McGrath RentCorp — Q1 2015 Form 10-Q
Business context and reporting period. This quarterly report covers the three months ended March 31, 2015, compared with Q1 2014. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment; it also sells equipment and manufactures classroom buildings. Rental operations generated about 90% of revenue. The interim financial statements were reviewed, not audited, and management cautions that Q1 results are not necessarily indicative of full-year results.
Financial performance and liquidity
Amounts below are in millions of dollars unless noted.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $90.2 | $87.6 | +3% |
| Gross profit | $39.1 | $38.6 | +1% |
| Income from operations | $13.9 | $15.2 | -9% |
| Net income | $6.8 | $7.9 | -13% |
| Diluted EPS | $0.26 | $0.30 | -13% |
| Adjusted EBITDA | $35.5 | $36.0 | -1% |
| Operating cash flow | $34.6 | $38.1 | -9% |
- Gross margin was approximately 43.3%, versus 44.1%; operating margin was 15.4%, versus 17.4%; net margin was 7.6%, versus 9.0%. Adjusted EBITDA margin was 39%, versus 41%.
- Revenue growth reflected higher rental and rental-service revenue, partly offset by sales revenue declining to $8.8 million from $11.0 million. Rental revenue rose 5% to $65.5 million; rental-related services increased 14% to $15.4 million.
- Operating expenses rose: direct rental-operation costs increased $4.0 million and selling and administrative expenses increased 8% to $25.2 million, primarily due to higher headcount, salaries and benefits. Interest expense increased to $2.4 million. The effective tax rate was about 39.5%, compared with 39.1%.
- Operating cash flow was $34.6 million; investing activities used $26.9 million, including $30.0 million of rental-equipment purchases. Financing activities used $8.2 million, including $6.6 million of dividends. Cash ended at $0.8 million.
- At March 31, total assets were $1,112.1 million and shareholders’ equity was $425.8 million. Notes payable were $320.9 million, down from $322.5 million at year-end. The filing does not present a classified current-liability balance or a current ratio.
- The company had $200.9 million drawn on $430.0 million of unsecured credit facilities, leaving $229.1 million available. Senior notes outstanding were $80.0 million of 4.03% Series A notes and $40.0 million of 3.68% Series B notes. The company reported covenant compliance: fixed-charge coverage of 3.98x against a 2.50x minimum, and leverage of 1.88x against a 2.75x maximum.
Material changes and segment performance
- Mobile Modular: Revenue increased 16% to $38.9 million and pretax income rose 66% to $3.1 million. Rental revenue grew 23%; average utilization improved to 74.2% from 69.9%. Sales revenue fell 30%.
- TRS-RenTelco: Revenue declined 5% to $28.1 million and pretax income fell 30% to $4.5 million. Rental revenue decreased 7%, and average monthly rental rates declined 11%; utilization improved to 59.9% from 56.8%. Higher equipment-sale gross profit only partly offset weaker rental performance.
- Adler Tanks: Revenue declined 1% to $22.9 million and pretax income fell 10% to $4.4 million. Average monthly rental rates declined 8%, while average utilization was broadly flat at 61.1%.
- Enviroplex: The segment recorded an operating loss of $0.8 million, compared with a $0.3 million loss, amid lower sales.
- Quarterly dividends declared were $0.25 per share, up 2% year over year. The company repurchased 12,210 shares for $0.4 million in March under a Rule 10b5-1 plan.
Outlook, risks and other items
- The filing gives no specific revenue or earnings guidance. Management said it believed liquidity would remain adequate through operating cash flow, used-equipment sales and borrowing capacity, and reported no anticipated covenant-compliance concerns absent significant deterioration in performance.
- Key demand risks include public-school funding, bond passage and education policies affecting modular classrooms; cyclical demand in electronics and industrial markets; and oil-and-gas activity, oil-price volatility and regulation affecting Adler Tanks. Management specifically noted that the sharp decline in oil prices could reduce demand if sustained.
- Other disclosed risks include rental rates and utilization, equipment returns and residual values, competition, variable-rate debt, customer credit and collections, supplier availability, environmental and product-liability exposure, and economic or financing-market weakness. A 1 percentage-point rise in rates on the $200.9 million variable-rate debt balance would increase annual debt service by about $2.0 million, according to the filing.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. It reported no material off-balance-sheet arrangements and no expected material adverse effect from ordinary-course legal proceedings. The financial statements include a reclassification from other revenue to foreign-exchange loss that did not affect net income, EPS or operating cash flow.
Most important facts for investors to verify
- Whether Mobile Modular’s higher utilization and rental growth continue, and whether TRS-RenTelco can stabilize rental rates and margins.
- Whether Adler Tanks’ rental rates and utilization respond to oil-and-gas conditions, and the related effect of continued oil-price weakness.
- Whether operating cash flow and rental-equipment investment remain balanced, including the impact of working-capital movements and capital commitments.
- Available credit capacity, variable-rate exposure and covenant headroom if earnings weaken or borrowing increases.
- Dividend and repurchase activity relative to cash generation and equipment-fleet investment needs.