McGrath RentCorp — Q1 2014 Form 10-Q
Period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. McGrath provides modular buildings, electronic test equipment, and liquid/solid containment equipment for rental and sale. The interim financial statements were reviewed by Grant Thornton, not audited; the company cautions that quarterly results are not necessarily indicative of the full year.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $87.5 | $88.7 | -1% |
| Rental operations revenue | $75.9 | $71.4 | +6% |
| Sales revenue | $11.0 | $16.8 | -34% |
| Gross profit | $38.6 | $39.0 | -1% |
| Income from operations | $15.1 | $17.4 | -13% |
| Interest expense | $2.2 | $2.2 | Flat |
| Net income | $7.9 | $9.2 | -15% |
| Diluted EPS | $0.30 | $0.36 | -17% |
| Operating cash flow | $38.1 | $41.6 | -9% |
| Adjusted EBITDA (non-GAAP) | $36.0 | $37.3 | -3% |
Gross margin was approximately 44.1% versus 44.0%; operating margin was approximately 17.3% versus 19.6%; net margin was approximately 9.0% versus 10.4%. Adjusted EBITDA margin was 41% versus 42%. The company defines Adjusted EBITDA to exclude interest, taxes, depreciation and amortization, and share-based compensation; it cautions that this non-GAAP measure is not a substitute for GAAP results or cash flow.
Cash flow, balance sheet and debt
- Investing activities used $28.1 million, including $31.8 million of rental-equipment purchases and $2.8 million of property, plant and equipment purchases; proceeds from used-equipment sales were $6.4 million.
- Financing activities used $10.3 million. This included a $40.0 million private placement borrowing, net repayments under bank lines, dividends and other financing items. Cash declined $0.4 million to $1.2 million.
- At March 31, 2014, total assets were $1.02 billion and notes payable were $288.1 million, compared with $290.0 million at year-end 2013. Shareholders’ equity was $401.6 million.
- Unsecured credit facilities provided $430.0 million of borrowing capacity; $148.1 million was outstanding and $281.9 million remained available. Separately, the company issued $40.0 million of unsecured Series B notes at 3.68%, due March 2021. The existing Series A notes bear 4.03% and mature in 2018, with principal payable in five annual installments beginning April 2014.
- Debt covenants were met. The fixed-charge coverage ratio was 3.94x against a 2.50x minimum; leverage was 1.81x against a 2.75x maximum. Tangible net worth was $363.4 million against a stated covenant threshold of $284.6 million.
- The quarterly dividend declared was $0.245 per share, up 2% year over year. No shares were repurchased during the quarter.
Material changes and segment performance
- Mobile Modular: Revenue increased 16% to $33.6 million; pretax income rose 5% to $1.9 million. Rental and service revenues grew, while higher direct costs and selling and administrative expenses limited improvement. Average utilization increased to 69.9% from 66.4%.
- TRS-RenTelco: Revenue declined 10% to $29.6 million and pretax income fell 28% to $6.4 million. Lower rental utilization and lower equipment sales drove the decline; average utilization was 56.8% versus 63.8%.
- Adler Tanks: Revenue increased 11% to $23.2 million and pretax income rose 8% to $4.9 million, supported by rental and rental-service growth. Average utilization was 61.0% versus 64.7%.
- Enviroplex: Sales fell to $1.1 million from $6.2 million; the segment recorded a $0.3 million pretax loss versus a $0.1 million loss. Management says its results are not significant relative to consolidated financial position.
- Consolidated rental and rental-related services represented approximately 87% of revenue, up from 81%; lower equipment sales were the principal offset to rental growth. Selling and administrative expenses increased 8% to $23.4 million, primarily due to $1.6 million higher salary and employee-benefit costs.
Outlook, risks and other matters
- The filing provides no specific numerical revenue or earnings guidance. Management notes uncertainty about public-school funding and classroom demand; interruptions in facility-bond passage or reduced school funding could adversely affect modular rentals and sales.
- Management identifies economic weakness, customer demand and credit risk, seasonality, utilization and rental pricing, used-equipment resale values, interest rates, and access to financing as risks. Segment-specific exposures include cyclical demand and equipment obsolescence in test equipment, and oil-and-gas activity, hydraulic-fracturing regulation, environmental liability and equipment redeployment in containment rentals.
- Most debt was subject to variable interest rates; the company estimated that each 1 percentage-point increase in the average rate on $148.1 million of variable-rate debt would add approximately $1.5 million to annual debt service.
- Management reported no material off-balance-sheet arrangements and no material change in market-risk exposure from the 2013 Form 10-K. It did not expect pending ordinary-course legal proceedings, individually or collectively, to materially affect financial condition, results or cash flows.
- Disclosure controls were concluded to be effective as of March 31, 2014, with no significant change in internal controls reported. The filing states there were no related-party transactions in Q1 2014.
Most important facts for investors to verify
- Whether TRS-RenTelco’s lower utilization and sales recover, and whether Mobile Modular and Adler Tanks can sustain rental growth and margins.
- Whether higher equipment investment translates into improved utilization and cash returns; Q1 rental-equipment purchases were $31.8 million, above the prior-year $25.2 million.
- How operating cash flow, available credit capacity, scheduled Series A principal repayments, and the new Series B borrowing affect liquidity and leverage through the year.
- Whether salary and benefit-cost growth, rental-equipment depreciation, and segment cost trends continue to pressure operating income.
- How school funding and bond approvals, oil-and-gas activity and regulation, interest rates, and used-equipment resale prices affect demand and results.