McGrath RentCorp — Q2 2021 Form 10-Q
Business context and reporting period. McGrath RentCorp rents and sells relocatable modular buildings, electronic test equipment, and containment tanks and boxes; it also manufactures classroom buildings. This unaudited quarterly report covers the three and six months ended June 30, 2021, compared with the same 2020 periods. The independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $146.4 million | $137.7 million | $267.6 million | $267.1 million |
| Gross profit | $65.9 million | $63.2 million | $122.9 million | $124.9 million |
| Operating income | $29.6 million | $32.7 million | $53.6 million | $62.4 million |
| Net income | $20.6 million | $22.5 million | $38.0 million | $42.7 million |
| Diluted EPS | $0.84 | $0.92 | $1.55 | $1.74 |
| Adjusted EBITDA and margin | $58.5 million; 40% | $58.1 million; 42% | $107.6 million; 40% | $113.0 million; 42% |
Q2 revenue grew 6%, but net income and diluted EPS each fell 9%. For the first half, revenue was nearly flat while net income and diluted EPS fell 11%. First-half gross margin was approximately 45.9%, versus 46.8% in 2020; operating margin was approximately 20.0%, versus 23.4%. Higher selling and administrative costs, including acquisition-related costs and amortization, weighed on operating income. First-half income tax rates were 23.1% versus 25.4%.
Cash flow and investment. Operating cash flow was $98.0 million for the first half, little changed from $97.5 million. Investing used $320.8 million, including $284.3 million for acquisitions and $58.9 million of rental-equipment purchases; financing provided $224.1 million. Cash ended at $2.4 million, compared with $1.2 million at year-end 2020.
Debt and liquidity. Notes payable rose to $472.7 million from $222.8 million at December 31, 2020, principally reflecting acquisition funding. The company reported $312.7 million drawn under its $432.0 million unsecured credit and sweep facilities, with $119.3 million of additional borrowing capacity. It issued $60 million of 2.35% Series E notes due 2026; proceeds paid down the credit facility. Outstanding senior notes also included $60 million of 3.84% Series C notes due 2022 and $40 million of 2.57% Series D notes due 2028. The company was in covenant compliance: fixed-charge coverage was 4.23x against a 2.50x minimum, and leverage was 2.01x against a 2.75x maximum.
Material changes and notable items
- Acquired Design Space Modular Buildings PNW in May for approximately $266.5 million and Kitchens To Go in April for approximately $18.3 million. Both were included in Mobile Modular from their acquisition dates. Preliminary purchase accounting recorded $104.2 million of combined goodwill; valuations remain subject to completion.
- Q2 Mobile Modular revenue increased 10%, but its pretax income declined 13%, partly reflecting higher expenses. First-half Adler Tanks revenue fell 4% and pretax income fell 51%, with lower rental utilization and rental margins cited as factors.
- First-half selling and administrative expenses increased 11%. Management cited acquired employee costs, $1.7 million of higher acquired-intangible amortization and $0.9 million of acquisition transaction costs; it also identified a $2.1 million non-operating legal expense in the first half.
- The quarterly dividend declared was $0.435 per share, 4% above the year-earlier quarter. No shares were repurchased in the first half of 2021.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said COVID-19’s duration and financial effects, including those of variants, remained uncertain and could not be fully estimated. Operations were continuing, but possible effects include project delays, early equipment returns, weaker demand, and customer payment delays or defaults. Management said it had reduced or deferred nonessential spending and believed available credit and access to additional senior notes supported liquidity.
Other disclosed risks include acquisition integration and realization of expected benefits; school funding and policy changes affecting classroom demand; cyclical end markets, utilization and used-equipment resale values; supplier, labor and materials cost pressures; variable-rate debt exposure; and environmental, product-liability, cyber and regulatory risks. A 1% increase in the average rate on the $312.7 million of variable-rate debt would increase annual debt service by approximately $3.1 million. Management did not expect ordinary-course legal proceedings, individually or collectively, to materially adversely affect the company. No material off-balance-sheet arrangements or material changes in market-risk exposures were reported.
Important facts for investors to verify
- Whether Design Space and Kitchens To Go deliver the expected operating contribution and whether preliminary asset, intangible-asset and goodwill valuations change.
- Whether Mobile Modular’s expense growth and Adler Tanks’ lower utilization and profitability improve, and how rental rates and fleet utilization trend.
- How acquisition-related borrowing, variable interest rates, and remaining credit capacity affect leverage, covenant headroom and cash availability.
- How COVID-19, school funding, customer credit quality, supply costs and used-equipment resale values affect subsequent results; management cautions actual outcomes may differ materially.