McGrath RentCorp — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. The interim financial statements were reviewed, not audited. McGrath RentCorp rents modular buildings, electronic test equipment and containment tanks and boxes, and also manufactures classroom buildings.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $79.5m (+20%) | $66.5m | $152.5m (+19%) | $128.3m |
| Gross profit | $39.4m (+29%) | $30.5m | $75.2m (+29%) | $58.3m |
| Operating income | $20.7m | $13.6m | $38.0m | $26.0m |
| Net income | $11.4m (+54%) | $7.4m | $21.0m (+50%) | $14.0m |
| Diluted EPS | $0.46 | $0.31 | $0.85 | $0.58 |
| Gross margin | 49.5% | 45.9% | 49.3% | 45.5% |
| Operating margin | 26.0% | 20.4% | 24.9% | 20.2% |
For the six months, operating cash flow was $71.4m, versus $43.2m. Investing used $68.3m, including $71.2m of rental-equipment purchases and $10.8m of property, plant and equipment purchases; financing used $3.7m. Cash ended the period at $0.4m. The company declared dividends of $0.23 per share for Q2, up 2% year over year.
At June 30, 2011, total assets were $866.7m and shareholders’ equity was $309.3m. Notes payable were $270.5m, versus $265.6m at year-end 2010. The company had $170.5m outstanding on $355m of revolving and sweep credit lines, leaving $184.5m available. It issued $100m of unsecured 4.03% senior notes due in 2018 and used the proceeds to repay revolver borrowings; principal installments begin in 2014. It also made the final $12m payment on its 5.08% notes due 2011. The company reported compliance with debt covenants.
Material changes and segment performance
- Growth was led by Adler Tanks and TRS-RenTelco. For the six months, Adler revenue rose 76% to $31.3m and pretax income rose 223% to $13.1m; period-end utilization was 86.4%, versus 76.7%.
- TRS-RenTelco six-month revenue increased 20% to $60.1m and pretax income increased 108% to $13.4m, supported by rental and equipment-sales growth and higher rental rates.
- Mobile Modular six-month revenue rose 3% to $59.1m, but pretax income fell 28% to $9.0m. Lower classroom rental revenue, rental margins and utilization offset higher sales and service revenue.
- Enviroplex reported a six-month operating loss of $1.1m; its pretax contribution was negative $1.0m. Management attributed weaker gross profit mainly to lower sales revenue.
- Adjusted EBITDA, a company-defined non-GAAP measure, increased 24% to $72.8m for the six months; its margin was 48%, versus 46%.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It cited public-school funding, facility bonds and classroom demand as important uncertainties; returns of modular units and seasonal patterns could also affect utilization and revenue. Other disclosed risks include economic weakness and price competition, cyclical demand in test-equipment and industrial markets, interest-rate exposure, equipment obsolescence, environmental and product liability, and possible changes in hydraulic-fracturing regulation.
Interest expense increased 14% for the six months, reflecting higher average debt and interest rates. Management estimated that each 1 percentage-point increase in the average rate on the $170.5m of variable-rate debt would raise annual debt service by approximately $1.7m. A related party controlled by the president of Adler Tanks supplied $9.0m of containment tanks during the six months; $0.9m was due to related parties at quarter-end. Management reported no material subsequent events, no material off-balance-sheet arrangements, and no expected material adverse effect from ordinary-course legal proceedings. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether Adler Tanks’ rapid revenue and utilization growth is sustainable, and whether its customer, industry and environmental exposures are adequately managed.
- Whether Mobile Modular’s classroom rental trends improve amid school-budget constraints, classroom returns and lower rental rates.
- Debt capacity, variable-rate exposure, covenant headroom and the timing and terms of any further shelf-note issuance.
- Capital spending, rental-fleet returns and utilization, and the sustainability of operating cash flow relative to fleet investment and dividends.
- The commercial terms and governance oversight of the $9.0m related-party tank purchases.