McGrath RentCorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparative figures are for the corresponding 2021 periods. McGrath RentCorp rents modular buildings, electronic test equipment, and liquid and solid containment equipment, and also sells equipment and manufactures classroom buildings. Interim statements were reviewed by Grant Thornton, not audited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $177.0m | $146.4m | $322.4m | $267.6m |
| Gross profit | $77.8m | $65.9m | $144.3m | $122.9m |
| Income from operations | $37.0m | $29.6m | $64.4m | $53.6m |
| Net income | $26.1m | $20.6m | $44.9m | $38.0m |
| Diluted EPS | $1.07 | $0.84 | $1.83 | $1.55 |
| Adjusted EBITDA, non-GAAP | $66.3m | $58.5m | $123.0m | $107.6m |
| Adjusted EBITDA margin | 37% | 40% | 38% | 40% |
Q2 revenue increased 21%, net income 27%, and diluted EPS 27% year over year. For the first half, revenue rose 20%, net income 18%, and diluted EPS 18%. Approximate gross margin was 44.0% in Q2 versus 45.0% a year earlier, and 44.8% for the half versus 45.9%. Higher sales and rental growth supported earnings, while direct costs and overhead rose.
Cash flow, debt, and liquidity
- First-half operating cash flow was $82.0m, down from $98.0m. Investing used $69.6m, including $94.8m of rental-equipment purchases and $6.6m of property, plant and equipment purchases; proceeds from used-equipment sales were $31.8m. Financing used $13.2m, including $22.1m of dividends. Cash declined to $0.9m from $1.5m at year-end 2021.
- Notes payable were $441.5m at June 30, 2022, compared with $426.5m at December 31, 2021. The company reported $281.5m outstanding against its $432.0m unsecured credit and sweep facilities at quarter-end, with $150.5m of additional capacity. The filing reports a 1.69x leverage ratio and 4.15x fixed-charge coverage ratio; it was in compliance with covenants.
- Interest expense was $3.0m in Q2 and $5.8m for the first half, compared with $2.3m and $4.0m, respectively, in 2021. Management said first-half expense rose with higher average debt, partly offset by lower average rates.
- On July 15, 2022, the company replaced its prior facility with a $650m unsecured revolving credit facility, expandable to $950m, maturing July 15, 2027. The filing says prior-facility obligations were refinanced under the new agreement.
Material changes and segment performance
- Mobile Modular led growth: first-half revenue rose 32% to $202.0m, with pretax income up 23% to $38.6m. The company cited increased rental equipment on rent and rental rates, sales growth, and contributions from Design Space and Kitchens To Go, acquired in 2021. Segment equipment utilization also improved.
- Adler Tanks first-half revenue increased 17% to $44.0m and pretax income rose to $4.7m from $1.6m, reflecting stronger rental activity and utilization.
- TRS-RenTelco revenue increased 5% to $70.8m, but pretax income grew only 1% to $16.2m; average utilization declined year over year.
- Enviroplex had a first-half operating loss of $1.4m versus operating income of $0.2m in 2021, as sales revenue fell. Q2 gross profit also declined, reflecting lower sales and margin.
- First-half rental-equipment acquisitions were $96.0m versus $190.7m in 2021; the prior-year figure included substantial acquisition-related spending. First-half 2022 purchases were higher than the comparable period excluding that context, and the company noted capital-intensive fleet investment.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said results for the first half should not be taken as necessarily indicative of full-year results.
- Management reported no significant financial impact from COVID-19 through June 30, 2022, but said the full effects remain uncertain. Risks include supply-chain disruption, inflation in materials and labor, customer demand and payment pressures, and interest-rate increases.
- The company estimated that each 1 percentage-point increase in average rates would add about $2.8m to annual debt service based on $281.5m of variable-rate debt outstanding at June 30.
- Other key exposures include school-funding and policy changes affecting modular classrooms, competition and cyclical demand in test equipment and containment markets, equipment utilization and resale values, acquisitions and integration, environmental and product liability, and cyber risk. The company disclosed an immaterial 2021 ransomware incident involving copying of some personal information; it said operations were not materially disrupted.
- Legal proceedings arise in the ordinary course; management did not expect current matters, individually or collectively, to materially adversely affect financial condition, results, or cash flows. The company declared a quarterly dividend of $0.455 per share, 5% above the prior-year comparable quarter.
Investor verification points
- Assess how much growth reflects underlying rental demand, pricing, and utilization versus the inclusion of 2021 acquisitions, and whether elevated sales and used-equipment gains are sustainable.
- Track rental margins, especially higher direct costs at Mobile Modular, and the trajectory of Enviroplex sales and profitability.
- Reconcile operating cash flow with fleet investment, dividends, and debt growth; verify liquidity and covenant headroom after the July 2022 credit-agreement refinancing.
- Monitor variable-rate exposure, near-term note maturities, and the impact of higher interest rates on earnings and cash generation.
- Evaluate risks from school funding, supply and labor costs, equipment redeployment and resale values, COVID-19, and the company’s disclosed cybersecurity and environmental exposures.