McGrath RentCorp — Q1 2017 Form 10-Q
Business and period. This unaudited quarterly report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures classroom buildings. Its four segments are Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $94.8 million | $93.7 million | Up 1% |
| Gross profit | $43.7 million | $40.7 million | Up 7% |
| Income from operations | $15.8 million | $14.3 million | Up 11% |
| Net income | $8.0 million | $6.6 million | Up 21% |
| Diluted EPS | $0.33 | $0.27 | Up 22% |
| Adjusted EBITDA (non-GAAP) | $36.3 million | $36.1 million | Up $0.1 million |
| Adjusted EBITDA margin | 38% | 39% | Down 1 percentage point |
Gross margin was approximately 46.0%, versus 43.4%; operating margin was approximately 16.7%, versus 15.2%; and net margin was approximately 8.4%, versus 7.0%. Rental operations revenue rose 2% to $85.9 million; equipment sales fell 8% to $8.3 million. Selling and administrative expense increased 5% to $27.8 million. Interest expense fell 22% to $2.8 million, reflecting lower average debt and lower average net interest rates (3.45% versus 3.77%).
Cash flow, balance sheet and debt
- Operating cash flow was $25.8 million, down 35% from $39.5 million. Management attributed the decrease mainly to a tax refund received in Q1 2016 and changes in prepaid expenses and other balance-sheet items.
- Investing cash outflow was $16.2 million, including $15.9 million of rental-equipment purchases and $5.8 million of property, plant and equipment purchases, partly offset by $5.5 million from used-equipment sales.
- Financing cash outflow was $8.7 million, including $6.2 million of dividends and $2.4 million of net bank-line repayments. Cash increased by $0.8 million to $1.7 million.
- At March 31, total assets were $1.131 billion, notes payable were $323.8 million, total liabilities were $734.1 million, and shareholders’ equity was $396.6 million. Notes payable declined from $326.3 million at December 31, 2016.
- The $432.0 million of unsecured revolving and sweep facilities had $183.9 million outstanding and $248.1 million of additional borrowing capacity. The revolving facility matures March 31, 2021. Senior notes outstanding included $40 million due in 2018, $40 million due in 2021, and $60 million due in 2022.
- The company reported covenant compliance: fixed-charge coverage of 3.73x against a 2.50x minimum, leverage of 1.98x against a 2.75x maximum, and tangible net worth of $360.4 million against a $315.2 million minimum.
Material changes and segment trends
- Mobile Modular: Revenue rose 7% to $48.3 million and pretax income rose 13% to $7.1 million. Rental revenue increased 8%; average utilization improved to 76.8% from 76.1%.
- TRS-RenTelco: Revenue declined 10% to $25.3 million, including a 25% decline in equipment sales. Pretax income nevertheless rose 16% to $5.4 million, supported by higher gross profit and lower expenses; average utilization improved to 62.2% from 59.6%.
- Adler Tanks: Revenue was essentially flat at $20.5 million, while pretax income rose to $1.6 million from $0.7 million, largely on improved rental and service margins. Average utilization increased to 52.3% from 50.3%.
- Enviroplex: Revenue increased to $0.8 million from $0.1 million; the segment recorded an operating loss of $0.8 million, compared with $0.8 million in Q1 2016.
The quarterly dividend declared was $0.26 per share, up 2% from the comparable prior-year quarter. The company reported no share repurchases during either quarter.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management cautions that Q1 results are not necessarily indicative of full-year results and states it expects liquidity to be supported by operating cash flow, equipment-sale proceeds, and available borrowing, while noting no assurance of future financing availability.
- Key risks include reliance on public-school funding and facility bonds for classroom demand; seasonality; economic and industry cyclicality; competitive pricing and utilization; used-equipment resale values; interest-rate exposure; and environmental, product-liability, and regulatory risks. Oil and gas exploration and production accounted for approximately 6% of Adler Tanks rental revenue and 1% of company revenue in the quarter.
- Variable-rate debt exposure is material: the company estimated annual debt service would rise approximately $1.8 million for each 1 percentage point increase in average interest rates, based on $183.9 million of variable-rate debt. It reported no interest-rate hedges.
- Management disclosed the CEO transition: Dennis C. Kakures retired early and COO Joseph F. Hanna was appointed President and CEO. The filing identifies successful transition as a risk.
- Adoption of share-based-payment guidance in Q1 reduced income-tax provision by $18,000. The company was evaluating upcoming revenue-recognition and lease standards; it did not expect a material revenue-standard impact but expected lessee accounting to increase assets and liabilities, with the magnitude still under review.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material off-balance-sheet arrangements or material changes in market-risk exposures were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Mobile Modular’s growth and improved utilization can offset continued weakness in TRS-RenTelco sales and sustain consolidated margins.
- The drivers and persistence of Adler Tanks’ improved profitability, while monitoring its exposure to oil and gas, customer concentration, and utilization.
- Operating cash generation excluding the prior-year tax-refund comparison, and cash needs for fleet investment, property and equipment, and dividends.
- Variable-rate debt exposure, borrowing capacity, debt maturities, and headroom under financial covenants if results weaken or rates rise.
- Effects of the CEO transition, school funding and bond activity, equipment redeployment and resale values, and adoption of new accounting standards.