McGrath RentCorp — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes. It also manufactures and sells classroom buildings. Rental and rental-related services generated about 89% of revenue in the first half of 2015. Reportable segments are Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $96.0 million | $95.7 million | $186.2 million | $183.3 million |
| Gross profit | $40.9 million | $42.1 million | $80.0 million | $80.7 million |
| Operating income | $16.5 million | $18.2 million | $30.3 million | $33.5 million |
| Net income | $8.5 million | $10.2 million | $15.3 million | $18.1 million |
| Diluted EPS | $0.32 | $0.39 | $0.58 | $0.69 |
| Adjusted EBITDA | $38.7 million | $40.2 million | $74.2 million | $76.2 million |
Q2 revenue was nearly flat, while net income fell 17% and diluted EPS fell 18%. First-half revenue rose 2%, but net income declined 15% and diluted EPS declined 16%. Gross margin was approximately 42.6% in Q2 (44.0% in 2014) and 43.0% for the first half (44.0% in 2014). Adjusted EBITDA margin was 40% in both 2015 periods, versus 42% in 2014.
Cash flow and investment: First-half operating cash flow was $65.3 million, up from $55.2 million. Investing activities used $65.3 million, including $71.2 million for rental equipment and $5.8 million for property and equipment, partly offset by used-equipment sale proceeds. Financing activities used $0.4 million. Cash was $0.7 million at June 30, 2015.
Debt and liquidity: Notes payable totaled $337.2 million, up from $322.5 million at year-end 2014. This included $237.2 million drawn on unsecured credit lines and $100.0 million of senior notes. The company reported $192.8 million of remaining capacity under its $430.0 million credit lines. Debt covenants were met: leverage ratio 2.00-to-1 against a maximum 2.75-to-1, and fixed-charge coverage 3.95-to-1 against a minimum 2.50-to-1.
Balance sheet and shareholder returns: Total assets were $1.13 billion and shareholders’ equity was $426.8 million. The quarterly dividend was raised 2% year over year to $0.25 per share. The company repurchased 101,653 shares in the first half for $3.1 million.
Material changes and segment trends
- Mobile Modular: First-half revenue increased 14% to $81.0 million and pretax income rose 79% to $7.1 million. Higher rental activity and rates supported results; utilization averaged 74.3%, versus 70.2% a year earlier. Sales revenue declined 36%.
- TRS-RenTelco: First-half revenue declined 9% to $56.0 million and pretax income fell 36% to $9.8 million. Lower rental rates and reduced rental and sales revenue pressured gross profit; average monthly rental rates were down 12%.
- Adler Tanks: First-half revenue declined 3% to $47.0 million and pretax income fell 17% to $9.3 million. Lower rental rates and service revenue weighed on performance; average monthly rental rates were down 8%.
- Companywide selling and administrative expense rose 5% in the first half, primarily from headcount, salaries, and benefits. Interest expense increased 4%, as higher average debt was partly offset by lower average interest rates.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said it believed liquidity would remain adequate through operating cash flow, equipment-sale proceeds, available credit, and the ability to adjust equipment purchases, dividends, or repurchases. It also cautioned that results are not necessarily indicative of the full year.
Management identified risks including reduced public-school funding or delayed facility bonds affecting modular demand; continued low oil prices and changes in hydraulic-fracturing regulation affecting Adler Tanks; cyclical demand and technology obsolescence in test equipment; competition, rental utilization and rates, equipment residual values, supplier availability, foreign exchange, and variable-rate debt. The company estimated annual debt-service costs would rise about $2.4 million for each 1 percentage-point increase in average rates on its variable-rate debt.
Q2 2014 included a $0.8 million gain from selling excess property; there was no comparable sale in 2015. First-half 2015 also included a $0.3 million foreign-exchange loss, compared with a $0.01 million loss in 2014. Management reported no material off-balance-sheet arrangements and no expected material adverse effect from ordinary-course legal proceedings.
Important facts for investors to verify
- Whether the declines in TRS-RenTelco and Adler Tanks’ rental rates, revenue, and pretax income persist, and whether Mobile Modular’s utilization and rental growth continue.
- How capital spending on rental equipment is funded and how it affects borrowing, liquidity, and covenant headroom.
- Exposure of Adler Tanks to oil and gas activity and hydraulic-fracturing demand amid oil-price and regulatory changes.
- Exposure to variable interest rates, including the stated sensitivity of approximately $2.4 million in annual debt service per 1-point rate increase.
- Whether public-school funding, classroom demand, and equipment redeployment affect modular utilization and pricing.