McGrath RentCorp — Q3 2022 Form 10-Q
Period: Quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. 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 statements are unaudited; Grant Thornton performed a review, not an audit.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $200.5m | $173.3m | $522.9m | $440.9m |
| Gross profit | $89.4m | $75.8m | $233.8m | $198.8m |
| Income from operations | $45.3m | $35.9m | $109.8m | $89.4m |
| Net income | $30.6m | $23.3m | $75.5m | $61.3m |
| Diluted EPS | $1.25 | $0.95 | $3.08 | $2.50 |
| Interest expense | $4.2m | $3.2m | $10.0m | $7.2m |
- Q3 revenue rose 16%, net income 32%, and diluted EPS 31%. For the first nine months, revenue rose 19%, net income 23%, and diluted EPS 23%.
- Calculated gross margin was approximately 44.6% for Q3 versus 43.7% a year earlier; nine-month gross margin was approximately 44.7% versus 45.1%. Operating margin was approximately 22.6% and 21.0%, respectively, compared with 20.7% and 20.3% in 2021.
- Rental and rental-related services generated about 81% of nine-month revenue. Rental revenue increased 17% in Q3 and 17% year to date; sales revenue rose 21% in Q3 and 21% year to date.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $74.7m in Q3 and $197.7m for nine months, up 13% and 14%, respectively. Adjusted EBITDA margin was 37% in Q3 and 38% year to date, compared with 38% and 39% in 2021.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $133.3m, down from $136.3m. Investing used $86.8m, including $130.4m of rental-equipment purchases and $10.6m of property and equipment purchases; proceeds from used-equipment sales were $54.2m. Financing used $46.4m, including $33.2m of dividends. Cash ended the period at $1.6m.
- Balance-sheet notes payable were $419.5m at September 30, versus $426.5m at year-end 2021. The company reported $259.5m outstanding under its $650m revolving and sweep facilities, with stated additional borrowing capacity of $390.5m.
- The July 2022 amended revolving credit facility matures in 2027. The company reported compliance with covenants: fixed-charge coverage of 4.14x against a 2.50x minimum, and leverage of 1.55x against a 2.75x maximum.
- Interest expense increased as rates rose. The company said a 1 percentage-point increase in the average rate on $259.5m of variable-rate debt would increase annual debt service by about $2.6m; it reported no interest-rate hedges.
- The quarterly dividend declared was $0.455 per share, 5% higher than the comparable 2021 quarter. No shares were repurchased during the period.
Material changes and management commentary
- Growth was broad-based, led by Mobile Modular. Q3 segment revenue increased 14% for Mobile Modular, 10% for TRS-RenTelco and 18% for Adler Tanks. Nine-month increases were 24%, 7% and 17%, respectively.
- Mobile Modular benefited from higher rental equipment on rent, rates and sales, but nine-month rental gross margin declined to 54% from 59% as other direct costs rose. Adler Tanks’ utilization and rental margins improved; TRS-RenTelco’s nine-month average utilization declined to 64.8% from 67.4%.
- Comparability is affected by the 2021 acquisitions of Design Space and Kitchens To Go, whose results were included from April and May 2021. Management attributed some Mobile Modular revenue and expense growth to those additions. There were no acquisition cash payments in the first nine months of 2022.
- Management said it had not seen a significant financial impact from COVID-19 through the reporting date, but could not predict the pandemic’s full effects. The filing provides no numerical earnings or revenue guidance.
Risks, contingencies and unusual items
- Management highlighted risks from inflation and higher rates, supply-chain and labor costs, economic slowdown, customer demand and payment risk, equipment utilization and resale values, and the cyclical end markets served by its segments. Public-school funding and policy changes could affect modular classroom demand; oil-and-gas activity and regulation could affect Adler Tanks.
- The company also cited acquisition integration, competition, environmental and product liability, and cybersecurity risks. It disclosed an immaterial 2021 ransomware incident involving copying of some personal information; it said the event did not materially disrupt operations or affect financial performance.
- Legal proceedings and claims arise in the ordinary course; management did not expect their outcomes, individually or collectively, to materially adversely affect financial condition, results or cash flows.
- Gain on sale of used rental equipment was $26.7m for the first nine months, compared with $17.8m in 2021. Such sales and margins can fluctuate. No impairment-triggering events for goodwill or intangible assets were reported during the period.
Investor verification priorities
- Assess whether revenue and earnings growth persists after accounting for the 2021 acquisitions and fluctuating used-equipment sales.
- Track rental utilization, rental rates and direct costs by segment, particularly Mobile Modular’s lower year-to-date rental margin and TRS-RenTelco’s softer utilization.
- Monitor variable-rate debt, interest expense, borrowing capacity and covenant headroom as rates and capital spending evolve.
- Review operating cash conversion and the scale of rental-equipment investment relative to operating cash flow and used-equipment sale proceeds.
- Check subsequent disclosures for updated outlook, COVID-19 or macroeconomic effects, and material developments in the stated operational, environmental, cybersecurity and litigation risks.