McGrath RentCorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 3, 2011. McGrath provides relocatable modular buildings, electronic test equipment, and liquid and solid containment equipment for rent and sale, plus classroom manufacturing. Interim statements were reviewed, not audited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $105.0m | $83.2m | $257.5m | $211.5m |
| Gross profit | $47.4m | $34.1m | $122.6m | $92.4m |
| Operating income | $27.3m | $17.5m | $65.3m | $43.4m |
| Net income | $15.4m | $9.7m | $36.4m | $23.7m |
| Diluted EPS | $0.62 | $0.40 | $1.47 | $0.98 |
| Adjusted EBITDA (non-GAAP) | $46.0m | $34.2m | $118.8m | $92.9m |
Q3 revenue grew 26%, net income 58%, and diluted EPS 55% year over year. Nine-month revenue rose 22%, net income 53%, and diluted EPS 50%. Gross margin was approximately 45.1% in Q3 versus 40.9% a year earlier, and 47.6% for the nine months versus 43.7%. Adjusted EBITDA margin was 44% and 46%, respectively, in 2011. Selling and administrative expense increased 21% in Q3 and 17% year to date; interest expense rose 26% and 18%, respectively.
Cash flow, balance sheet and financing
- Nine-month operating cash flow was $104.5m, up from $66.1m. Investing used $114.4m, including $120.7m of rental-equipment purchases and $15.2m of property and equipment purchases; proceeds from used equipment sales were $21.5m. Financing provided $9.5m. Cash ended at $0.7m.
- At September 30, total assets were $895.1m, notes payable $289.6m, total liabilities $574.7m, and shareholders’ equity $320.4m. Cash was $0.7m; accounts receivable was $89.6m.
- The $289.6m of notes payable included $189.6m outstanding on revolving credit and sweep facilities and $100m of 4.03% senior notes due in 2018. The revolvers had $165.4m of additional capacity under $355m total commitments. The 2018 notes amortize in five equal annual installments beginning in 2014; proceeds were used to repay revolver borrowings. The company also had $100m of additional private shelf note capacity.
- The company reported compliance with debt covenants: leverage ratio 1.83 to 1; fixed-charge coverage was 5.48 to 1 under the credit facility and 4.37 to 1 under the senior notes. Its prior $60m, 5.08% notes were fully repaid in June 2011.
- Quarterly dividend declared was $0.23 per share, up 2% from the year-earlier quarter. Dividends paid in the first nine months were $16.6m.
Material changes and segment trends
- Adler Tanks: Nine-month revenue increased 66% to $50.8m and pretax income increased 150% to $22.2m. Higher rental demand and utilization drove growth; period-end utilization was 90.5%, versus 77.4% a year earlier.
- TRS-RenTelco: Nine-month revenue grew 19% to $91.8m and pretax income 69% to $21.1m, supported by higher rental rates, rental activity and equipment sales.
- Mobile Modular: Nine-month revenue was nearly flat at $94.4m, but pretax income fell 19% to $14.0m. Lower classroom rental revenue and rental rates, higher selling and administrative expense, and lower rental-services gross profit weighed on results. Q3 revenue declined 5%, although pretax income rose 5% on improved gross margins and lower direct costs.
- Enviroplex: Nine-month revenue increased to $20.4m from $8.9m, mainly reflecting higher classroom manufacturing sales; segment pretax contribution remained relatively small.
- Rental equipment purchases were higher year over year, principally to meet demand at TRS-RenTelco and Adler Tanks. Property and equipment spending also rose, including a New Jersey facility, IT projects and expansion of the Livermore inventory center.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management cautions that nine-month results are not necessarily indicative of full-year results.
- Key stated risks include economic weakness and constrained school funding affecting classroom demand; cyclical demand in electronics, oil and gas, industrial and construction markets; utilization, rental pricing and equipment redeployment; competition; variable interest rates; supplier availability; and environmental, safety and product-liability exposure, particularly for tanks and boxes. The company noted that a 1% increase in average rates on $189.6m of variable-rate debt would increase annual debt service by approximately $1.9m.
- Management said it was unaware of anticipated covenant noncompliance, while noting that significant financial deterioration could affect compliance. No material off-balance-sheet arrangements or material subsequent events were reported; ordinary-course legal proceedings were not expected to have a material adverse effect.
- Related-party transactions: Adler Tanks purchased $18.3m of tanks during the first nine months from Sabre Manufacturing, controlled by Adler’s president; $0.4m was due to related parties at quarter-end.
- Operating cash flow benefited from higher deferred taxes, primarily associated with federal bonus depreciation on capital expenditures. This tax-related working-capital effect is worth distinguishing from recurring operating performance.
- Management concluded disclosure controls were effective, and reported no significant changes in internal control over financial reporting. The company adopted share-based-payment guidance in 2011 without significant financial-statement impact; it did not expect the new goodwill impairment guidance to have a significant impact.
Most important facts for investors to verify
- Whether Adler Tanks’ exceptional growth and high utilization can persist, and how much reflects organic demand versus fleet expansion.
- Whether Mobile Modular’s lower rental rates, classroom returns and weaker year-to-date pretax income improve, given school funding and seasonal risks.
- The sustainability and cash conversion of earnings: compare operating cash flow with substantial rental-equipment and other capital spending, and assess the effect of bonus depreciation on deferred taxes.
- Debt composition, available revolver capacity, interest-rate exposure and continued covenant headroom.
- The terms, pricing and governance oversight of the related-party equipment purchases from Sabre Manufacturing.
- Potential exposure to school budget changes, economic cycles, environmental claims and equipment redeployment pressures; the filing reports no material quantified contingency value for these risks.