McGrath RentCorp — Q3 2015 Form 10-Q
Business context and period: McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures modular classrooms. This filing covers the three and nine months ended September 30, 2015; interim statements are unaudited and were reviewed by Grant Thornton, not audited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $113.0 million | $113.0 million | $299.3 million | $296.3 million |
| Gross profit | $50.1 million | $49.3 million | $130.2 million | $130.0 million |
| Operating income | $25.2 million | $25.1 million | $55.5 million | $58.6 million |
| Net income | $13.6 million | $13.7 million | $29.0 million | $31.8 million |
| Diluted EPS | $0.54 | $0.53 | $1.12 | $1.22 |
| Adjusted EBITDA | $47.0 million | $46.4 million | $121.2 million | $122.7 million |
Q3 gross margin was approximately 44.4% versus 43.6% a year earlier; nine-month gross margin was approximately 43.5% versus 43.9%. Nine-month operating income fell 5%, while selling and administrative expense rose 4% to $74.7 million. The 2014 comparison included an $0.8 million gain on sale of property; there was no such gain in 2015.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $100.6 million, up from $85.0 million. Investing activities used $93.2 million, including $104.9 million of rental-equipment purchases; financing activities used $7.8 million. Cash ended at $0.8 million.
- Notes payable were $382.1 million at September 30, 2015, versus $322.5 million at December 31, 2014. Debt increased as bank-line borrowings rose; the company also repaid $20.0 million of Series A notes.
- Unsecured credit lines totaled $430.0 million, with $282.1 million drawn and $147.9 million of additional borrowing capacity. Series A notes had $60.0 million outstanding and Series B notes $40.0 million.
- Debt covenants were met: fixed-charge coverage was 3.93x against a 2.50x minimum; leverage was 2.26x against a 2.75x maximum. Tangible net worth was $352.0 million versus a $302.1 million minimum.
- The company repurchased 1.86 million shares for $48.8 million during the nine months, at an average $26.28 per share. It declared quarterly dividends of $0.25 per share, 2% higher year over year.
Material changes and segment trends
- Mobile Modular: Nine-month revenue increased 14% to $134.1 million and pretax income rose 93% to $18.0 million, supported by higher rental activity, rates and utilization. Rental-equipment utilization averaged 75.3%, up from 71.4%.
- TRS-RenTelco: Nine-month revenue declined 10% to $85.3 million and pretax income fell 34% to $16.2 million. Lower rental rates and weaker rental and sales gross profit were principal factors; average monthly rental rates declined 12%.
- Adler Tanks: Nine-month revenue declined 3% to $71.5 million and pretax income fell 23% to $13.7 million. Lower rental rates and utilization contributed; period-end utilization was 57.0%, versus 65.1% a year earlier.
- Rental and rental-related services increased to approximately 86% of nine-month revenue from 82%; sales and other revenue declined to 14% from 18%.
Outlook, risks and other matters
- The filing provides no specific revenue or earnings guidance. Management said it believed liquidity would remain adequate through operating cash flow, equipment-sale proceeds and available borrowing, and did not anticipate covenant noncompliance absent significant deterioration in performance.
- Management highlighted dependence of modular demand on school funding, facility bonds and education policies. It also warned that prolonged low oil prices and regulatory changes affecting hydraulic fracturing could reduce Adler Tanks demand. Economic downturns, competition, utilization and used-equipment resale values are additional risks.
- Most debt is variable-rate; the company estimated annual debt service would rise about $2.8 million for each 1% increase in average rates on its $282.1 million of variable-rate debt. It reported no interest-rate hedges.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material off-balance-sheet arrangements or material changes in market-risk exposure were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Mobile Modular growth and utilization can offset continued weakness in TRS-RenTelco and Adler Tanks.
- Whether Adler Tanks utilization, rental rates and demand recover, particularly given oil-and-gas exposure.
- Capital spending needs and cash generation relative to dividends, share repurchases and rising borrowings.
- Available credit capacity, variable-rate exposure and continued compliance with debt covenants.
- School funding and bond activity, used-equipment resale proceeds, and any changes to the risks or outlook disclosed in subsequent filings.