McGrath RentCorp — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. McGrath RentCorp rents modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures classroom buildings. Its four reportable segments are Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex. Interim financial statements were reviewed by Grant Thornton, not audited.
Financial results
Amounts are in millions, except per-share data. Comparative periods are the three and nine months ended September 30, 2012.
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $108.9 | $99.4 | $284.7 | $262.1 |
| Gross profit | $45.2 | $43.6 | $124.4 | $124.3 |
| Income from operations | $22.8 | $22.8 | $58.5 | $60.9 |
| Net income | $12.6 | $12.5 | $31.6 | $32.8 |
| Diluted EPS | $0.48 | $0.50 | $1.23 | $1.31 |
| Adjusted EBITDA (non-GAAP) | $43.4 | $42.2 | $119.0 | $117.7 |
Q3 revenue rose 9.5% and net income rose 1.0%, while diluted EPS fell 4%. For the nine-month period, revenue increased 8.6%, but net income declined 3.7% and diluted EPS declined 6%. Gross margin was approximately 41.5% in Q3 versus 43.9% a year earlier, and 43.7% year to date versus 47.4%; operating margins were approximately 21.0% and 20.6%, respectively, compared with 22.9% and 23.2% in the prior-year periods. These percentages are calculated from reported amounts.
Cash flow and investment: Nine-month operating cash flow was $99.9 million, up from $91.0 million. Investing activities used $76.0 million, including $93.4 million for rental equipment and $8.0 million for property and equipment, partly offset by $25.4 million from used-equipment sales. Financing activities used $24.8 million, including $21.1 million of net repayments on bank lines and $18.3 million of dividends, partly offset by stock-option proceeds and tax benefits. Cash declined $1.0 million to $0.7 million.
Debt and liquidity: Notes payable were $280.9 million at September 30, down from $302.0 million at December 31, 2012. The company reported $180.9 million drawn on its unsecured credit and sweep facilities, with $249.1 million of additional borrowing capacity. Its $100 million of 4.03% senior notes mature in 2018, with principal repayments beginning in April 2014. The company reported compliance with financial covenants: fixed-charge coverage of 4.03x against a 2.50x minimum and leverage of 1.76x against a 2.75x maximum. Cash was low at $0.7 million; no current ratio or detailed current-liability breakdown is provided in the filing text.
Total assets were $1,009.4 million, rental equipment net was $753.8 million, and shareholders’ equity was $395.7 million at September 30, 2013. The board declared a quarterly dividend of $0.24 per share, 2% above the prior-year comparable dividend.
Material changes and segment trends
- Revenue growth reflected higher rental-related services and sales, as well as rental growth. Sales and other revenue were approximately 20% of nine-month consolidated revenue, versus 17% in 2012; management cautions that sales can fluctuate with customer requirements and equipment availability.
- Mobile Modular’s nine-month revenue rose 10%, but pretax income fell 46% to $4.8 million. Management cited weaker rental margins, higher equipment-preparation material and labor costs, and increased selling and administrative expense. Average rental utilization improved, while rental rates declined.
- TRS-RenTelco’s nine-month revenue increased 5% and pretax income increased 10% to $26.5 million, supported by equipment sales and lower administrative costs following its exit from the environmental test equipment business in November 2012. In Q3, revenue was flat and pretax income declined 6%.
- Adler Tanks’ nine-month revenue increased 11%, but pretax income declined 11% to $19.2 million. Higher rental and service revenue was offset by lower rental margins and higher selling and administrative costs. Utilization fell year over year.
- Enviroplex contributed 3% of nine-month pretax income, compared with a loss contribution of 1% in 2012. On August 16, 2013, Sabre Manufacturing, a related-party supplier of containment tanks, was sold to an unrelated party; purchases from Sabre totaled $13.6 million in the first nine months of 2013.
Outlook, risks, and other matters
The filing gives no specific earnings or revenue guidance. Management says nine-month results are not necessarily indicative of full-year results. It described operations as cash-generative and said it expects to fund requirements through operating cash flow, equipment-sale proceeds, and borrowing capacity, while noting that significant deterioration could affect covenant compliance.
- Demand and pricing risks include public-school funding, bond measures and education policies for modular classrooms; economic and industry cycles affecting test-equipment rentals; and oil and gas activity, hydraulic-fracturing regulation, and industrial demand affecting Adler Tanks.
- Other identified risks include rental-equipment utilization and redeployment, equipment obsolescence or impairment, competition and pricing pressure, labor and materials costs, customer credit and collections, supplier availability, and seasonality.
- The company also disclosed potential environmental, health and safety, product-liability, litigation, disaster, foreign-exchange, cybersecurity, and acquisition-integration risks. It has variable-rate debt and stated that a 1 percentage-point rise in average rates would increase annual debt service by approximately $1.8 million at the reported variable-rate debt balance.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. The company reported no material off-balance-sheet arrangements, no material change in market-risk exposure, and effective disclosure controls as of September 30, 2013.
Important facts for investors to verify
- Whether Mobile Modular’s rental-margin pressure and higher preparation costs persist, and whether the improved utilization translates into profit.
- Whether Adler Tanks can sustain revenue growth while improving utilization, rental margins, and operating costs.
- The quality and repeatability of revenue growth from equipment sales and rental-related services, given their potential variability.
- Debt repayment schedule, variable-rate exposure, covenant headroom, and actual liquidity needs amid low reported cash and capital-intensive fleet investment.
- Effects of school funding and policy changes, economic cycles, and oil and gas or hydraulic-fracturing developments on segment demand.