McGrath RentCorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures modular classrooms. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $129.5 million | $122.0 million | +6% |
| Gross profit / margin | $61.7 million / 47.6% | $57.0 million / 46.7% | +8% profit |
| Operating income / margin | $29.7 million / 22.9% | $27.3 million / 22.4% | +9% |
| Net income | $20.2 million | $18.4 million | +9% |
| Diluted EPS | $0.81 | $0.75 | +8% |
| Operating cash flow | $45.7 million | $46.5 million | -2% |
| Adjusted EBITDA (non-GAAP) | $54.9 million; 42% margin | $49.9 million; 41% margin | +10% |
Rental and rental-related services revenue rose to $114.0 million from $104.2 million; equipment sales declined to $14.4 million from $16.8 million. Interest expense fell 15% to $2.7 million, reflecting lower average rates and debt. The effective tax rate was 24.3%, versus 23.9%.
Cash flow, balance sheet and capital
- At March 31, cash was $0.3 million; accounts receivable was $125.8 million; rental equipment, net, was $975.7 million; and total assets were $1.314 billion.
- Notes payable totaled $291.5 million, compared with $293.4 million at year-end 2019. Total liabilities were $676.8 million and shareholders’ equity was $637.6 million.
- Operating cash flow of $45.7 million funded, in part, $35.4 million of rental-equipment purchases and $3.2 million of property and equipment purchases. Investing cash outflow was $28.2 million; financing cash outflow was $19.5 million.
- The company reported $191.5 million outstanding under its $432 million combined revolving and sweep facilities, with $240.5 million additional borrowing capacity. The renewed five-year $420 million credit facility matures March 31, 2025. The company also had $40 million of Series B notes due 2021 and $60 million of Series C notes due 2022.
- Quarterly dividend declared was $0.42 per share, up 12% from the comparable quarter. The company repurchased 163,946 shares for $7.9 million, an average $47.89 per share.
Material changes and segment performance
- Mobile Modular: Revenue increased 12% to $73.2 million and pretax income rose 31% to $17.9 million, led by higher rental rates, equipment on rent, and rental-related services.
- TRS-RenTelco: Revenue rose 11% to $34.1 million; pretax income increased 3% to $7.3 million. Higher rental revenue was partly offset by lower sales and a foreign-exchange loss.
- Adler Tanks: Revenue fell 12% to $20.7 million and pretax income declined 42% to $2.0 million. Average utilization dropped to 47.8% from 57.3%; management cited weaker activity in several markets, including oil and gas.
- Enviroplex: Pretax loss was $0.6 million, compared with pretax income of $0.04 million a year earlier, mainly reflecting lower sales.
- Rental-equipment acquisitions were approximately level with the prior-year quarter at $35.4 million. The doubtful-account allowance increased to $2.2 million from $1.9 million; bad-debt expense was $0.6 million versus $0.2 million.
Outlook, risks and contingencies
- COVID-19 had not significantly affected Q1 results, but the company reported fewer new equipment shipments as customers delayed projects. Management expected near-term rental revenue to decline from Q1, with a potentially greater and faster effect at shorter-term TRS-RenTelco and Adler Tanks than at Mobile Modular. The magnitude and duration were not forecastable, and no fiscal 2020 estimate was provided.
- The company said it was reducing or deferring nonessential capital expenditures and operating costs, monitoring customer payment risk, and believed available liquidity could help it weather near-term effects. It warned that a prolonged, severe impact could materially harm operations, financial position, and liquidity.
- At quarter-end, the company complied with debt covenants: fixed-charge coverage was 4.30x against a 2.50x minimum, and leverage was 1.21x against a 2.75x maximum. It cautioned that significant deterioration could affect compliance.
- Key risks include COVID-related project delays, equipment returns, reduced demand and delayed or missed customer payments; oil-and-gas and other end-market weakness; school funding and classroom demand; equipment utilization and resale values; variable-rate debt; supplier availability; and environmental, product-liability and regulatory exposures. The company disclosed no material off-balance-sheet arrangements. Routine legal proceedings were not expected to have a material adverse effect.
- In response to COVID-19, the company conducted a qualitative review and reported no goodwill or intangible-asset impairment trigger for the quarter. It also adopted the expected-credit-loss accounting standard effective January 1, 2020, with no material adoption impact.
Important facts for investors to verify
- Subsequent quarterly filings for actual COVID-19 effects on revenue, utilization, customer collections, bad-debt expense, and capital spending versus management’s stated uncertainty.
- Adler Tanks’ utilization and profitability trends, including exposure to oil and gas markets.
- Available borrowing capacity, debt balances and maturities, interest-rate sensitivity, and ongoing covenant headroom.
- Whether equipment purchases, repurchases and dividends remain aligned with cash generation and liquidity needs.
- Any change in impairment assessments, legal or environmental contingencies, or customer-credit losses.