McGrath RentCorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The interim financial statements are unaudited; Grant Thornton performed a review, not an audit.
Business context
McGrath RentCorp rents and sells relocatable modular buildings and portable storage, electronic test equipment, and liquid and solid containment equipment. Its four reportable segments are Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex.
Financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $137.7m | $127.4m | $267.1m | $249.4m |
| Gross profit | $63.2m | $59.9m | $124.9m | $116.9m |
| Operating income | $32.7m | $29.1m | $62.4m | $56.4m |
| Net income | $22.5m | $19.5m | $42.7m | $37.9m |
| Diluted EPS | $0.92 | $0.79 | $1.74 | $1.54 |
| Operating cash flow | Not stated separately | Not stated separately | $97.5m | $92.0m |
Q2 revenue rose 8%, net income 16%, and diluted EPS 16% year over year. H1 revenue increased 7%, net income 13%, and diluted EPS 13%. Gross margin was approximately 45.9% in Q2 versus 47.0% a year earlier; H1 gross margin was approximately 46.7% versus 46.9%. Interest expense declined 30% in Q2 and 23% in H1, reflecting lower average rates and debt levels. Adjusted EBITDA, a non-GAAP measure, rose 11% to $58.1m in Q2 and 10% to $113.0m in H1.
H1 operating cash flow was $97.5m; investing cash outflow was $42.5m, including $57.6m of rental-equipment purchases and $21.9m of proceeds from used-equipment sales. Financing cash outflow was $56.7m, including $21.3m of net debt repayment, $13.5m of share repurchases, and $19.5m of dividends paid. Cash was $0.7m at June 30, down from $2.3m at year-end 2019.
At June 30, total notes payable were $272.1m, down from $293.4m at December 31, 2019. The company reported $172.1m outstanding under its revolving and sweep facilities, with $259.9m of additional borrowing capacity. It also had $40m of Series B notes due March 2021 and $60m of Series C notes due November 2022. The renewed $420m revolving facility matures in March 2025. Covenant compliance was reported: fixed-charge coverage of 4.38x against a 2.50x minimum and leverage of 1.10x against a 2.75x maximum.
Material changes and segment performance
- Mobile Modular: Q2 revenue rose 13% to $76.8m; pretax income rose 34% to $19.3m. H1 revenue rose 13% to $150.0m and pretax income rose 33% to $37.2m. Growth reflected higher rentals and equipment sales; Q2 sales revenue more than doubled. H1 average utilization was 78.2%, down from 79.1%.
- TRS-RenTelco: Q2 revenue increased 2% to $33.1m, while pretax income declined 1% to $7.9m. H1 revenue rose 7% to $67.1m and pretax income increased 1% to $15.3m. Rental rates and utilization were lower year over year in Q2.
- Adler Tanks: Q2 revenue fell 29% to $18.6m and pretax income fell 70% to $1.2m. H1 revenue declined 21% to $39.3m and pretax income declined 57% to $3.2m. Management cited COVID-19 disruptions, lower oil and gas prices, and weaker activity; H1 average utilization fell to 45.9% from 57.1%.
- Enviroplex: H1 revenue was $10.7m versus $3.9m a year earlier, mainly from higher classroom sales; H1 operating income was $1.2m versus an operating loss of $1.1m.
Outlook, risks, and other notable items
- Management said it had not seen a significant COVID-19 impact in Q2 results, but could not estimate the pandemic’s full-year effect on results, liquidity, or financial condition. Risks include project delays, early equipment returns, weaker rental and sales demand, and delayed or missed customer payments. The company reduced or deferred nonessential spending and continued monitoring the situation.
- No specific earnings or revenue guidance is provided in the filing. Management said the renewed credit facility and potential additional senior-note issuance support liquidity, while warning that a prolonged, severe pandemic impact could materially harm operations and liquidity.
- Adler Tanks’ performance was also exposed to oil and gas market weakness. Other disclosed risks include school funding and classroom demand, equipment utilization and resale values, customer credit, supply availability, environmental and product liability, and variable-rate debt. A 1 percentage-point increase in rates would raise annual debt service by approximately $1.7m based on variable-rate debt outstanding at quarter-end.
- The quarterly dividend was increased 12% year over year to $0.42 per share. H1 share repurchases totaled 279,866 shares for $13.5m at an average $48.24 per share. The company adopted the expected-credit-loss standard in January; management said adoption had no material financial-statement impact.
- Management reported effective disclosure controls and no material off-balance-sheet arrangements. It said ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether COVID-19 effects after quarter-end changed rental demand, utilization, customer collections, or management’s liquidity assessment.
- Whether Adler Tanks’ utilization and margins recover, and how persistently oil and gas weakness affects that segment.
- Whether Mobile Modular’s sales growth and rental performance are sustainable, given seasonal demand and school funding risks.
- Debt maturities, variable-rate exposure, facility availability, and continued compliance with lending covenants.
- Cash conversion and capital allocation, including rental-equipment purchases, dividends, and repurchases; adjusted EBITDA is non-GAAP and should be assessed alongside GAAP cash flows.