McGrath RentCorp — Q3 2020 Form 10-Q
Business context and reporting period. The company rents and sells relocatable modular buildings and portable storage, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings through Enviroplex. This unaudited quarterly report covers the three and nine months ended September 30, 2020, compared with the same 2019 periods. Grant Thornton conducted an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
Key financial results
Amounts below are in millions except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $156.4 | $173.6 | $423.6 | $423.0 |
| Gross profit | $68.2 | $78.3 | $193.1 | $195.2 |
| Income from operations | $37.3 | $46.7 | $99.7 | $103.1 |
| Net income | $28.1 | $32.5 | $70.8 | $70.4 |
| Diluted EPS | $1.15 | $1.32 | $2.88 | $2.86 |
| Gross margin | 43.6% | 45.1% | 45.6% | 46.1% |
| Operating margin | 23.9% | 26.9% | 23.5% | 24.4% |
| Net margin | 18.0% | 18.7% | 16.7% | 16.6% |
- Cash flow: Nine-month operating cash flow was $131.5 million, down from $136.9 million. Investing used $41.5 million, versus $110.6 million, reflecting rental-equipment purchases falling to $65.7 million from $127.2 million. Financing used $90.6 million, including $43.5 million of net bank-line repayments, $13.6 million of share repurchases, and $29.6 million of dividends. Cash ended at $1.5 million.
- Debt and liquidity: Notes payable were $250.0 million at September 30, down from $293.4 million at year-end 2019. Of $432 million in unsecured credit and sweep facilities, $150 million was outstanding and $282 million remained available; the company also had $100 million of Series B and C senior notes outstanding. It reported compliance with its covenants: fixed-charge coverage of 4.30x against a 2.50x minimum and leverage of 1.04x against a 2.75x maximum.
- Assets and shareholder returns: Total assets were $1.295 billion, versus $1.310 billion at December 31, 2019; rental equipment, net, was $948.1 million. The quarterly dividend was $0.42 per share, up 12% from the year-ago quarter. Nine-month dividends declared were $1.26 per share.
- Adjusted EBITDA: The company’s non-GAAP measure was $62.7 million in Q3, down 11%, and $175.7 million for nine months, up 1%. Adjusted EBITDA margin was 40% for Q3 and 41% for nine months. The filing cautions that this measure is not a substitute for GAAP results or cash flow.
Material changes versus comparable periods
- Q3 revenue fell 10%, net income fell 13%, and diluted EPS fell 13%. Lower Enviroplex classroom sales versus an unusually strong Q3 2019, alongside weaker Adler Tanks rental activity, drove much of the decline. Q3 sales revenue overall was $42.3 million, down from $50.9 million.
- Nine-month revenue was essentially flat and net income increased 1%, while gross profit declined 1% and diluted EPS increased 1%. The result reflected growth at Mobile Modular offset by deterioration at Adler Tanks and lower Enviroplex sales.
- Segment performance: For nine months, Mobile Modular revenue rose 12% and pretax income rose 27%; TRS-RenTelco revenue rose 6% while pretax income fell 4%; Adler Tanks revenue fell 21% and pretax income fell 53%; Enviroplex revenue fell to $16.6 million from $32.2 million. Adler Tanks’ average utilization fell to 45.5% from 56.2%.
- Interest expense declined 38% in Q3 and 28% for nine months, as average interest rates and debt levels were lower. The effective tax rate was 20.8% for Q3 versus 25.3%, and 23.6% for nine months versus 24.8%.
Outlook, risks and notable items
- Management said COVID-19 had not significantly affected Q3 financial results to date, but could not estimate its full impact on 2020 or future periods. Risks cited include project delays, equipment returns, reduced rental and sales demand, and customer payment delays or defaults. The company reduced or deferred nonessential capital and operating spending.
- No numerical earnings or revenue guidance is provided. Management said it believes available liquidity and financing capacity can help it manage near-term effects, while warning that an extended, severe pandemic impact could materially harm operations, financial position, and liquidity.
- Adler Tanks’ weakness was attributed in part to COVID-related business disruption and lower oil and gas prices. Mobile Modular’s nine-month growth included higher equipment sales, which management notes can fluctuate with customer demand, equipment availability, and funding.
- On October 1, 2020, after quarter-end, the company entered a rate-lock agreement for a possible $40 million, seven-year senior-note issuance at 2.57%, with funding contemplated by March 17, 2021, subject to agreement terms. The filing does not state that the notes had been issued.
- The company reported no material off-balance-sheet arrangements and no material changes in market-risk exposures. It said ordinary-course legal proceedings were not expected to have a material adverse effect. Management found disclosure controls effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19, customer credit deterioration, or further project delays materially affect utilization, collections, and demand after September 30.
- Whether Adler Tanks’ utilization and results recover, and whether oil and gas market conditions continue to pressure the segment.
- How sustainable Mobile Modular’s sales-driven growth is, given the prior-year comparison and variability of equipment sales.
- Cash needs and capital spending relative to the low cash balance, available revolver capacity, debt maturities, and dividend and repurchase commitments.
- Whether the proposed $40 million senior notes were ultimately issued and how the March 2021 Series B maturity was funded or refinanced.
- Potential effects of lower used-equipment resale values, rental-equipment impairment, and the increase in the doubtful-account allowance to $2.2 million from $1.9 million at year-end.