McGrath RentCorp — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and also manufactures classroom buildings. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2017 |
|---|---|---|
| Total revenue | $135.4 million, up 11% | $339.8 million, up 7% |
| Gross profit | $58.8 million, up 17% | $151.7 million, up 12% |
| Operating income | $30.3 million | $68.0 million |
| Net income | $16.8 million, up 30% | $36.2 million, up 27% |
| Diluted EPS | $0.69, versus $0.54 | $1.50, versus $1.19 |
| Adjusted EBITDA | $50.7 million, versus $45.1 million | $128.9 million, versus $120.5 million |
For the quarter, gross, operating and net margins were approximately 43%, 22% and 12%, respectively; for the nine-month period, approximately 45%, 20% and 11%. These percentages are calculated from reported figures.
- Revenue mix and segment trends: Nine-month rental and rental-related service revenue was $270.3 million; sales and other revenue was $69.5 million. Mobile Modular and Adler Tanks grew revenue and pretax income. TRS-RenTelco revenue declined 4% for the nine months, but pretax income rose 18%, supported by improved rental gross profit. Adler Tanks’ average utilization increased to 54.7% from 49.9%; Mobile Modular’s was 76.6% versus 76.3%, and TRS-RenTelco’s was 62.8% versus 60.1%.
- Cash flow and investment: Nine-month operating cash flow was $81.1 million, down from $105.3 million. Investing used $57.5 million, including $73.2 million of rental-equipment purchases and $12.8 million of property and equipment purchases; used-equipment sales generated $28.5 million. Financing used $23.2 million, including $18.6 million of dividends and $20.0 million of Series A note principal payments, partly offset by net bank-line borrowings.
- Debt and liquidity: At September 30, cash was $1.4 million and notes payable were $323.1 million. The company reported $203.2 million drawn against $432.0 million of unsecured credit lines, with $228.8 million of additional borrowing capacity. Senior notes outstanding included $20 million due in 2018, $40 million due in 2021 and $60 million due in 2022. The company was in compliance with debt covenants: fixed-charge coverage was 3.83x against a 2.50x minimum; leverage was 1.88x against a 2.75x maximum.
- Other balance-sheet measures: Total assets were $1.156 billion, including $865.7 million of net rental equipment; shareholders’ equity was $412.8 million. Accounts receivable was $107.4 million.
Material changes versus the prior comparable period
- Quarterly growth was broad-based: revenue increased $13.4 million and net income increased $3.9 million year over year. Nine-month revenue increased $21.0 million and net income increased $7.7 million.
- Nine-month selling and administrative expense rose 7% to $83.7 million, primarily reflecting higher headcount, salaries, benefits and corporate costs. Nine-month interest expense fell 8% to $8.7 million, mainly due to lower average debt, partly offset by higher rates.
- Operating cash flow declined largely because the prior-year period included an income-tax refund; 2017 also had lower increases in deferred taxes and certain liabilities. Rental-equipment purchases were higher year over year.
- On adoption of share-based compensation guidance, the company recorded $0.5 million of excess tax benefits as a reduction in its nine-month tax provision.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management says nine-month results should not necessarily be considered indicative of full-year results and believes existing liquidity sources can fund requirements, while noting that borrowing, equipment purchases and dividends can be adjusted if needed.
- Management declared a quarterly dividend of $0.26 per share, 2% above the year-earlier comparable quarter. No shares were repurchased during the nine-month period.
- Key risks include reduced or delayed public-school funding and changes in education policy; cyclicality in test-equipment, oil-and-gas and industrial markets; lower utilization or difficulty redeploying returned equipment; used-equipment resale values; variable interest rates; supplier and labor constraints; environmental, product-liability and regulatory exposure; and competition. The company stated that a 1% increase in average rates on its $203.2 million of variable-rate debt would add about $2.0 million to annual debt service.
- The company noted its CEO transition to Joseph F. Hanna in February 2017. It reported no material off-balance-sheet arrangements and said ordinary-course legal proceedings were not expected to have a material adverse effect.
- New lease accounting was expected to increase reported assets and liabilities as a lessee; the company was still assessing the amount. Management did not anticipate a material consolidated impact from the new revenue standard.
Important facts for investors to verify
- Whether rental revenue growth, utilization and pricing trends continue, particularly in Adler Tanks and Mobile Modular.
- Whether TRS-RenTelco can sustain profit growth despite lower nine-month revenue and sales.
- How the decline in operating cash flow, higher rental-equipment investment and dividend payments affect borrowing needs and liquidity.
- Debt maturities, variable-rate exposure, covenant headroom and the impact of interest-rate changes.
- Potential effects of public-school funding, cyclical end markets, returned equipment and used-equipment resale prices on future utilization and margins.