McGrath RentCorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. McGrath RentCorp rents modular buildings, portable storage and electronic test equipment, and manufactures classroom buildings. Following its February 2023 sale of Adler Tanks, continuing operations comprise Mobile Modular, TRS-RenTelco and Enviroplex. The interim financial statements were reviewed, not audited.
Financial performance
Amounts below are in millions, except per-share figures and percentages. Income-statement revenue and earnings figures distinguish continuing operations from discontinued operations.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Continuing-operations revenue | $203.0 | $153.4 | $366.7 | $278.4 |
| Gross profit, continuing operations | $94.6 | $67.0 | $172.0 | $125.0 |
| Gross margin, calculated | 46.6% | 43.7% | 46.9% | 44.9% |
| Operating income | $47.6 | $33.1 | $67.5 | $58.6 |
| Income from continuing operations | $28.0 | $23.5 | $39.5 | $41.2 |
| Net income, including discontinued operations | $30.6 | $26.1 | $102.2 | $44.9 |
| Diluted EPS, total | $1.25 | $1.07 | $4.17 | $1.83 |
| Interest expense | $9.9 | $2.4 | $17.4 | $4.7 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $71.5 | $82.0 |
| Adjusted EBITDA, continuing operations | $77.0 | $57.6 | $138.7 | $107.7 |
Six-month 2023 net income included a $61.5 million after-tax gain on the Adler Tanks sale. Continuing-operations diluted EPS was $1.61 for the six months, versus $1.68 in 2022. Adjusted EBITDA is a company-defined non-GAAP measure; it should not be treated as a substitute for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- At June 30, cash was $2.2 million, notes payable $672.6 million, total assets $2.109 billion and shareholders’ equity $880.6 million. At December 31, 2022, notes payable were $413.7 million and cash was $1.0 million.
- Six-month investing cash outflow was $300.2 million, including $456.3 million paid for acquisitions, partly offset by $268.0 million of Adler Tanks sale proceeds. Rental-equipment purchases were $128.1 million; property, plant and equipment purchases were $11.2 million.
- Financing provided $230.0 million, principally from increased borrowings. The company paid $22.8 million in dividends during the six months; the declared Q2 dividend was $0.465 per share.
- The company reported covenant ratios of 3.82:1 for fixed-charge coverage and 2.18:1 for leverage, against minimum and maximum thresholds of 2.50:1 and 2.75:1, respectively. It reported compliance at quarter-end.
Material changes and management commentary
- Vesta Modular was acquired for approximately $437.2 million on February 1; Brekke Storage and Dixie Storage were acquired for approximately $16.4 million and $4.8 million. Their results are included in Mobile Modular from their respective acquisition dates. Acquisition purchase-price allocations were preliminary.
- Adler Tanks was sold for approximately $268.0 million, shifting the company’s focus to modular and storage businesses. The sale generated the $61.5 million after-tax gain reported in six-month results.
- Management attributed Mobile Modular’s growth principally to Vesta Modular, higher rental equipment on rent and improved rental rates. In Q2, Mobile Modular revenue rose 47% year over year; average utilization was 79.1% and average monthly rental rates rose 4%. TRS-RenTelco’s Q2 revenue was roughly flat, while average utilization fell to 58.2% from 64.5%.
- For the six months, interest expense rose to $17.4 million as average debt and borrowing rates increased; the reported effective rate was 5.77%, versus 2.74% in 2022. Selling and administrative expenses included $14.3 million of acquisition- and divestiture-related transaction costs.
- On July 1, after quarter-end, the company acquired Inland Leasing and Storage assets for $3.8 million, adding approximately 600 portable-storage units.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said it believes it can obtain sufficient financing to meet capital needs, but noted that significant deterioration in performance could affect covenant compliance. It cited exposure to variable interest rates, economic conditions and inflation, acquisition integration and goodwill impairment, equipment utilization and resale values, school funding and enrollment, competition, supply-chain constraints, cybersecurity, and environmental, regulatory and litigation risks. The company estimated that each 1 percentage-point increase in the average rate on $572.7 million of variable-rate debt would add approximately $5.7 million to annual debt service. Management did not expect current legal proceedings, individually or collectively, to materially adversely affect results, financial condition or cash flows.
Important facts for investors to verify
- Reconcile growth comparisons across the filing: some MD&A revenue comparisons include Adler Tanks’ discontinued-operation revenue in the 2022 base, while the income statement presents continuing operations separately.
- Track post-acquisition Mobile Modular utilization, rental rates, margins and integration costs, and confirm final acquisition purchase-price allocations.
- Assess the effect of higher rates and debt balances on interest expense, cash generation and covenant headroom.
- Monitor TRS-RenTelco’s declining utilization and the sustainability of rental and equipment-sale margins.
- Separate recurring operating performance from the Adler Tanks gain, transaction costs and other discontinued-operation items when evaluating earnings.