McGrath RentCorp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. McGrath RentCorp rents and sells modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures modular classrooms. Financial statements are unaudited; the independent accountant conducted an interim review, not an audit, and reported no material modifications were needed.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $173.3m | $156.4m | $440.9m | $423.6m |
| Gross profit | $75.8m | $68.2m | $198.8m | $193.1m |
| Operating income | $35.9m | $37.3m | $89.4m | $99.7m |
| Net income | $23.3m | $28.1m | $61.3m | $70.8m |
| Diluted EPS | $0.95 | $1.15 | $2.50 | $2.88 |
| Adjusted EBITDA (non-GAAP) | $66.0m | $62.7m | $173.6m | $175.7m |
- Q3 revenue rose 11%, primarily on higher rental and rental-service revenue; net income and diluted EPS fell 17%. Higher selling and administrative expenses, interest expense and taxes weighed on earnings. Q3 adjusted EBITDA margin was 38%, versus 40% a year earlier.
- For the first nine months, revenue increased 4%, while net income and diluted EPS declined 13%. Adjusted EBITDA decreased 1%; its margin was 39%, versus 41%.
- Rental revenue grew, but sales revenue declined: Q3 sales were $37.6m versus $42.3m; nine-month sales were $80.5m versus $87.4m. Q3 rental revenue increased to $103.3m from $88.1m.
- Q3 effective tax rate was 28.7%, compared with 20.8%; the nine-month rate was 25.3%, compared with 23.6%. Management attributed the higher rates to lower excess tax benefits from stock compensation and activity in higher-tax states.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $136.3m, up from $131.5m. Investing cash outflow was $335.4m, including $285.6m paid for acquisitions and $90.4m of rental-equipment purchases. Financing provided $200.3m, including increased borrowings to fund acquisitions.
- At September 30, cash was $2.4m; notes payable were $459.5m, up from $222.8m at December 31, 2020. Total assets were $1.610bn and shareholders’ equity was $712.5m.
- The company reported $299.5m outstanding under unsecured credit and sweep facilities with $432.0m total capacity, leaving $132.5m available. It was in compliance with debt covenants: fixed-charge coverage ratio 4.12x (minimum 2.50x) and leverage ratio 1.92x (maximum 2.75x).
- Variable-rate debt was $299.5m. Management estimated annual debt service would rise about $3.0m for each 1 percentage-point increase in the average interest rate. The quarterly dividend declared was $0.435 per share, 4% above the prior-year quarter.
Material changes and business developments
- McGrath acquired Kitchens To Go on April 1 for $18.3m and Design Space on May 17 for $267.3m. Both were added to Mobile Modular. Preliminary purchase accounting included $104.2m of combined goodwill; acquired asset valuations and working capital remained subject to finalization.
- Acquisitions lifted Mobile Modular revenue, but related costs also contributed to higher expenses: Q3 selling and administrative expenses rose 29% company-wide, including $2.4m of additional acquired-intangible amortization. Nine-month expenses included $1.3m of acquisition transaction costs and a $2.1m legal expense.
- In Q3, Mobile Modular revenue increased 16%, while pretax income declined 9%; TRS-RenTelco revenue declined 2% and pretax income was broadly unchanged; Adler Tanks revenue increased 16% while pretax income declined 3%. For the nine months, Adler Tanks pretax income fell 31%, while TRS-RenTelco pretax income rose 3%.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said COVID-19’s duration and full effects remained uncertain and could not be fully estimated for fiscal 2021. It had not seen a significant financial impact in the reported periods, and operating locations were open.
- Risks cited include COVID-related demand or payment disruption, supply-chain delays, higher materials and labor costs, acquisition integration and valuation risks, and potential increases in variable-rate interest expense. Public-school funding, classroom demand, seasonality, equipment utilization and used-equipment resale values are also relevant business risks.
- Management stated it believed available cash flows and financing resources could support capital needs, while noting that a prolonged, severe COVID impact could adversely affect operations, financial position and liquidity. No material off-balance-sheet arrangements were reported. Ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether acquired businesses deliver expected rental growth and returns, and how final purchase-price allocations affect goodwill and future amortization or impairment.
- Whether rental growth and utilization can offset weaker sales, rising operating costs and margin pressure.
- Debt balances, available credit, covenant headroom and sensitivity to variable interest rates.
- Accounts receivable growth and cash conversion: receivables increased to $168.8m from $123.3m at year-end, while the cash-flow statement showed a $33.5m use of cash from receivables.
- Developments in COVID-19, supply-chain and labor-cost conditions, public-school funding, and customer demand across the company’s rental markets.