McGrath RentCorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. The interim financial statements were reviewed, not audited. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and containment tanks and boxes, and also manufactures classroom buildings.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $145.4 million | $121.2 million | +20% |
| Gross profit | $66.5 million | $57.1 million | +16% |
| Income from operations | $27.4 million | $23.9 million | +14% |
| Net income | $18.8 million | $17.4 million | +8% |
| Diluted EPS | $0.77 | $0.71 | +8% |
| Adjusted EBITDA (non-GAAP) | $56.7 million | $49.1 million | +15% |
| Operating cash flow | $51.7 million | $37.6 million | +38% per cash flow statement |
Gross margin was approximately 45.7%, versus 47.1%; operating margin was approximately 18.8%, versus 19.8%. Adjusted EBITDA margin was 39%, versus 41%. The effective income tax rate rose to 23.5% from 21.3%.
Investing activities used $34.5 million, including $39.4 million of rental-equipment purchases and $5.4 million of property, plant and equipment purchases, partly offset by $10.3 million from used-equipment sales. Financing activities used $17.1 million, including $11.0 million of dividends paid and $2.5 million of net bank-line repayments. Cash increased $0.1 million to $1.6 million.
At March 31, 2022, notes payable totaled $424.0 million. The company reported $264.0 million outstanding under its unsecured credit and sweep facilities, with $168.0 million of additional borrowing capacity. It also had $160.0 million of senior notes outstanding. Debt covenants were met: fixed-charge coverage was 4.12x against a 2.50x minimum, and leverage was 1.67x against a 2.75x maximum.
Material changes versus Q1 2021
- Mobile Modular revenue increased 32% to $90.6 million, and pretax income rose 13% to $16.6 million. Higher rental fleet utilization and rates, service revenue and equipment sales contributed; rental gross margin declined to 55% from 60% as other direct costs rose faster than rental revenue.
- Adler Tanks revenue grew 15% to $20.3 million and pretax income increased to $1.4 million from $0.3 million, supported by stronger rental revenue, utilization and rental margins.
- TRS-RenTelco revenue was essentially flat at $33.5 million; pretax income fell 6% to $7.5 million. Rental revenue increased, but equipment sales declined 24% and average utilization decreased.
- Enviroplex reported an operating loss of $1.1 million, compared with a $1.0 million loss. Lower sales and gross margin contributed.
- Selling and administrative expenses rose 18% to $39.1 million, including higher payroll and acquisition-related amortization. Interest expense increased 58% to $2.8 million, reflecting higher average debt despite a lower average net interest rate.
- Rental-equipment acquisitions were $46.5 million, versus $24.7 million. Mobile Modular’s rental-equipment purchases increased substantially.
Q1 2022 results include Design Space and Kitchens To Go, acquired in 2021; Q1 2021 did not include their operating results. Management reported that COVID-19 had not significantly affected Q1 results, but its overall future effect remained uncertain.
Outlook, risks and unusual items
The filing provides no numerical full-year guidance. Management said the quarter should not be viewed as necessarily indicative of full-year results. It expects to fund operations and capital needs through operating cash flow, used-equipment sale proceeds and borrowing, but notes that capital requirements are significant.
- Key disclosed risks include inflation in equipment, materials, labor and fuel costs; supplier and logistics disruption; interest-rate increases on variable-rate debt; and customer credit or equipment redeployment risk.
- Demand may be affected by public-school funding and classroom policies, seasonality, economic cycles in test-equipment and industrial markets, and oil-and-gas activity affecting Adler Tanks.
- The company cited uncertainty around COVID-19 and potential impacts on customers, suppliers, demand and costs. It also disclosed an immaterial 2021 ransomware incident involving copying of some personal information; the company reported no material operational or financial impact.
- Goodwill and intangible assets totaled $177.9 million; the company reported no impairment-triggering events in the quarter. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- The quarterly dividend declared was $0.455 per share, 5% above the prior-year comparable dividend. No shares were repurchased during either comparison period.
Important facts for investors to verify
- Reconcile operating cash flow: the cash flow statement reports $51.7 million for Q1 2022, while the MD&A narrative states $51.3 million and describes a 36% increase. The filing text does not explain this discrepancy.
- Assess how much of reported growth came from acquisitions versus organic activity, particularly in Mobile Modular, and whether acquisition integration costs and amortization continue.
- Monitor rental margins, utilization and pricing by segment, especially Mobile Modular’s lower rental gross margin and TRS-RenTelco’s lower utilization.
- Review debt maturities and sensitivity to interest-rate increases, alongside the company’s remaining credit capacity and covenant headroom.
- Track rental-equipment capital spending, used-equipment sale proceeds, cash conversion and dividend commitments against available liquidity.