McGrath RentCorp — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. McGrath RentCorp rents and sells modular buildings and portable storage, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings. Interim financial statements are unaudited and were reviewed by Grant Thornton, which reported no material modifications were needed.
Financial performance and condition
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $122.0 | $113.0 | $318.8 | $299.3 |
| Gross profit | $50.4 | $50.1 | $134.8 | $130.2 |
| Income from operations | $24.2 | $25.2 | $56.6 | $55.5 |
| Net income | $12.9 | $13.6 | $28.5 | $29.0 |
| Diluted EPS | $0.54 | $0.54 | $1.19 | $1.12 |
| Adjusted EBITDA (non-GAAP) | $45.1 | $47.0 | $120.5 | $121.2 |
| Adjusted EBITDA margin | 37% | 42% | 38% | 41% |
- Q3 rental operations revenue fell to $87.9 million from $92.1 million, while equipment sales rose to $33.5 million from $20.4 million. For the nine-month period, rental operations revenue was nearly flat at $258.1 million; sales increased to $58.9 million from $40.2 million.
- Calculated consolidated margins: gross margin was approximately 41.3% in Q3 versus 44.4% a year earlier, and 42.3% for nine months versus 43.5%. Operating margin was approximately 19.9% versus 22.3% in Q3 and 17.7% versus 18.5% year to date.
- Interest expense increased 20% in Q3 to $2.9 million and 32% for nine months to $9.5 million. Management attributed the nine-month increase to higher average debt and rates; it also expensed $0.5 million of remaining issuance costs from the prior credit facility in Q1.
- Nine-month operating cash flow was $106.2 million, compared with $100.6 million. Investing used $50.3 million, including $64.3 million of rental-equipment purchases and $10.0 million of property and equipment purchases, partly offset by $24.0 million of proceeds from used-equipment sales. Financing used $55.9 million, including $20.0 million of senior-note principal payments and $18.3 million of dividends.
- At September 30, cash was $1.1 million, notes payable were $345.3 million, total liabilities were $754.3 million, and shareholders’ equity was $390.6 million. Notes payable declined from $381.3 million at December 31, 2015.
- The company had $205.4 million drawn on $432.0 million of unsecured credit lines, with $226.6 million of additional capacity. It reported covenant compliance: fixed-charge coverage of 3.75x against a 2.50x minimum and leverage of 2.11x against a 2.75x maximum.
Material changes and segment trends
- Q3 revenue increased 8%, but net income decreased 5% and diluted EPS was unchanged. Nine-month revenue rose 7%, net income declined 2%, and diluted EPS increased 6%; the share count was lower than in 2015, when the company repurchased shares.
- Mobile Modular was the principal growth contributor: nine-month revenue increased 18% to $158.5 million and pretax income rose 33% to $23.9 million. Higher rental activity, rates and equipment sales contributed.
- TRS-RenTelco nine-month revenue declined 4% to $82.2 million and pretax income declined 3% to $15.7 million, primarily reflecting lower rental revenue and rates.
- Adler Tanks nine-month revenue declined 13% to $62.3 million and pretax income fell 63% to $5.1 million. Average utilization fell to 49.9% from 59.9%; management cited lower rental demand and margins.
- The quarterly dividend declared was $0.255 per share, 2% above the prior-year comparable quarter. No shares were repurchased in the first nine months of 2016.
Outlook, risks and other notable items
- The filing provides no numerical earnings or revenue guidance. Management said nine-month results should not be viewed as necessarily indicative of full-year results.
- Management identifies public-school funding, bond approvals and education policies as risks to modular demand. It also highlights cyclical demand, commodity and regulatory exposure in Adler Tanks, and technology obsolescence and industry cycles in test equipment.
- Adler Tanks’ utilization and rental demand remain notable pressure points; the filing links part of its exposure to oil and gas activity and warns that weak commodity markets or changes in hydraulic-fracturing regulation could reduce demand.
- The company’s president and CEO, Dennis C. Kakures, was on medical leave following a stroke; an Interim Office of the CEO was established. The company said the timing and course of his recovery were unknown.
- Variable-rate debt exposes earnings to rate increases; the filing estimates annual debt service would rise about $2.1 million for each 1 percentage-point increase in the average rate on $205.4 million of variable-rate debt.
- Management reported effective disclosure controls and no material off-balance-sheet arrangements. Ordinary-course legal proceedings were not expected to have a material adverse effect. The company stated it had no material change in market-risk exposures from its 2015 annual report.
Most important facts for investors to verify
- Whether Mobile Modular growth can continue and offset weaker results in Adler Tanks and TRS-RenTelco.
- Whether Adler Tanks utilization and rental rates stabilize, particularly given oil-and-gas and industrial demand exposure.
- Whether the increased revenue mix from equipment sales is sustainable; sales and related margins can fluctuate with customer needs and equipment availability.
- Debt costs, variable-rate exposure, available revolver capacity and covenant headroom as operating performance changes.
- The CEO’s recovery and any effects of the interim leadership arrangement.
- Potential full-year seasonality and public-school funding developments affecting modular rentals and sales.