McGrath RentCorp — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2013, compared with the same quarter of 2012. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and also manufactures classroom buildings. Interim financial statements are unaudited; Grant Thornton reviewed them and reported no material modifications needed.
Financial performance and position
- Revenue: $88.7 million, up 12% year over year. Rental operations revenue was $71.4 million, up 2%; sales revenue was $16.8 million, up 107%, contributing much of the consolidated increase.
- Profitability: Gross profit was $39.0 million, down 2%; gross margin was about 44%, versus about 50% a year earlier. Operating income was $17.4 million, down 6%; net income was $9.2 million, down 7%. Diluted EPS was $0.36, versus $0.39. Adjusted EBITDA, a company-defined non-GAAP measure, was $37.3 million, up 1%, with a 42% margin versus 47%.
- Cash flow and investment: Operating cash flow was $41.6 million, compared with $35.5 million. Investing activities used $19.9 million, including $25.2 million of rental-equipment purchases and $1.6 million of property and equipment purchases, partly offset by $6.8 million in used-equipment sale proceeds. Financing activities used $22.9 million, mainly reflecting $20.7 million in net bank-line repayments and $6.1 million in dividends paid.
- Liquidity and debt: Cash was $0.5 million at quarter-end, down from $1.6 million at year-end 2012. Notes payable were $281.3 million, down from $302.0 million. The company reported $181.3 million drawn on its $430 million of unsecured credit lines, with $248.7 million of additional borrowing capacity. It also has $100 million of 4.03% senior notes due 2018; reported notes payable and facility balances should be reconciled to the debt disclosures.
- Balance sheet and shareholder returns: Total assets were $967.1 million and shareholders’ equity was $372.9 million. The declared quarterly dividend was $0.24 per share, up 2% from the prior-year quarter.
Material changes and segment trends
- TRS-RenTelco: Revenue rose 7% to $32.7 million and pretax income rose 32% to $8.9 million, supported by higher rental and equipment-sale gross profit and lower selling and administrative expense. Average utilization declined to 63.8% from 65.5%.
- Mobile Modular: Revenue increased 2% to $29.0 million as equipment sales offset a 3% decline in rental operations revenue. Pretax income fell 39% to $1.8 million. Management cited lower rental rates and margins; average monthly rental rate declined 6%.
- Adler Tanks: Revenue increased 4% to $20.8 million, but pretax income fell 41% to $4.5 million. Higher rental-equipment depreciation and other direct costs reduced gross profit 16%; average utilization declined to 64.7% from 76.5%.
- Enviroplex: Revenue was $6.2 million, compared with negligible revenue in Q1 2012; the segment reported a $0.1 million pretax loss, improved from a $1.0 million loss.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or other quantitative full-year guidance. Management cautions that first-quarter results are not necessarily indicative of the full year.
- Management reported compliance with debt covenants at March 31, 2013: fixed-charge coverage was 4.01x against a 2.50x minimum; leverage was 1.77x against a 2.75x maximum under the credit facility. It said significant deterioration in performance could affect compliance.
- Key risks include economic and industry downturns, public-school funding and classroom demand, rental pricing and utilization, equipment returns and redeployment, variable-rate debt, and access to financing. The company said a 1% increase in average rates on its $181.3 million of variable-rate debt would raise annual debt service by about $1.8 million; it reported no interest-rate hedges.
- Adler Tanks faces additional exposure to oil-and-gas activity, hydraulic-fracturing regulation, environmental or spill liability, and customer concentration. The company also identifies supply, competition, seasonality, cybersecurity, acquisition-integration and environmental risks.
- The company purchased $4.0 million of containment tanks from Sabre Manufacturing, controlled by the president of its Adler Tanks subsidiary; support services from Sabre were insignificant and no amount was due to related parties at quarter-end.
- Management expected no material adverse effect from ordinary-course legal proceedings and reported no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Investor facts to verify
- Whether the sharp year-over-year increase in sales revenue is repeatable, given management’s warning that equipment sales and associated margins fluctuate.
- Whether Adler Tanks’ lower utilization and rising direct costs persist, and how they affect margins and returns on its expanded fleet.
- Whether Mobile Modular can stabilize rental rates and profitability amid school-funding and classroom-demand uncertainty.
- How operating cash flow, equipment spending, dividends and debt repayments affect liquidity, particularly given quarter-end cash of $0.5 million.
- Debt composition and variable-rate exposure, remaining covenant headroom, and the impact of interest-rate changes.
- The terms and governance of the $4.0 million related-party equipment purchase from Sabre Manufacturing.