McGrath RentCorp — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparison is Q1 2017 unless otherwise stated. McGrath RentCorp rents modular buildings, electronic test equipment, and containment tanks and boxes, and manufactures classroom buildings. Financial statement amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $105.1 | $94.8 | +11% |
| Gross profit / gross margin | $50.2 / 47.7% | $43.7 / 46.0% | +15% |
| Operating income | $22.0 | $15.8 | +39% |
| Net income | $14.5 | $8.0 | +81% |
| Diluted EPS | $0.59 | $0.33 | +79% |
| Operating cash flow | $31.2 | $25.8 | +21% |
| Adjusted EBITDA (non-GAAP) | $42.8 | $36.3 | +18% |
Rental revenue increased 9% to $74.3 million; rental-related services revenue was nearly flat at $17.8 million. Sales revenue rose to $12.1 million from $8.3 million, but management cautioned that equipment sales and margins fluctuate with customer needs, equipment availability, and funding. Selling and administrative expense increased 1% to $28.1 million. Interest expense rose 7% to $3.0 million as higher average rates (3.93% versus 3.45%) more than offset lower average debt.
The effective tax rate fell to 23.9% from 39.9%, primarily reflecting the Tax Cuts and Jobs Act’s reduction of the federal corporate rate. This was an important contributor to earnings growth.
Investing activities used $19.1 million, including $24.2 million of rental-equipment purchases; financing activities used $10.1 million, including $6.3 million of dividends paid. Cash increased to $4.4 million from $2.5 million at year-end. At March 31, total assets were $1,148.9 million, notes payable were $300.6 million, and shareholders’ equity was $530.3 million. The company reported $180.6 million outstanding under its $432 million unsecured credit and sweep facilities, with $251.4 million of additional borrowing capacity.
Dividend declared was $0.34 per share, up 31% from the prior-year quarter. Rental-equipment utilization improved year over year: Mobile Modular 77.3% average, TRS-RenTelco 62.7%, and Adler Tanks 57.6%.
Material changes and segment results
- Mobile Modular: Revenue rose 11% to $53.9 million and pretax income increased 51% to $10.6 million, supported by higher rental rates, utilization, and sales.
- TRS-RenTelco: Revenue rose 11% to $28.0 million and pretax income increased 21% to $6.5 million, reflecting higher rental activity and sales.
- Adler Tanks: Revenue increased 4% to $21.2 million and pretax income rose 56% to $2.4 million. Higher rental revenue and utilization were partly offset by lower rental-related services revenue and lower average rental rates.
- Enviroplex: Reported an operating loss of $0.7 million versus $0.8 million; sales increased. Its pretax contribution remained negative.
Operating cash flow improved, while rental-equipment purchases increased from $15.9 million to $24.2 million, primarily at TRS-RenTelco. Adjusted EBITDA margin rose to 41% from 38% (company-defined non-GAAP measure).
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management says Q1 results are not necessarily indicative of full-year results.
- Management reported compliance with debt covenants: fixed-charge coverage was 6.95x against a 2.50x minimum, and leverage was 1.63x against a 2.75x maximum. It identified no known trend expected to cause noncompliance, while noting deterioration in performance could affect compliance.
- A $20 million Series A Senior Note balance was due April 21, 2018. The filing does not state how this maturity was repaid or refinanced; verify the subsequent outcome.
- Key disclosed risks include economic downturns and constrained financing, variable interest rates, school funding and policy changes affecting modular demand, seasonality, competitive pricing, technology obsolescence, used-equipment resale values, supplier dependence, and environmental, safety, and product-liability exposure. The company estimated that each 1% increase in rates would raise annual debt service by about $1.8 million on variable-rate debt outstanding at quarter-end.
- Oil and gas exploration and production represented about 10% of Adler Tanks’ rental revenue and 2% of consolidated revenue. The filing highlights exposure to oil-price cycles and hydraulic-fracturing regulation.
- Accounting updates: Topic 606 was adopted January 1, 2018 with no financial-statement impact. The company was evaluating the impact of lease standard Topic 842, effective for it in 2019; it expected lessee adoption to increase assets and liabilities but had not quantified the effect. A $39,000 rental-asset impairment was recorded in Q1 2018.
- Management said legal proceedings in the ordinary course were not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported. Disclosure controls were deemed effective. Interim financial statements were reviewed by the independent accountant, not audited.
Investor verification priorities
- Confirm repayment, refinancing, or other disposition of the $20 million Series A notes due April 21, 2018.
- Assess whether rental revenue growth, utilization, and margins persist, particularly given segment-specific service revenue and pricing trends.
- Separate operating improvement from the lower tax rate when evaluating earnings growth and future comparability.
- Review rental-equipment capital spending, cash generation, dividend commitments, and borrowing capacity alongside debt maturities and variable-rate exposure.
- Monitor school funding, used-equipment resale proceeds, and cyclical demand in test-equipment and containment markets; review the eventual quantified impact of Topic 842.