McGrath RentCorp — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. McGrath RentCorp rents modular buildings, portable storage and electronic test equipment, and manufactures classroom buildings. The company sold Adler Tanks on February 1, 2023; its results are reported as discontinued operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Continuing-operations revenue | $243.5m | $174.3m | $610.3m | $452.8m |
| Gross profit | $111.5m | $76.8m | $283.5m | $201.8m |
| Income from continuing operations | $40.4m | $27.1m | $79.8m | $68.3m |
| Net income, including discontinued operations | $40.4m | $30.6m | $142.6m | $75.5m |
| Diluted EPS | $1.65 | $1.25 | $5.81 | $3.08 |
| Interest expense | $11.0m | $3.4m | $28.4m | $8.1m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $118.9m | $133.3m |
Continuing-operations gross margin was approximately 45.8% in Q3 versus 44.1% a year earlier, and 46.5% for the nine months versus 44.6%. Adjusted EBITDA from continuing operations was $95.3m in Q3, up from $64.8m, and $234.0m for the nine months, up from $172.5m. Adjusted EBITDA is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP results.
For comparison, management’s revenue growth figures include Adler Tanks revenue in the prior-year periods: consolidated revenue was $243.5m versus $200.5m in Q3 (+21%), and $619.7m versus $522.9m for the nine months (+19%). The continuing-operations revenue figures in the table exclude discontinued operations.
Balance sheet, liquidity and capital allocation
- At September 30, cash was $1.9m; notes payable were $667.6m, compared with $413.7m at December 31, 2022. Total assets were $2.14bn and shareholders’ equity was $911.4m.
- The $650m unsecured revolving facility had $492.7m drawn and $157.3m of stated borrowing capacity available. The company also reported $75m of Series F notes issued in September at 6.25%, maturing in 2030; proceeds were primarily intended for taxes related to the Adler Tanks sale.
- Cash flow for the first nine months: operating activities provided $118.9m; investing activities used $331.5m; financing activities provided $213.6m. Investing included $458.3m of acquisition payments and $268.0m of Adler Tanks sale proceeds. Rental equipment purchases were $171.3m.
- Debt covenants were met at quarter-end: fixed-charge coverage was 3.68x against a 2.50x minimum; leverage was 2.03x against a 2.75x maximum. The filing estimates that each 1% increase in the average rate on $492.7m of variable-rate debt would add about $4.9m to annual debt service.
- The quarterly dividend was $0.465 per share, 2% above the comparable prior-year quarter.
Material changes and management commentary
- Vesta Modular was acquired in February for approximately $437.2m. The company also acquired Brekke Storage, Dixie Storage and Inland Leasing. These businesses joined Mobile Modular, contributing to its growth and increasing rental equipment, goodwill and debt.
- Q3 continuing revenue and earnings growth were led by Mobile Modular, with Vesta contributing to rental, services and sales. Mobile Modular’s Q3 revenue rose 55% and pretax income rose 89%. TRS-RenTelco’s revenue rose 2%, but pretax income fell 28%; rental revenue and utilization declined.
- Across continuing operations, higher gross profit was partly offset by increased selling and administrative costs and substantially higher interest expense. Nine-month selling and administrative costs included $14.3m of acquisition- and divestiture-related transaction costs.
- Adler Tanks’ sale generated a $61.5m after-tax gain in the first nine months. Consequently, reported nine-month net income and EPS were materially elevated; management reported nine-month net income excluding that sale gain of $81.1m.
- Management provided no specific forward financial guidance in the supplied filing text. It cautioned that results can fluctuate with economic conditions, customer budgets and demand, interest rates, equipment utilization, acquisition integration, and the timing and mix of equipment sales.
Risks, contingencies and unusual items
- Key disclosed risks include higher interest rates and debt covenant headroom, integration and execution of acquisitions, demand and funding for public-school modular classrooms, cyclical demand and technology obsolescence in test equipment, supply-chain and labor costs, used-equipment residual values, credit losses, and environmental, regulatory and cybersecurity exposures.
- The company reported no material change in market-risk exposures or contractual obligations from its prior annual report. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Grant Thornton’s interim review found no material modifications needed for GAAP conformity. This was a review, not an audit; the quarterly financial statements are unaudited.
Important facts for investors to verify
- Separate ongoing operating performance from the Adler Tanks sale gain and from the prior-year discontinued-operation revenue when comparing growth and EPS.
- Track acquisition contribution and integration, particularly Vesta Modular, alongside transaction costs and the resulting goodwill and intangible assets.
- Monitor variable-rate borrowing, interest expense, available revolver capacity and covenant ratios as debt levels and rates change.
- Assess whether Mobile Modular’s rental growth and utilization can be sustained, and whether weakness in TRS-RenTelco rental demand continues.
- Review cash conversion and capital needs: nine-month operating cash flow declined year over year while rental-equipment purchases and acquisition spending were significant.