McGrath RentCorp — Q1 2012 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2012, compared with Q1 2011. McGrath rents relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment; it also manufactures classroom buildings. Interim financial statements were reviewed by Grant Thornton, not audited.
Financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $78.9 | $73.0 | +8% |
| Gross profit / margin | $39.8 / 50.5% | $35.9 / 49.2% | +11% |
| Operating income / margin | $18.5 / 23.4% | $17.3 / 23.7% | +7% |
| Interest expense | $2.2 | $1.5 | +47% |
| Pre-tax income | $16.3 | $15.8 | +3% |
| Net income / margin | $9.9 / 12.6% | $9.6 / 13.2% | +3% |
| Diluted EPS | $0.39 | $0.39 | Flat |
| Adjusted EBITDA (non-GAAP) | $37.0 | $34.5 | +7%; 47% margin in both periods |
| Operating cash flow | $35.5 | $35.4 | Nearly flat |
- Revenue mix and segments: Rental operations revenue was $70.2 million, up from $62.5 million; sales revenue fell to $8.1 million from $9.9 million. Adler Tanks revenue rose 37% to $20.1 million and pre-tax income rose 34% to $7.7 million. TRS-RenTelco revenue increased 5% to $30.5 million and pre-tax income increased 12% to $6.8 million. Mobile Modular revenue declined 3% to $28.4 million; pre-tax income fell 40% to $2.9 million, reflecting lower sales and rental margins and higher expenses.
- Cash flow and investment: Investing activities used $30.1 million, including $35.0 million of rental-equipment purchases, partly offset by $6.8 million from used-equipment sales. Financing activities used $6.3 million, including $5.7 million in dividends and $4.4 million of net bank-line repayments. Cash declined by $0.9 million to $0.4 million. Rental-equipment acquisitions of $12.7 million were unpaid at quarter-end.
- Balance sheet and debt: At March 31, 2012, total assets were $934.3 million, notes payable $292.1 million, total liabilities $592.4 million, and shareholders’ equity $341.9 million. Cash was $0.4 million and net accounts receivable was $84.6 million. The filing reports $192.1 million drawn on unsecured revolving facilities, with $162.9 million of additional capacity; the $292.1 million notes-payable balance also includes the $100 million of 4.03% senior notes due in 2018.
- Margins and costs: Selling and administrative expenses increased 15% to $21.4 million, primarily due to personnel and benefit costs. Management attributed the 47% rise in interest expense to higher average debt and a higher average net interest rate (2.9%, versus 2.2%).
Changes, outlook, and risks
- Adler Tanks was the principal growth contributor. Its fleet expanded substantially, while average utilization fell to 76.5% from 86.0%; period-end utilization declined to 72.9% from 89.4%. Management cited higher equipment on rent as a driver of revenue growth.
- Mobile Modular average utilization was 66.5%, versus 66.8%; its average monthly rental rate declined 3%. TRS-RenTelco average utilization was 65.5%, versus 65.2%, and rental rates increased 2%.
- The board declared a quarterly dividend of $0.235 per share, up 2% from the comparable prior-year dividend. The filing provides no specific earnings or revenue guidance; management cautions that Q1 results are not necessarily indicative of full-year results.
- At quarter-end, the company reported compliance with its credit-facility and senior-note covenants. The consolidated leverage ratio was 1.78:1; fixed-charge coverage ratios were 5.17:1 under the credit facility and 4.30:1 under the senior notes. The credit facility matures May 14, 2013.
- Risks highlighted include public-school funding and policy changes affecting modular demand, cyclical industrial and energy markets, lower utilization or rental pricing, competition, interest-rate exposure on variable-rate debt, equipment obsolescence, environmental and product-liability claims, and access to financing. Management noted hydraulic-fracturing regulation as a potential risk to Adler Tanks demand. The company disclosed no material off-balance-sheet arrangements and said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Related-party transaction: The company acquired $13.8 million of containment tanks from Sabre Manufacturing, controlled by the president of Adler Tank Rentals; $2.1 million was due to related parties at quarter-end.
Important facts for investors to verify
- Whether Adler Tanks’ rapid fleet growth can be converted into sustained utilization and returns, given the lower utilization rates reported.
- Whether Mobile Modular’s weaker sales, rental margins, and pre-tax contribution improve, particularly amid uncertainty in public-school funding.
- How variable-rate borrowing costs, the May 2013 credit-facility maturity, and substantial rental-equipment investment affect liquidity and debt levels.
- The terms, pricing, approval process, and ongoing dealings associated with the $13.8 million related-party equipment purchase.
- Whether cash generation and covenant headroom remain adequate if demand, rental rates, or equipment resale proceeds weaken.