McGrath RentCorp — Q2 2013 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2013; comparisons are with the three and six months ended June 30, 2012. McGrath rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and also sells equipment and manufactures classrooms. Interim financial statements are unaudited; Grant Thornton conducted a review, not an audit.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Total revenue | $87.1m | $83.8m | $175.8m | $162.7m |
| Gross profit | $40.1m | $40.8m | $79.1m | $80.6m |
| Income from operations | $18.4m | $19.6m | $35.7m | $38.1m |
| Net income | $9.8m | $10.5m | $19.1m | $20.4m |
| Diluted EPS | $0.38 | $0.42 | $0.74 | $0.81 |
| Adjusted EBITDA (non-GAAP) | $38.3m | $38.5m | $75.6m | $75.5m |
Gross margin was approximately 46.1% in Q2 (48.7% prior year) and 45.0% in H1 (49.6% prior year). Net margin was approximately 11.3% in Q2 (12.5% prior year) and 10.8% in H1 (12.5% prior year). Adjusted EBITDA margin was 44% in Q2 and 43% in H1, versus 46% in both prior-year periods. The company declared dividends of $0.24 per share for Q2, up 2% year over year.
H1 operating cash flow was $66.2m, compared with $65.3m. Investing cash outflow was $46.0m, including $56.2m of rental-equipment purchases; financing cash outflow was $21.1m, principally reflecting repayments on credit lines and dividends. Cash declined $0.9m to $0.7m. At June 30, assets were $985.3m, rental equipment net was $737.6m, and notes payable were $278.9m, down from $302.0m at year-end 2012. The filing reports $178.9m outstanding on unsecured lines and $251.1m of additional borrowing capacity; the $278.9m notes payable balance also includes $100m of 4.03% senior notes due 2018.
Material changes versus prior comparable periods
- Revenue rose 4% in Q2 and 8% in H1, but gross profit, operating income, net income, and EPS declined in both comparisons. Higher revenue did not translate into higher consolidated earnings, in part because direct rental costs and cost of sales increased.
- TRS-RenTelco was the strongest earnings contributor: H1 revenue increased 8% and pretax income rose 20% to $17.5m. Its rental-equipment utilization weakened, while higher rental rates and sales supported results.
- Mobile Modular H1 revenue rose 4%, but pretax income fell 38% to $3.4m. Management cited lower rental margins, higher equipment preparation costs, and increased selling and administrative expense.
- Adler Tanks H1 revenue rose 11%, but pretax income fell 22% to $11.2m. Higher direct costs and lower rental margins outweighed revenue growth; average utilization fell to 65.5% from 73.3%.
- H1 rental-equipment purchases were $56.2m, down from $73.3m a year earlier. The company repaid $23.1m net under bank lines, versus net borrowings of $11.5m in H1 2012.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or revenue guidance. Management says operating results for the first six months should not be taken as necessarily indicative of the full year. It describes liquidity as supported by operating cash flow, used-equipment sales, and available borrowing capacity, and reported compliance with debt covenants. At June 30, the fixed-charge coverage ratio was 4.01 to 1 versus a 2.50 minimum, and leverage was 1.76 to 1 versus a 2.75 maximum.
Key risks include economic weakness and constrained customer budgets; public-school funding, bond approvals, and classroom demand; cyclical demand and pricing in electronics and oil-and-gas-related markets; utilization and redeployment of returned rental equipment; higher labor, materials, and fuel costs; variable-rate debt exposure; and environmental, product-liability, and regulatory risks, including changes affecting hydraulic fracturing. Management estimated that a 1 percentage-point increase in average interest rates would add about $1.8m to annual debt service based on variable-rate debt outstanding at period-end. Legal proceedings arise in the ordinary course; management did not expect them to have a material adverse effect. No material off-balance-sheet arrangements were reported. The company disclosed related-party tank purchases from Sabre Manufacturing, controlled by the Adler Tank Rentals president’s associate: $9.5m in H1 2013, with $0.4m due at June 30.
Most important facts for investors to verify
- Whether revenue growth can be converted into improved margins, particularly given increased direct costs and weaker Mobile Modular and Adler Tanks profitability.
- Segment rental rates, utilization, and equipment-on-rent trends, especially the decline in Adler Tanks H1 average utilization and TRS-RenTelco utilization.
- Capital spending, rental-equipment sales, cash balances, and the sustainability of cash generation and dividend payments.
- Debt composition, variable-rate exposure, available credit capacity, and continued covenant compliance.
- School funding and classroom demand, as well as oil-and-gas activity and regulatory developments affecting Adler Tanks.
- Related-party purchases from Sabre and the company’s controls over pricing and approval of those transactions.