McGrath RentCorp — Q2 2014 Form 10-Q
Business context and reporting period. The company rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and also manufactures classroom buildings. This unaudited quarterly report covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The interim statements were reviewed by Grant Thornton, not audited.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Revenue | $95.7 million, up 10% | $183.3 million, up 4% |
| Gross profit / margin | $42.1 million / 44.0% | $80.7 million / 44.0% |
| Operating income / margin | $18.2 million / 19.1% | $33.5 million / 18.3% |
| Net income | $10.2 million, up 4% | $18.1 million, down 5% |
| Diluted EPS | $0.39, versus $0.38 | $0.69, versus $0.74 |
| Adjusted EBITDA (non-GAAP) | $40.2 million, up 5%; 42% margin | $76.2 million, up 0.8%; 42% margin |
For the six-month period, operating cash flow was $55.2 million, down from $66.2 million. Investing activities used $57.9 million, including $68.1 million of rental-equipment purchases; purchases of rental equipment were $12 million higher year over year. Financing activities provided $2.3 million. Cash declined $0.5 million to $1.1 million.
At June 30, total assets were $1.052 billion and total liabilities were $645.3 million. Notes payable were $307.0 million, compared with $290.0 million at year-end 2013. This included $187.0 million drawn on unsecured credit lines, with $243.0 million of additional capacity available, and $120.0 million of senior notes. The company reported compliance with debt covenants: fixed-charge coverage was 3.94x against a 2.50x minimum, and leverage was 1.90x against a 2.75x maximum. Cash dividends declared were $0.245 per share for the quarter.
Material changes and operating drivers
- Second-quarter revenue growth was led by Mobile Modular, whose revenue rose 26% to $37.3 million, including higher rental, service, and sales revenue. Its pretax income increased 34% to $2.1 million.
- TRS-RenTelco’s second-quarter revenue declined 3% to $32.1 million, as lower rental and equipment-sales revenue was partly offset by higher sales margins and lower selling and administrative costs. Pretax income rose 5% to $8.9 million. For the first half, segment revenue fell 6% and pretax income fell 12%, with lower rental utilization and sales revenue weighing on results.
- Adler Tanks’ second-quarter revenue rose 3% to $25.2 million, but pretax income declined 7% to $6.2 million as higher expenses and weaker sales gross profit offset rental growth. First-half revenue rose 7%, while pretax income was down 1%. First-half average utilization declined to 61.8% from 65.5%.
- For the first half, consolidated selling and administrative expenses rose 9% to $47.3 million, primarily due to increased employee headcount, salaries, and benefits. Interest expense rose 4% to $4.5 million, reflecting higher average debt and interest rates.
- First-half rental-equipment acquisitions were $71.7 million, versus $60.0 million a year earlier. The company issued $40 million of 3.68% Series B senior notes, due in 2021, and repaid $20 million of Series A principal.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management cited demand risks from economic and industry cycles, public-school funding and facility bonds, equipment utilization and remarketing, competition, and fluctuations in equipment sales. It also highlighted seasonality in education, electronics, and containment markets.
- Key segment risks include potential declines in test-equipment demand or technology obsolescence; oil-and-gas activity, hydraulic-fracturing regulation, and customer demand for Adler Tanks; and delays or reductions in school funding affecting modular classrooms. Other disclosed risks include environmental and product liability, credit and collection losses, supplier dependence, and natural disasters.
- The company sold a non-operating property in June for $2.5 million of net proceeds, recognizing an $0.8 million gain. This was a one-time item in the reported period. The company reported no material off-balance-sheet arrangements; management did not expect ordinary-course legal proceedings to have a material adverse effect.
- The company stated that $187 million of variable-rate debt was outstanding; a 1 percentage-point increase in average rates would increase annual debt service by approximately $1.9 million. It reported no material change in market-risk exposures from its prior annual report.
Important facts for investors to verify
- Whether Mobile Modular’s growth and higher utilization are sustainable, and whether elevated equipment investment translates into rental demand and cash generation.
- Whether TRS-RenTelco’s lower utilization and rental gross profit recover, and how much reported earnings depend on equipment-sales mix.
- Whether Adler Tanks’ lower utilization reflects temporary conditions or sustained demand pressure, particularly in oil-and-gas markets.
- Debt levels, variable-rate exposure, available revolver capacity, and covenant headroom as capital spending and dividends continue.
- The effect of the property-sale gain and other nonrecurring or variable items when assessing underlying earnings; compare GAAP results with the company’s non-GAAP Adjusted EBITDA.
- Potential changes in school funding, industry demand, equipment resale values, environmental exposure, and the adoption of new accounting standards.