McGrath RentCorp — Q2 2018 Form 10-Q
Business context and reporting period. McGrath RentCorp rents and sells relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings through Enviroplex. This filing covers the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. The interim statements are unaudited and were reviewed by the independent auditor.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $117.0 million | $109.6 million | $222.1 million | $204.4 million |
| Gross profit | $53.9 million | $49.2 million | $104.1 million | $92.9 million |
| Income from operations | $24.4 million | $21.8 million | $46.5 million | $37.7 million |
| Net income | $15.9 million | $11.5 million | $30.4 million | $19.4 million |
| Diluted EPS | $0.65 | $0.48 | $1.24 | $0.80 |
| Adjusted EBITDA | $45.4 million | $41.9 million | $88.3 million | $78.2 million |
Q2 revenue rose 7%, net income 39%, and diluted EPS 35% year over year. For the first half, revenue rose 9%, net income 56%, and diluted EPS 55%. Calculated Q2 gross, operating, and net margins were approximately 46.1%, 20.9%, and 13.6%, respectively, versus 44.9%, 19.9%, and 10.5% a year earlier. First-half margins were approximately 46.9%, 20.9%, and 13.7%, versus 45.4%, 18.4%, and 9.5%.
Cash flow and investment: First-half operating cash flow was $53.8 million, up from $49.4 million. Investing activities used $45.9 million, including $58.7 million of rental-equipment purchases and $6.4 million of property and equipment purchases, partly offset by $19.2 million of used-equipment sale proceeds. Financing activities used $5.9 million. Cash was $4.5 million at June 30, 2018, versus $2.5 million at year-end 2017.
Debt and liquidity: Notes payable totaled $314.9 million, compared with $303.4 million at December 31, 2017. The company had $214.9 million outstanding on unsecured credit and sweep lines with $217.1 million of additional capacity. It repaid the final $20 million of Series A notes in April; Series B and C notes outstanding totaled $100 million. The company reported compliance with its covenants: fixed-charge coverage of 6.74x against a 2.50x minimum, leverage of 1.67x against a 2.75x maximum, and tangible net worth of $502.1 million against a $355.0 million threshold.
The quarterly dividend declared was $0.34 per share, up 31% from the comparable 2017 quarter. First-half dividends declared were $0.68 per share, versus $0.52.
Material changes and management commentary
- Growth was led by higher rental activity and equipment utilization. For the first half, Mobile Modular revenue increased 8% and pretax income 24%; TRS-RenTelco revenue increased 13% and pretax income 17%; Adler Tanks revenue increased 4% and pretax income 50%.
- First-half rental-equipment acquisitions were $59.5 million, versus $49.6 million in 2017, with the increase primarily at TRS-RenTelco. Adler Tanks’ average utilization increased to 58.5% from 53.4%; Mobile Modular’s rose to 77.3% from 76.7%, and TRS-RenTelco’s to 62.8% from 62.3%.
- Selling and administrative expenses increased 8% in Q2 and 4% in the first half, primarily from higher headcount, salaries, and benefits. First-half interest expense increased 4%, as higher average rates more than offset lower debt levels.
- The effective tax rate was 24.6% in Q2, compared with 39.4% in Q2 2017; management attributed the decline primarily to the Tax Cuts and Jobs Act and its reduction of the federal corporate rate to 21%.
Outlook, risks, and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management said it expects liquidity needs to be supported by operating cash flow, equipment-sale proceeds, and borrowing capacity, and reported no anticipated covenant-compliance issues absent significant deterioration in performance. It cautioned that first-half results are not necessarily indicative of full-year results.
Key stated risks include cyclical demand in test-equipment and containment markets; public-school funding, bond approvals, and policy changes affecting classroom demand; competition and pricing pressure; equipment utilization, residual values, and redeployment of returned units; supplier availability and cost inflation; and variable-rate debt exposure. The company estimated that a 1 percentage-point increase in average rates would raise annual debt service by about $2.1 million, based on variable-rate debt outstanding at June 30. Environmental, product-liability, catastrophe, foreign-exchange, and customer-credit risks are also discussed. In June 2018, WillScot agreed to acquire ModSpace; in July, United Rentals agreed to acquire BakerCorp, developments that could affect competition.
Management did not expect ordinary-course legal proceedings, individually or collectively, to have a material adverse effect. The company reported no material off-balance-sheet arrangements and no material change in market-risk exposures. Adoption of the customer-revenue standard on January 1, 2018 had no financial-statement impact. The company was evaluating the effect of the lease standard, effective for it in 2019, and expected lessee accounting to increase assets and liabilities; the magnitude was still under evaluation. A $39,000 rental-asset impairment was recorded in the first half. Q2 foreign-currency exchange loss was $344,000.
Investor verification points
- Check whether rental growth, utilization, and pricing gains persist, particularly against increased equipment investment and segment-level margin trends.
- Monitor variable-rate debt, credit-line availability, refinancing needs, and covenant headroom as interest rates and capital spending change.
- Assess the durability of the lower tax rate and any remaining Tax Act estimates or deferred-tax effects.
- Track demand-sensitive exposures: public-school funding and modular-unit returns; test-equipment industry cycles; and oil-and-gas, environmental, and infrastructure activity for Adler Tanks.
- Review subsequent disclosures for the lease-standard adoption impact and developments relating to competition, suppliers, environmental matters, and customer equipment redeployment.