit the capitalization of value-added items to specific additions such as portable storage office conversions, restrooms, sidewalls and ventilation upgrades.  In addition, only major refurbishment costs incurred near the end of the estimated useful life of the rental equipment, which extend its useful life, and are subject to certain limitations, are capitalized. The Company capitalized $6 million in extended life or value added refurbishments in 2021. Changes in these policies to expense these costs as incurred could impact the Company’s financial results.

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Acquisition Accounting - The Company has made acquisitions of businesses in the past and records the assets acquired and liabilities assumed based on their respective fair values at the date of acquisition.  Long-lived assets (primarily rental equipment), goodwill and other intangible assets generally represent the largest components of the Company’s acquisitions.  Determining the fair value of the assets and liabilities acquired can be judgmental in nature and can involve the use of significant estimates and assumptions.  Rental equipment is valued utilizing either a cost, market or income approach, or a combination of certain of these methods, depending on the asset being valued and the availability of market or income data.  The intangible assets acquired are primarily comprised of customer relationships, non-compete agreements and trade names.  These assets are valued on an excess earnings or income approach based on projected cash flows. The estimated fair values of these intangible assets reflect various assumptions about revenue growth rates, operating margins, projected cash flows, discount rates, customer attrition rates, terminal values, useful lives and other prospective financial information.  When appropriate, the Company’s estimates of the fair values of assets and liabilities acquired include assistance from independent third-party valuation firms.  Goodwill is calculated as the excess of the cost of the acquired business over the net of the fair value of the assets acquired and the liabilities assumed. The judgments made in determining the estimated fair value assigned to the assets acquired, as well as the estimated life of the assets, can materially impact the Company’s financial results in periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future.  As discussed below, we regularly review for impairments.

Impairment of rental equipment - The carrying value of the Company’s rental equipment is its capitalized cost less accumulated depreciation.  To the extent events or circumstances indicate that the carrying value cannot be recovered, an impairment loss is recognized to reduce the carrying value to fair value.  The Company evaluates the carrying value of rental equipment for impairment whenever events and circumstances have occurred that would indicate the carrying value may not be fully recoverable.  Determining fair value includes estimates and judgments regarding the projected net cash flows considering current and future market conditions including assumptions regarding utilization, rental pricing, the condition of the equipment, the equipment’s expected remaining life and sale proceeds.  Due to uncertainties inherent in the valuation process and market conditions, it is reasonably possible that actual results of operating and disposing of rental equipment could be materially different than current expectations.

Impairment of goodwill and intangible assets - The Company’s goodwill is not amortized to expense, the Company assesses whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments. These impairment assessments occur annually, or more frequently if an event occurs, or circumstances change in the interim that would indicate that it was more likely than not the fair value had reduced below its carrying value. Application of the goodwill impairment assessment requires judgement including the identification of reporting units, assignment of assets and liabilities to reporting units, business projections including changes in pricing, rental and sale activity and costs, long term growth rates and discount rates.  In 2021, 2020 and 2019 the Company performed qualitative assessments taking into consideration the market value of the Company, any changes in management, key personnel, strategy and any relevant macroeconomic conditions, concluding that the fair value of the reporting units substantially exceeded the respective reporting units carrying value, including goodwill.

Intangible assets (other than goodwill) acquired are recorded at their estimated fair value at the date of acquisition.  Definite lived intangibles are amortized over their expected useful lives, while indefinite lived intangibles are not amortized. The Company monitors conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization period. The Company tests these assets for potential impairment annually and whenever management determines events or changes in circumstances indicate that the carrying value may not be recoverable.

Revenue recognition:

Lease revenue - 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 building 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.  These revenues are recognized on a straight-line basis over the term of the lease. Certain leases are accounted for as sales-type leases.  For these leases, sales revenue and the related accounts receivable are recognized upon delivery and installation of the equipment and the unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  Other revenues include interest income on sales-type leases and rental income on facility leases.

Non-lease revenue - Sales revenue is recognized upon delivery and installation of the equipment to customers.  Certain leases are accounted for as sales-type 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.  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 obtain control when delivery and installation are complete.  For contracts that have multiple performance obligations, the transaction

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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. Judgment is involved in determining the performance obligations and standalone selling prices.  To the extent actual results were to differ from these estimates, the timing of profit recognition could change and impact the Company’s financial results.