McGrath RentCorp (NASDAQ: MGRC) — Q2 2019 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2019; comparisons are with the quarter and six months ended June 30, 2018. McGrath rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment; it also sells equipment and manufactures modular classrooms through Enviroplex. Unless noted otherwise, amounts below are in millions of dollars. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $127.4 | $117.0 | $249.4 | $222.1 |
| Gross profit | $59.9 | $53.9 | $116.9 | $104.1 |
| Income from operations | $29.1 | $24.4 | $56.4 | $46.5 |
| Net income | $19.5 | $15.9 | $37.9 | $30.4 |
| Diluted EPS | $0.79 | $0.65 | $1.54 | $1.24 |
| Adjusted EBITDA (non-GAAP) | $52.4 | $45.4 | $102.3 | $88.3 |
- Q2 revenue rose 9%, net income 22%, and diluted EPS 22%; for the first half, revenue rose 12%, net income 25%, and diluted EPS 24%.
- Q2 gross, operating, and net margins were approximately 47.0%, 22.8%, and 15.3%, respectively, versus 46.1%, 20.9%, and 13.6% a year earlier. First-half margins were approximately 46.9%, 22.6%, and 15.2%, compared with 46.9%, 20.9%, and 13.7%.
- Q2 rental revenue increased 14% to $88.1 million and rental-related services revenue increased 28% to $24.5 million; sales declined 30% to $13.7 million. Management attributed growth mainly to rental and related-services activity; sales vary with customer needs, equipment availability, and funding.
- For the first half, Mobile Modular revenue grew 17% and pretax income 36%; TRS-RenTelco revenue grew 8% and pretax income 8%; Adler Tanks revenue grew 13% and pretax income 33%. Adler’s average utilization was 57.1%, down from 58.5% a year earlier, and period-end utilization was 55.3%, versus 61.3%.
- First-half operating cash flow was $92.0 million, up from $53.8 million. Investing used $76.4 million, including $90.7 million of rental-equipment purchases and $18.3 million of used-equipment sale proceeds. Financing used $15.6 million, including $17.3 million of dividends. Cash was $1.5 million at June 30, 2019.
- Notes payable were $301.9 million, versus $298.6 million at December 31, 2018. The company reported $201.9 million outstanding under unsecured credit lines, with $230.1 million of additional borrowing capacity; separate Series B and C notes totaled $100 million. The credit facility matures March 31, 2021; the senior notes mature in 2021 and 2022.
- Quarterly dividend declared was $0.375 per share, 10% above the comparable prior-year quarter.
Material changes, outlook, and risks
- Rental-equipment purchases increased substantially year over year, supporting fleet expansion: first-half acquisitions were $90.7 million versus $58.7 million. The company says its capital-intensive rental operations are funded by operating cash flow, used-equipment sales, and borrowings.
- Interest expense increased 5% in Q2 and 4% for the first half. Management cited higher average interest rates, partly offset by lower average debt. Most debt is variable-rate; the filing estimates each 1 percentage-point rate increase would add about $2.0 million to annual debt service based on variable-rate borrowings at quarter-end.
- The company reported compliance with debt covenants: fixed-charge coverage was 4.09x against a 2.50x minimum, and leverage was 1.39x against a 2.75x maximum. Management reported no known trend indicating likely noncompliance, while noting deterioration could affect compliance.
- No quantitative full-year earnings or revenue guidance is provided in the filing. Management cautions that first-half results are not necessarily indicative of the full year and highlights possible fluctuation from economic and industry conditions, customer funding, seasonality, utilization, equipment purchases and sales, and interest rates.
- Material business risks include school-funding and policy changes affecting classroom demand; equipment returns and utilization; cyclical demand in test-equipment and containment markets; used-equipment residual values; supplier availability and costs; environmental, product-liability, and litigation exposures; cyber and IT disruption; and variable-rate debt. The company says ordinary-course legal proceedings are not expected to have a material adverse effect and reported no material off-balance-sheet arrangements.
- Adoption of the new lease standard in 2019 resulted in recognition of $10.2 million of operating lease assets and liabilities at June 30; it did not materially affect reported results. No rental-asset impairment charge was recorded in the first half of 2019.
Most important facts for investors to verify
- Whether rental growth, pricing, and utilization—especially the weaker Adler Tanks utilization—persist in subsequent quarters.
- Whether fleet investment produces sufficient rental returns and cash flow, given the sharp increase in rental-equipment purchases.
- How variable interest rates affect interest costs and covenant headroom; confirm debt balances and remaining credit availability.
- Whether school-district funding, oil and gas activity, and used-equipment sale prices affect segment demand and margins.
- How dividend payments and future capital spending are funded if operating cash flow or used-equipment proceeds weaken.