McGrath RentCorp — Q1 2019 Form 10-Q
Business context and period: The company rents and sells relocatable modular buildings and portable storage, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings. This filing covers the three months ended March 31, 2019, compared with the first quarter of 2018. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $122.0 million | $105.1 million | +16% |
| Rental operations revenue | $104.2 million | $92.1 million | +13% |
| Sales revenue | $16.8 million | $12.1 million | +39% |
| Gross profit | $57.0 million | $50.2 million | +14% |
| Income from operations | $27.3 million | $22.0 million | +24% |
| Net income | $18.4 million | $14.5 million | +28% |
| Diluted EPS | $0.75 | $0.59 | +27% |
| Adjusted EBITDA | $49.9 million | $42.8 million | +16% |
Gross margin was approximately 46.7% versus 47.7%; operating margin was approximately 22.4% versus 21.0%. Adjusted EBITDA margin was 41% in both periods. Interest expense was $3.1 million, up 4%; management cited higher average interest rates, partly offset by lower average debt. The effective tax rate was 23.9% in both periods.
Cash flow, debt and liquidity
- Operating cash flow was $46.5 million, up from $31.2 million. The filing attributes the increase mainly to improved operating income, deferred income and other balance-sheet changes.
- Investing cash outflow was $27.7 million, including $34.1 million of rental-equipment purchases and $2.8 million of property and equipment purchases; proceeds from used-equipment sales were $9.2 million.
- Financing cash outflow was $18.9 million, including $9.1 million of net repayments on bank lines and $8.2 million of dividends paid. Cash ended the quarter at $1.4 million.
- Notes payable totaled $289.5 million at March 31, 2019, down from $298.6 million at December 31, 2018. The company reported $189.5 million outstanding on its unsecured revolving and sweep facilities and $242.5 million of additional borrowing capacity. It also had $40 million of Series B notes and $60 million of Series C notes outstanding.
- Debt covenants were met: fixed-charge coverage was 4.05x against a 2.50x minimum; leverage was 1.38x against a 2.75x maximum. Tangible net worth was $545.8 million versus a stated covenant threshold of $370.0 million.
Material changes and segment results
- Mobile Modular: Revenue rose 21% to $65.1 million; pretax income increased 28% to $13.6 million. Growth reflected higher rental, service and sales revenue. Average utilization improved to 78.8% from 77.3%.
- TRS-RenTelco: Revenue rose 9% to $30.7 million; pretax income increased 8% to $7.1 million. Average utilization improved to 64.3% from 62.7%, while rental-services revenue declined.
- Adler Tanks: Revenue rose 11% to $23.4 million; pretax income increased 45% to $3.5 million. Higher rental and service revenue drove growth; average utilization was 57.3% versus 57.6%.
- Enviroplex: Revenue was $2.8 million. The segment reported a small pretax profit of $41,000, compared with a $553,000 pretax loss a year earlier.
- Selling and administrative expense increased 6% to $29.7 million, primarily due to higher salaries and employee benefits. The declared quarterly dividend rose 10% year over year to $0.375 per share.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified full-year outlook. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management identifies public-school funding, facility bonds, enrollment and education policy as important drivers of modular demand. The business is seasonal, with classroom shipments typically concentrated in the second and third quarters.
- Other stated risks include economic and industry cycles, interest-rate increases on variable-rate debt, competition and pricing pressure, equipment utilization and resale values, customer credit, supplier availability, environmental and product liability exposure, and cyber and operational disruption.
- Oil and gas exploration and production accounted for approximately 12% of Adler Tanks rental revenue and 2% of consolidated revenue. The company notes that industry downturns or changes to hydraulic-fracturing regulation could reduce demand.
- Effective January 1, 2019, the company adopted the new lease standard. Adoption resulted in $10.8 million of right-of-use assets and operating lease liabilities; operating lease expense was $1.0 million for the quarter. The company said adoption did not affect lessor revenue recognition.
- There were no material off-balance-sheet arrangements or material changes in market-risk exposure reported. Management did not expect ordinary-course legal proceedings, individually or collectively, to have a material adverse effect.
Important facts for investors to verify
- Whether revenue growth and improved earnings continue, and how much depends on equipment sales versus recurring rental activity.
- Segment utilization, rental rates and margins, particularly the modest utilization decline at Adler Tanks and the lower rental-services revenue at TRS-RenTelco.
- Rental-equipment investment needs, operating cash flow conversion and the company’s low reported cash balance relative to debt.
- Variable-rate debt exposure: management estimated annual debt service would rise about $1.9 million for each 1 percentage-point increase in average rates, based on $189.5 million of variable-rate debt.
- Reliance on public-school funding and seasonal demand, alongside equipment returns, used-equipment resale values and industry conditions affecting Adler Tanks.
- Continued covenant headroom and the effect of the new lease standard on reported balance-sheet amounts.