McGrath RentCorp — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. The interim financial statements were reviewed by Grant Thornton, not audited. The company provides equipment rentals and related services, principally through Mobile Modular, TRS-RenTelco and Adler Tanks, and also manufactures classroom buildings through Enviroplex.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $93.7 million | $90.2 million; up 4% |
| Gross profit / margin | $40.7 million / 43.4% | $39.1 million / 43.3% |
| Operating income / margin | $14.3 million / 15.2% | $13.9 million / 15.4% |
| Net income | $6.6 million | $6.8 million; down 4% |
| Diluted EPS | $0.27 | $0.26; up 4% |
| Adjusted EBITDA (non-GAAP) | $36.1 million; 39% margin | $35.5 million; 39% margin |
| Operating cash flow | $39.6 million | $34.6 million |
| Cash / notes payable at March 31 | $1.1 million / $365.8 million | At December 31, 2015: $1.1 million / $381.3 million |
Interest expense rose 49% to $3.6 million, reflecting higher average debt and rates, plus a $0.5 million write-off of remaining debt issuance costs from the prior credit facility. The write-off reduced net income by about $0.3 million and diluted EPS by approximately $0.01. The effective tax rate was about 39.5%.
Cash used in investing was $17.6 million, including $22.8 million of rental-equipment purchases and $6.1 million of used-equipment sale proceeds. Financing used $22.1 million, mainly for $15.5 million of net bank-line repayments and $6.1 million of dividends paid. Operating cash flow included an $11.0 million income-tax refund. Cash declined $0.04 million during the quarter.
At March 31, the company reported $205.9 million outstanding under its $432.0 million combined revolving and sweep facilities, with stated additional borrowing capacity of $226.1 million. It renewed its $420 million unsecured revolving facility, which matures March 31, 2021, and increased its sweep facility from $10 million to $12 million. Senior notes outstanding were $160 million in aggregate: $60 million Series A due 2018, $40 million Series B due 2021 and $60 million Series C due 2022.
Material changes and segment results
- Mobile Modular: Revenue grew 16% to $45.1 million and pretax income more than doubled to $6.2 million. Rental revenue increased 18%; average utilization was 76.1%, versus 74.2%.
- TRS-RenTelco: Revenue was essentially flat at $28.0 million; pretax income increased 3% to $4.6 million. Rental revenue fell 5%, partly offset by higher equipment sales.
- Adler Tanks: Revenue fell 11% to $20.5 million and pretax income dropped 83% to $0.7 million. Average utilization declined to 50.3% from 61.1%, amid weaker rental demand.
- Rental and rental-related services accounted for about 90% of consolidated revenue. Lower Adler Tanks results offset much of Mobile Modular’s improvement.
- Shares used in diluted EPS calculations declined to 23.9 million from 26.3 million, helping diluted EPS rise despite lower net income. No shares were repurchased in Q1 2016; the declared quarterly dividend was $0.255 per share, up 2% year over year.
Outlook, risks and other notable items
The filing gives no specific revenue or earnings guidance. Management cautions that Q1 results are not necessarily indicative of full-year results and notes seasonal variation in its education, test-equipment and containment rental markets. Management said it was unaware of anticipated covenant noncompliance, while noting deterioration in financial performance could affect compliance.
The company met its financial covenants at quarter-end: fixed-charge coverage was 3.81x against a 2.50x minimum; leverage was 2.22x against a 2.75x maximum. Tangible net worth was $343.5 million against a stated $306.2 million threshold. Management reported no material off-balance-sheet arrangements and no material change in market-risk exposures. It said ordinary-course legal proceedings were not expected to have a material adverse effect.
Key disclosed risks include weak oil and gas activity affecting Adler Tanks, public-school funding and bond delays affecting modular demand, cyclical demand and technology obsolescence in test equipment, equipment utilization and resale values, variable-rate borrowing costs, and environmental, safety and product-liability exposures. The company stated that a 1% increase in average rates on its $205.9 million of variable-rate debt would increase annual debt service by approximately $2.1 million. Its risk disclosure also notes that Williams Scotsman and Modspace announced an intended merger of their North American modular operations.
New accounting standards on revenue recognition, leases and stock-based compensation were under evaluation; the filing did not quantify their expected effects.
Important facts for investors to verify
- Whether Adler Tanks’ lower utilization and rental demand stabilize, and how much the oil and gas downturn contributes to subsequent results.
- Whether Mobile Modular’s revenue growth and utilization gains continue, given the importance of public-school funding, classroom demand and seasonal delivery patterns.
- Actual borrowing, interest rates and covenant headroom after the new credit facility; variable-rate exposure is material.
- How much of Q1 operating cash flow is repeatable: the period included an $11.0 million tax refund, while equipment spending and dividends remain significant cash uses.
- Whether used-equipment sales, rental-equipment utilization and residual values support reported margins and cash generation in later quarters.