McGrath RentCorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. McGrath RentCorp rents and sells modular buildings, electronic test equipment, and liquid and solid containment equipment. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $121.2 million | $129.5 million | Down 6% |
| Gross profit | $57.1 million | $61.7 million | Down 7% |
| Income from operations | $23.9 million | $29.7 million | Down 19% |
| Net income | $17.4 million | $20.2 million | Down 14% |
| Diluted earnings per share | $0.71 | $0.81 | Down 12% |
| Adjusted EBITDA | $49.1 million | $54.9 million | Down 10%; margin 41% vs. 42% |
| Operating cash flow | $37.6 million | $45.7 million | Down 18% |
Gross margin was approximately 47.1% versus 47.6%; operating margin was approximately 19.8% versus 22.9%. The effective tax rate declined to 21.3% from 24.3%, primarily due to greater excess tax benefits from share-based compensation. Quarterly dividends declared were $0.435 per share, up 4% year over year.
Cash flow, debt and liquidity
- Investing activities used $8.5 million, compared with $28.2 million in Q1 2020. Rental-equipment purchases were $18.0 million versus $35.4 million; proceeds from used-equipment sales were $10.4 million.
- Financing activities used $28.0 million, including $13.9 million of net repayments under bank lines and $10.6 million of dividends paid. Cash increased by $1.1 million to $2.3 million.
- Notes payable were $208.8 million at March 31, down from $222.8 million at December 31, 2020. The company reported $108.8 million drawn against its $432 million of unsecured credit and sweep lines, with $323.2 million of additional stated borrowing capacity.
- Debt covenants were met: fixed-charge coverage was 4.24x against a 2.50x minimum; leverage was 0.89x against a 2.75x maximum.
Material changes and segment performance
- Mobile Modular: Revenue fell 6% to $68.6 million; pretax income fell 18% to $14.7 million. Lower rental and service revenue, weaker utilization, and higher selling and administrative expenses weighed on results. Average utilization was 75.8%, versus 78.7%.
- TRS-RenTelco: Revenue declined 1% to $33.6 million, while pretax income rose 9% to $8.0 million, helped by lower foreign-exchange losses and interest allocation. Average utilization improved to 68.1% from 65.3%.
- Adler Tanks: Revenue decreased 14% to $17.7 million and pretax income fell 83% to $0.3 million. Management cited weaker activity, with average utilization down to 40.3% from 47.8%.
- Enviroplex: The segment reported a pretax loss of $0.9 million, compared with a $0.6 million loss. Segment revenues were $1.2 million, down from $1.5 million.
Consolidated rental and rental-related services revenue declined, particularly at Mobile Modular and Adler Tanks. Selling and administrative expense increased 4% to approximately $33.1 million; management attributed the increase primarily to a legal expense, partly offset by lower travel, meals and meeting costs. Interest expense decreased 33% to $1.8 million.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management said the full effects of COVID-19 remained uncertain and could include project delays, equipment returns, weaker rental and sales demand, and customer payment delays or defaults. The company said it had not seen a significant COVID-19 impact in Q1 and was managing costs and capital expenditures conservatively.
- On April 1, 2021, after quarter-end, the company acquired Kitchens To Go for $18.3 million cash. The business provides modular kitchen facilities and will join Mobile Modular.
- On March 17, the company issued $40 million of 2.57% Series D notes due 2028 and used the proceeds to repay $40 million of Series B notes. The company also reported $60 million of Series C notes due 2022.
- Principal risks discussed include pandemic-related disruption; school funding and demand for modular classrooms; cyclical demand and utilization in test equipment and containment markets; supplier availability and rising input costs; used-equipment resale values; customer credit; environmental and product liability; acquisitions; cybersecurity; and variable interest rates. The company estimated that a 1 percentage-point rate increase would add about $1.1 million to annual debt service based on variable-rate debt outstanding at quarter-end.
- Management did not expect ordinary-course legal proceedings, individually or collectively, to have a material adverse effect. No material off-balance-sheet arrangements were reported, and no material changes in market-risk exposure were disclosed.
Investor verification points
- Determine whether the revenue and utilization declines at Mobile Modular and Adler Tanks persist, and whether TRS-RenTelco’s improved utilization translates into sustained earnings growth.
- Assess the continuing effects of COVID-19 on customer demand, equipment returns, collections, and planned capital spending.
- Review the integration, performance, and funding impact of the Kitchens To Go acquisition.
- Track debt levels, variable-rate exposure, covenant headroom, and the timing of the Series C notes’ 2022 maturity.
- Clarify the amount and nature of the legal expense affecting Q1 selling and administrative expense; the filing does not provide a clear quantified amount.