McGrath RentCorp — Q2 2016 Form 10-Q
Business context and reporting period. McGrath RentCorp rents and sells relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings. This unaudited quarterly filing covers the three and six months ended June 30, 2016, with comparisons to 2015. The interim financial statements received an independent accountant’s review, not an audit.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $103.1 million | $96.0 million | $196.8 million | $186.2 million |
| Gross profit | $43.8 million | $40.9 million | $84.4 million | $80.0 million |
| Income from operations | $18.1 million | $16.5 million | $32.3 million | $30.3 million |
| Net income | $9.1 million | $8.5 million | $15.6 million | $15.3 million |
| Diluted EPS | $0.38 | $0.32 | $0.65 | $0.58 |
| Adjusted EBITDA and margin | $39.3 million; 38% | $38.7 million; 40% | $75.4 million; 38% | $74.2 million; 40% |
Revenue rose 7% in Q2 and 6% in the first half; net income rose 7% and 2%, respectively. Calculated gross margin was about 42.4% in Q2 (42.6% prior year) and 42.9% for six months (43.0% prior year). Selling and administrative expense increased 5% in both comparisons. Interest expense rose 27% in Q2 and 38% in the first half, reflecting higher average debt and interest rates; first-half expense also included a $0.5 million charge for remaining issuance costs on the replaced credit line. Diluted weighted-average shares were lower year over year, contributing to EPS growth exceeding net-income growth.
Cash flow and balance sheet: First-half operating cash flow was $73.2 million, versus $65.2 million, including an $11.0 million income-tax refund. Investing cash use was $41.4 million, including $45.7 million of rental-equipment purchases; financing cash use was $31.7 million. Cash at June 30 was $1.2 million. Total assets were $1.148 billion, notes payable $363.1 million, total liabilities $764.7 million, and shareholders’ equity $383.3 million. Notes payable had been $381.3 million at December 31, 2015.
The renewed five-year unsecured revolving facility provides $420 million, with an option for up to $620 million in commitments; together with the sweep facility, borrowing capacity was $432.0 million. At June 30, $223.3 million was outstanding and $208.7 million remained available. Senior notes outstanding included $40 million Series A, $40 million Series B and $60 million Series C. The company reported compliance with debt covenants: fixed-charge coverage of 3.79x against a 2.50x minimum, leverage of 2.20x against a 2.75x maximum, and tangible net worth of $346.5 million against a stated $308.4 million threshold.
Material changes and segment performance
- Mobile Modular: First-half revenue increased 17% to $94.8 million and pretax income increased 80% to $12.9 million. Rental growth and higher utilization and rates supported results; average utilization rose to 76.0% from 74.3%.
- TRS-RenTelco: First-half revenue was essentially flat at $55.9 million and pretax income rose 1% to $9.9 million. Equipment rental revenue declined 6%, partly offset by 25% growth in sales revenue. Average utilization was 59.5%, versus 59.8%.
- Adler Tanks: First-half revenue declined 11% to $42.0 million and pretax income fell 65% to $3.2 million. Rental revenue declined 16%; average utilization fell to 49.7% from 60.9%. Management cited lower equipment on rent, with oil-and-gas market weakness among the disclosed risks.
- Enviroplex: First-half pretax loss narrowed to $0.2 million from $0.9 million, while sales-related gross profit improved.
The company declared a quarterly dividend of $0.255 per share, 2% higher than the comparable prior-year quarter. It made no share repurchases in the first half of 2016; 1,592,026 shares remained authorized for repurchase.
Outlook, risks and notable items
No quantified revenue, earnings or other formal forward guidance is provided. Management said the six-month results should not be considered indicative of full-year results. It reported no material off-balance-sheet arrangements, no material change in market-risk exposures, and no expected material adverse effect from ordinary-course legal proceedings.
- Management identified public-school funding, facility bonds, enrollment and education policy as factors that could affect modular classroom demand.
- Adler Tanks faces exposure to weak oil-and-gas activity, utilization pressure, commodity and regulatory changes, and competition. The filing notes that oil-and-gas exploration and production accounted for about 11% of Adler rental revenue and 2% of company revenue in the first half.
- Other disclosed risks include economic or credit-market deterioration, interest-rate increases, equipment utilization and resale values, customer credit and collection, supplier availability, environmental and product liability, and catastrophic events. The company had $223.3 million of variable-rate debt and estimated that a 1% increase in average rates would add about $2.2 million to annual debt service.
- The company adopted a 2016 Stock Incentive Plan, reserving 2 million shares plus certain shares available from the prior plan. It was evaluating the effects of upcoming revenue-recognition, lease and stock-compensation accounting standards.
Important facts for investors to verify
- Whether Adler Tanks’ utilization and rental revenue stabilize or continue to weaken.
- Whether Mobile Modular’s growth and higher utilization persist, and how school funding and seasonal classroom demand develop.
- How much first-half operating cash flow depended on the one-time $11.0 million tax refund, and the company’s ongoing cash generation after rental-equipment investment and dividends.
- Debt levels, variable-rate exposure, remaining revolver availability and covenant headroom, particularly if earnings or utilization decline.
- Whether sales revenue, which management says can fluctuate with customer demand and equipment mix, is repeatable at comparable margins.