McGrath RentCorp 10-Q Summary: Period Ended September 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine-month period ended on that date. McGrath RentCorp is a leading rental provider of relocatable modular buildings, electronic test equipment, and liquid/solid containment tanks. The company operates through four segments: Mobile Modular (modular buildings), TRS-RenTelco (electronic test equipment), Adler Tanks (containment solutions), and Enviroplex (classroom manufacturing). The financial statements are unaudited but reviewed by Grant Thornton LLP.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended 9/30/10 | Nine Months Ended 9/30/10 |
|---|---|---|
| Total Revenues | $83,204 | $211,457 |
| Gross Profit | $34,050 | $92,360 |
| Net Income | $9,700 | $23,736 |
| Diluted EPS | $0.40 | $0.98 |
| Operating Cash Flow (9mo) | N/A | $66,109 |
| Notes Payable (Debt) | $272,500 | $272,500 |
| Cash Balance | $496 | $496 |
| Adjusted EBITDA (9mo) | N/A | $92,855 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 10% ($7.7M) for the quarter and 1% ($2.3M) for the nine months compared to 2009.
- Profitability: Net income rose 2% for the quarter but declined 3% for the nine months ($0.7M decrease) compared to the prior year.
- Segment Performance:
- Mobile Modular: Revenues and gross profit declined significantly (16% revenue drop for 9 months) due to lower demand for commercial buildings and higher returns of classroom units in education markets.
- TRS-RenTelco: Revenues increased 5% (9 months) and pre-tax income surged 147%, driven by higher rental rates and utilization in the electronics sector.
- Adler Tanks: Revenues jumped 77% (9 months) and pre-tax income increased 211%, fueled by expansion into new market areas and higher utilization.
- Cash Flow: Operating cash flow decreased 26% to $66.1M for the nine months, primarily due to a $19.5M increase in accounts receivable. Investing cash outflows increased to $78.8M due to $93.4M in rental equipment purchases.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the strong performance of the Adler Tanks and TRS-RenTelco segments, which offset weakness in the Mobile Modular segment. The company declared a quarterly dividend of $0.225 per share, a 2% increase over the prior year. The company remains compliant with all financial covenants, including a Consolidated Leverage Ratio of 2.18 to 1 (limit 2.50 to 1).
Risks and Contingencies:
- Economic Sensitivity: Demand is tied to state funding for public schools (Mobile Modular) and industrial activity in oil/gas and electronics (Adler Tanks/TRS-RenTelco). Recessionary pressures and credit market tightening pose risks.
- Regulatory & Environmental: The company faces risks related to environmental liability from containment tanks and changing building codes for modular units.
- Competition: Intense competition in all segments, particularly from larger national players in modular buildings and containment rentals.
- Asset Management: Risks of equipment obsolescence (electronics) and the ability to redeploy returned modular units efficiently.
Investor Verification Checklist
- Accounts Receivable: Verify the $19.5M increase in receivables and the adequacy of the allowance for doubtful accounts ($1.6M) given the economic environment.
- Mobile Modular Utilization: Confirm the trend in utilization rates (67.4% period end) and the impact of school funding delays on future rental demand.
- Debt Covenants: Monitor the Consolidated Leverage Ratio and Fixed Charge Coverage Ratio to ensure continued compliance with the $355M credit facility and senior notes.
- Capital Expenditures: Assess the sustainability of the $93.4M equipment purchase rate in the context of operating cash flow declines.
- Related Party Transactions: Review the $13.0M in purchases from Sabre Manufacturing, LLC (controlled by the President of Adler Tanks) for pricing fairness.