McGrath RentCorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the same period in 2022. The interim financial statements were reviewed, not audited. McGrath RentCorp rents modular buildings, portable storage and electronic test equipment, and manufactures classroom buildings. Following the Adler Tanks divestiture, its continuing reportable segments are Mobile Modular, TRS-RenTelco and Enviroplex.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $163.7m | $125.1m | Up 31% |
| Gross profit, continuing operations | $77.4m | $58.0m | Up 33%; gross margin approximately 47.3%, versus 46.4% |
| Operating income, continuing operations | $19.9m | $25.4m | Down 22%; operating margin approximately 12.1%, versus 20.3% |
| Income from continuing operations | $11.5m | $17.7m | Down 35%; diluted EPS $0.47 versus $0.72 |
| Net income | $71.7m | $18.8m | Includes a $58.9m after-tax gain on Adler Tanks sale |
| Operating cash flow | $35.7m | $51.7m | Down $16.0m |
| Capital investment and acquisitions | $538.2m | Not comparable | $77.7m rental equipment purchases, $6.9m PP&E purchases and $453.6m business acquisitions |
| Notes payable | $658.8m | $413.7m at Dec. 31, 2022 | Increase largely associated with acquisition financing |
| Cash | $0.7m | $1.0m at Dec. 31, 2022 | Unsecured credit lines had $91.2m additional borrowing capacity |
Revenue figures require care: the income statement reports $163.7m from continuing operations. Management also cites $173.2m of revenue including Adler Tanks discontinued operations through its February 1 sale, versus $145.4m in the prior-year quarter; that broader figure increased 19%.
Management-reported Adjusted EBITDA from continuing operations was $61.8m, up 23% from $50.1m, with margin of 38% versus 40%. This non-GAAP measure adds back $14.1m of transaction costs in Q1 2023. Including discontinued operations, Adjusted EBITDA was $65.4m versus $56.7m, excluding the sale gain. Dividends declared were $0.465 per share, up 2% year over year.
Material changes and transactions
- On February 1, the company sold Adler Tanks for a stated sale price of $264.5m and recorded a $58.9m after-tax gain. Cash proceeds from the sale reported in investing activities were $262.5m. The divestiture reflects a strategic focus on modular and storage businesses.
- On February 1, McGrath acquired Vesta Modular for $437.2m; on March 1, it acquired Brekke Storage for $16.4m. Acquired businesses contributed to Mobile Modular results from their respective acquisition dates. Preliminary purchase accounting recorded $217.4m of goodwill for the two acquisitions.
- Management attributed lower continuing-operations income primarily to $14.2m of acquisition and divestiture transaction costs, higher salaries and benefits, and higher interest expense. Interest expense rose to $7.5m from $2.3m; the effective borrowing rate was 5.57% versus 2.68%.
- Mobile Modular revenue rose 40%, with Vesta contributing to rental, service and sales growth. TRS-RenTelco revenue rose 8%, but pretax income fell 38%; average utilization declined to 59.2% from 64.6%.
Liquidity, outlook and risks
Cash flow from operations declined partly because of lower deferred tax cash-flow benefits and higher prepaid expenses, partly offset by increased accounts payable and accrued liabilities. Investing cash outflow was $263.5m, partly offset by Adler sale proceeds. Financing provided $227.5m, primarily through increased borrowings. At March 31, $558.8m was outstanding under the $650m unsecured credit lines, with $91.2m available. The company reported covenant compliance: fixed-charge coverage of 4.12x against a 2.50x minimum, and leverage of 2.21x against a 2.75x maximum.
No formal earnings or revenue guidance is provided in the filing. Management says it believes liquidity can be supported through operating cash flow, used-equipment sales, borrowing capacity and, if needed, reduced equipment purchases, dividends or repurchases. The company cautions that results can fluctuate with economic conditions, interest rates, customer demand and funding, equipment utilization and pricing, seasonality, supply-chain and labor costs, and acquisition integration. School funding and bond measures may affect classroom demand; electronic test-equipment demand is cyclical. Most debt is variable-rate, and the filing estimates annual debt service would rise approximately $5.6m for each 1% increase in rates, based on variable-rate debt outstanding at quarter-end.
The filing identifies acquisition integration, goodwill and intangible-asset impairment, used-equipment resale values, credit and collection risk, competition, cybersecurity, environmental and regulatory exposure, and natural disasters among other risks. Management reported no material change in market-risk exposure or critical accounting estimates. Ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting. Subsequent to quarter-end, the company acquired Dixie Storage on April 1 for $4.9m.
Investor verification priorities
- Reconcile continuing-operations revenue of $163.7m with management’s $173.2m figure that includes discontinued Adler Tanks operations.
- Assess recurring earnings separately from the $58.9m sale gain and $14.2m transaction costs; review acquisition contributions and integration performance.
- Monitor debt, variable-rate interest exposure, available credit and covenant headroom following the acquisitions.
- Review Mobile Modular and TRS-RenTelco utilization, rental rates, equipment investment and used-equipment resale assumptions.
- Track final purchase-price allocations, acquired goodwill and intangible valuations, and the effects of the Dixie Storage acquisition.