McGrath RentCorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The company rents modular buildings, electronic test equipment, and liquid/solid containment equipment; it also manufactures classroom buildings. Interim financial statements were unaudited and reviewed by Grant Thornton, which reported no material modifications needed.
Financial performance
Amounts in millions of dollars except per-share data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $99.4 | $104.9 | $262.1 | $257.4 |
| Rental operations revenue | $76.4 | $71.7 | $218.0 | $200.7 |
| Gross profit | $43.6 | $47.3 | $124.3 | $122.6 |
| Operating income | $22.8 | $27.3 | $60.9 | $65.3 |
| Net income | $12.5 | $15.4 | $32.8 | $36.4 |
| Diluted EPS | $0.50 | $0.62 | $1.31 | $1.47 |
| Adjusted EBITDA (non-GAAP) | $42.2 | $46.0 | $117.7 | $118.8 |
- For the quarter, revenue fell 5%, net income 19%, and diluted EPS 19%. Lower modular and Enviroplex sales and weaker Mobile Modular and Adler Tanks gross profit outweighed growth at TRS-RenTelco.
- For the nine months, revenue rose 2%, but net income declined 10% and diluted EPS 11%. Rental operations increased while sales revenue fell; higher selling and administrative expense and interest expense pressured earnings.
- Gross margin was approximately 43.9% for Q3 2012 versus 45.1% a year earlier, and 47.4% year to date versus 47.6%. Interest expense was $2.3 million for Q3 and $6.9 million year to date; the nine-month increase was attributed to higher average debt and interest rates.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $91.0 million, down from $104.5 million. Investing used $96.7 million, including $106.2 million of rental-equipment purchases and $11.0 million of property and equipment purchases; proceeds from used rental-equipment sales were $20.6 million.
- Financing provided $4.8 million, including $17.7 million of net bank-line borrowings and $17.3 million of dividends paid. Cash declined by $0.9 million to $0.4 million.
- At September 30, total assets were $988.3 million, rental equipment net was $719.6 million, accounts receivable was $101.0 million, total liabilities were $632.5 million, and shareholders’ equity was $355.8 million. Notes payable were $314.2 million.
- The amended unsecured revolving facility provides $420 million of borrowing capacity, potentially expandable to $450 million; together with the sweep facility, total lines were $430 million. The company reported $214.2 million outstanding and $215.8 million available. The facility matures in June 2017; $100 million of 4.03% senior notes mature in 2018, with principal installments beginning in 2014.
- At quarter-end, fixed-charge coverage was 4.11x versus a 2.50x minimum, leverage was 1.96x versus a 2.75x maximum, and tangible net worth was $316.4 million versus a $257.5 million minimum. The company reported compliance with covenants.
Material changes, outlook and risks
- Segment results diverged: nine-month TRS-RenTelco revenue rose 4% and pretax income rose 14%; Adler Tanks revenue rose 26%, but pretax income fell 3%. Mobile Modular revenue fell 6% and pretax income fell 36%. Enviroplex sales and gross profit declined substantially.
- Adler Tanks reported weaker utilization—72.0% average for the first nine months versus 86.4%—and management linked lower Northeast demand and equipment coming off rent to weakness in the Marcellus gas-shale region.
- On July 2, the company decided to exit its environmental test-equipment rental business, which management said was not expected to become meaningfully profitable. It was exploring a sale of the business or its rental assets; management did not expect a significant consolidated financial-statement impact.
- The company declared a quarterly dividend of $0.235 per share, 2% above the comparable prior-year quarter. No specific earnings or revenue guidance was provided.
- Key risks include economic and credit-market weakness, school funding and bond delays affecting modular demand, cyclical end-markets and utilization, oil-and-gas activity and hydraulic-fracturing regulation affecting Adler Tanks, variable-rate debt exposure, customer credit and equipment recovery, and environmental, product-liability, and catastrophic-loss claims. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
- Related-party purchases from Sabre Manufacturing, controlled by the president of Adler Tanks, totaled $10.3 million in Q3 and $32.1 million year to date; $1.0 million was due to Sabre at quarter-end.
Important facts for investors to verify
- Whether Adler Tanks’ off-rent equipment and utilization improve, particularly in the Northeast/Marcellus region, and how this affects margins.
- Whether cash generation can support rental-fleet investment and dividends while maintaining covenant headroom and managing variable-rate debt.
- Whether receivables growth and the doubtful-account allowance—which rose to $2.2 million from $1.5 million at year-end—signal any deterioration in collections.
- The terms and governance controls around material related-party purchases from Sabre, and progress on exiting the environmental test-equipment business.
- How public-school funding, customer demand, hydraulic-fracturing rules, and other cyclical market conditions affect rental rates, utilization, and future results.