McGrath RentCorp — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. McGrath RentCorp rents and sells modular buildings, electronic test equipment, and containment tanks and boxes, and manufactures classroom buildings. The interim financial statements were reviewed by Grant Thornton, not audited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $173.6 million | $143.1 million | $423.0 million | $365.2 million |
| Gross profit | $78.3 million | $64.1 million | $195.2 million | $168.1 million |
| Operating income | $46.7 million | $35.8 million | $103.1 million | $82.3 million |
| Net income | $32.5 million | $24.8 million | $70.4 million | $55.2 million |
| Diluted EPS | $1.32 | $1.01 | $2.86 | $2.25 |
| Adjusted EBITDA | $70.8 million | $57.3 million | $173.1 million | $145.6 million |
Q3 revenue grew 21%, net income 31%, and diluted EPS 31% year over year. For the first nine months, revenue rose 16%, net income 28%, and diluted EPS 27%. Gross margin was approximately 45.1% in Q3 versus 44.7%; for the nine-month periods it was approximately 46.1% versus 46.0%. Adjusted EBITDA margin was 41% versus 40% in both comparisons. Interest expense was $3.2 million in Q3 and $9.4 million year to date; the nine-month effective tax rate was 24.8%, compared with 24.1%.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $136.9 million, compared with $96.8 million. Investing used $110.6 million, including $127.2 million of rental-equipment purchases; financing used $25.4 million. Cash ended at $2.3 million.
- At September 30, 2019, total assets were $1.306 billion, notes payable $301.5 million, total liabilities $689.5 million, and shareholders’ equity $616.7 million. Notes payable increased from $298.6 million at December 31, 2018.
- Available unsecured credit lines totaled $432.0 million, of which $201.5 million was outstanding, leaving $230.5 million available. The $100.0 million of Series B and C senior notes mature in 2021 and 2022, respectively.
- The company reported covenant compliance: fixed-charge coverage was 4.23x against a 2.50x minimum; leverage was 1.31x against a 2.75x maximum. The board declared a quarterly dividend of $0.375 per share, 10% higher than the year-earlier quarter.
Drivers and material changes
- Mobile Modular revenue increased 15% in Q3 and 16% year to date, supported by rental and rental-related services growth. Nine-month pretax income rose 26%.
- TRS-RenTelco Q3 revenue rose 21% and nine-month revenue 12%, with higher rental activity and utilization. Nine-month sales gross profit was lower, partly due to reduced margins on used equipment.
- Adler Tanks Q3 revenue declined 5% and pretax income declined 11%. Management cited weaker activity across multiple markets; Q3 period-end utilization fell to 51.0% from 64.0% a year earlier. Nine-month revenue and pretax income nevertheless increased 6% and 13%, respectively.
- Enviroplex benefited from strong California education demand for new permanent modular buildings. Its nine-month revenue was $32.2 million, versus $19.8 million, and its pretax contribution increased to 10% from 5%.
- On August 15, the company acquired TuffBox Container’s container rental business for $7.8 million. The preliminary allocation included $5.5 million of rental equipment and $1.3 million of intangible assets, including $0.3 million of goodwill.
- Adoption of lease accounting standard ASC 842 resulted in recognition of $10.3 million of right-of-use assets and operating lease liabilities at September 30, with no opening retained-earnings adjustment.
Outlook, risks and contingencies
The filing provides no quantified full-year earnings or revenue guidance. Management noted that nine-month results are not necessarily indicative of full-year results. It described continued growth in rental assets and strong education demand, but also identified weaker Adler Tanks activity. Risks include school funding and facility-bond timing, seasonality, equipment utilization and residual values, cyclical end markets, competition, supplier availability, acquisition integration, environmental and product liability exposure, and interest-rate changes. Most debt is variable rate; management estimated that a 1% increase in average rates would add approximately $2.0 million to annual debt service based on variable-rate borrowings outstanding at period end. The company said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material off-balance-sheet arrangements. It is evaluating the impact of the upcoming expected-credit-loss accounting standard.
Important facts for investors to verify
- Whether rental growth, pricing and utilization remain supportive, particularly the weaker Adler Tanks utilization and demand trends.
- Whether cash generation can sustain elevated rental-equipment investment, dividends and acquisition activity while preserving liquidity and covenant headroom.
- How much of revenue and earnings growth reflects recurring rentals versus sales and Enviroplex’s education-driven demand.
- The integration and performance of TuffBox, and the final allocation of its purchase price.
- Exposure to variable borrowing rates, school funding decisions, and customer or industry downturns.