McGrath RentCorp — Q2 2012 Form 10-Q
Business context and reporting period
McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment, and manufactures modular classrooms. This unaudited quarterly report covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The interim statements received an accountant’s review, not an audit.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $83.8m | $79.5m | $162.7m | $152.5m |
| Gross profit | $40.8m | $39.3m | $80.6m | $75.3m |
| Operating income | $19.6m | $20.7m | $38.1m | $38.0m |
| Net income | $10.5m | $11.4m | $20.4m | $21.0m |
| Diluted EPS | $0.42 | $0.46 | $0.81 | $0.85 |
| Adjusted EBITDA | $38.5m | $38.3m | $75.5m | $72.8m |
| Operating cash flow | Not separately presented | Not separately presented | $65.3m | $71.4m |
Q2 gross margin was approximately 48.7% versus 49.5% a year earlier; six-month gross margin was approximately 49.6% versus 49.3%. Operating margin was approximately 23.4% in Q2 versus 26.1%, and 23.4% for the half versus 24.9%. Adjusted EBITDA margin was 46% for the half, compared with 48%.
Six-month investing cash outflow was $70.0m, including $73.3m of rental-equipment purchases; financing provided $3.8m. Cash declined $0.9m to $0.34m. At June 30, total assets were $963.6m, notes payable $308.0m, and shareholders’ equity $347.5m. The $308.0m notes payable comprises $208.0m drawn on bank lines and $100.0m of 4.03% senior notes due 2018. The company reported $222.0m of additional borrowing capacity under its $420m revolving facility and $10m sweep facility. The quarterly dividend declared was $0.235 per share, up 2% year over year.
Material changes versus prior periods
- Six-month revenue rose 7%, led by Adler Tanks, whose revenue increased 30% to $40.7m, and higher rental revenue at TRS-RenTelco. Q2 revenue rose 5%.
- Despite revenue growth, six-month net income declined 3% and diluted EPS declined 5%; Q2 net income declined 8% and diluted EPS declined 9%. Higher selling and administrative costs and interest expense weighed on results. Six-month interest expense rose 33% to $4.6m.
- Mobile Modular six-month revenue fell 5% and pretax income fell 39% to $5.4m, with lower equipment sales and weaker rental economics. TRS-RenTelco pretax income increased 8% to $14.5m. Adler Tanks pretax income rose 10% to $14.5m, but Q2 pretax income fell 8% as costs and off-rent equipment affected results.
- Operating cash flow fell 9% year over year; management attributed the decline primarily to a $6.1m income-tax receivable benefit in 2011 that did not recur.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- On July 2, 2012, the company decided to exit its environmental test-equipment rental business over three to twelve months, after concluding it was unlikely to become meaningfully profitable. It may sell the business or sell equipment while continuing to serve customers; management expects no significant financial-statement impact.
- A new five-year, $420m unsecured revolving credit facility, effective June 2012, replaced the prior $350m facility and matures June 15, 2017. The company reported compliance with its financial covenants; leverage ratio was 1.88 versus a 2.75 maximum and fixed-charge coverage was 4.23 versus a 2.50 minimum.
- Management cited weaker demand in the Marcellus gas-shale region and lower Adler utilization: six-month average utilization was 73.3% versus 85.4% in 2011. Key exposures include school-district funding and classroom demand, economic and industry cycles, equipment utilization and pricing, interest rates, customer credit, environmental and product liability, and regulatory changes affecting hydraulic fracturing. A 1% increase in average rates on variable-rate debt would add approximately $2.1m in annual debt service, based on the $208m variable-rate balance.
- Adler purchased $21.8m of containment tanks from Sabre Manufacturing during the six months; Sabre is controlled by the president of Adler. Amounts due to related parties were $2.0m at June 30.
- Management said ordinary-course legal proceedings are not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Adler’s lower utilization and regional demand weakness persist, and whether fleet growth translates into revenue and earnings.
- Progress, costs, customer arrangements and asset-sale proceeds from the environmental test-equipment business exit.
- Cash generation relative to rental-fleet investment, dividends and borrowing; cash was only $0.34m at quarter-end.
- Debt balances, variable-rate exposure and covenant headroom, especially if earnings or utilization weaken.
- Terms, approval and ongoing scale of related-party purchases from Sabre Manufacturing.
- Whether school funding, economic conditions and other disclosed industry and regulatory risks materially affect future demand.