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Mc Grath Rent Corp (MGRC -0.77%)
Q3Â 2019 Earnings Call
Oct 29, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2019 Conference Call. [Operator Instructions] This conference is being recorded today Tuesday October 29 2019. Before we begin note that the matters that the company management will be discussing today, that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our 2019 total company operating profit outlook as well as statements relating to the company's expectations strategies prospects or targets.
These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K, and other SEC filings. Forward-looking statements are only are made only as of the date hereof. Except as otherwise required by law we assume no obligation to update any forward-looking statements. In addition to the press release issued today the company also filed with the SEC, the earnings release on Form 8-K and Form 10-Q for the quarter. Speaking today will be Joe Hanna Chief Executive Officer; and Keith Pratt Chief Financial Officer.
I will now turn the call over to Mr. Hanna. Please go ahead sir.
Joseph F. Hanna -- President and Chief Executive Officer
Thank you Chris. Good afternoon and thank you for joining us on today's call. I will start the call with some comments on our third quarter 2019 performance and then Keith will provide additional detail in his financial review. The third quarter typically marks a very busy time of year for us as customers finish summer projects especially modular education projects prior to the start of the school year. This year we had an active quarter and we were pleased with our 11% increase in rental revenues and 30% increase in operating profit. Overall, our diversified portfolio, serving a wide range of customers across multiple markets benefited from favorable economic tailwinds and our teams did a great job executing. At Mobile Modular rental revenues grew 13% and operating income grew 16%. Activity for modular classrooms was healthy as funding both at the state and local levels in prior quarters have made their way into the growth and modernization projects at school districts. Additionally commercial rentals were up as customers increase their needs for temporary space both in public and private sectors.
We continue to grow the business responsibly and we're able to improve utilization and increase rates during the quarter while placing 7% more equipment on rent. This accomplishment reflects a focused team that is committed to our performance improvement initiatives and has consistently delivered results. Enviroplex our permanent modular classroom manufacturer had an exceptional, quarter contributing to companywide sales increase of 41%. We delivered record revenue with a committed and dedicated team that performed very well. Permanent modular classrooms help school districts provide a quality education environment, for children more economically than conventional construction. Enviroplex business levels were supported by a favorable funding environment in California through state and local bonds. Typically a majority of project completions occur in the third quarter of the year. We have shared in previous calls our focus on strategic initiatives and smart expansion of the business. During the quarter we closed an acquisition of a portable storage operator in the Tulsa and Oklahoma City markets for $7.8 million.
These markets were on our near-term short list of new geographies to enter and this acquisition provides a nice jump-start with a broad base of customers and relatively new fleet both big positives. Previous to this acquisition Portable Storage also expanded into 2 other geographies this year as greenfield operations. We are pleased to see this business expanding in both new and legacy markets. At TRS-Rentelco rental revenue increased 21% and operating income grew by 32%. Both the general purpose products segment and the communications products, segment grew rental revenues very nicely and activity was broad-based. Testing needs were robust in the lab for R&D work as we continue to see a favorable demand picture developing around 5G. As we have shared in previous quarters the many benefits that 5G offers will enable many more products to connect wirelessly to the network. Development of those products is taking place now. The team at TRS managed customer needs, and the rental fleet skillfully and we were very pleased with our performance in the quarter. At Adler Tank Rentals we saw softening market conditions which contributed to an 8% reduction in rental revenues and a 7% decrease in operating income compared to a year ago.
Typically the third quarter is a strong quarter and we simply did not see the lift on a quarter-over-quarter basis that we expected. Visibility is more challenging in this business as we have, shared in the past. A weaker oil and gas industry not only affects direct activity in upstream operations but also indirectly affects other end markets and we saw this play out in the quarter. Considering the price of oil today we view this softness as part of the normal cyclicality of the oil and gas industry. We did a nice job increasing rates and delivering additional rental-related services revenues in a more challenging environment. To finish up both our third quarter and our year-to-date performance reflects our ability to deliver impressive results, with the portfolio. It all takes hard work. And our team members around the business have done a remarkable job providing the exceptional experiences that customers associate with McGrath RentCorp. We remain positive about our overall momentum entering the fourth quarter. Despite some economic uncertainty many fundamentals remain, healthy and our activity levels are good. We will maintain our focus as we bring 2019 to a successful close.
So now let me turn the call over to Keith who will take you through our financial review.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Thank you Joe. Picking up on what Joe just said we were very pleased with the quarter's results. For the third quarter of 2019 total revenues increased 21% to $173.6 million from $143.1 million a year ago. The company's 30% operating profit increase for the quarter was driven by a $4.6 million increase in gross profit from rental revenues a $2.5 million increase in gross profit on rental-related service revenues and a $7.1 million increase in gross profit on sales. Net income increased 31% to $32.5 million from $24.8 million and earnings per diluted share also increased 31% to $1.32 from $1.01. Now I'll break the results down by reviewing rental division performance compared to the third quarter of 2018. Mobile Modular total revenues increased $11.4 million or 15% to $86.3 million on higher rental and rental-related services revenues partly offset by lower sales revenues. Rental revenues for the quarter increased 13% from a year ago which was primarily driven by a 7% improvement in average rental rates and 7% higher average equipment on rent. Sales revenues decreased $0.5 million or 3% on lower new equipment sales. Rental revenue growth continued to be healthy across our commercial and education markets as well as in our Portable Storage business.
Equipment preparation costs included in other direct costs of rental operations increased $2.1 million or 20% to $12.8 million. The increased costs resulted from higher workload volumes to support increased rental demand in our education and commercial markets higher labor and material costs and higher cost of rerent equipment. Rental margins were comparable at 61%. The combined result of higher rental revenue and comparable rental margin was a 12% increase in gross profit on rents. Average modular rental equipment for the quarter was $803 million which was an increase of $43 million. Average fleet utilization for the third quarter increased to 79.4% from 78.6%. At TRS-RenTelco total revenues increased $6 million or 21% to $34.1 million on higher rental and sales revenues. Rental revenues for the quarter increased 21% primarily driven by higher average equipment on rent and stable rental rates. Rental margins increased to 45% from 42%. The combined result was a 28% increase in gross profit on rents. We saw balanced growth in rental revenues from both general purpose and communications test equipment and we continue to invest in new rental equipment for growth opportunities. Average electronics rental equipment for the quarter was $314 million which was an increase of $34 million.
Average utilization for the quarter increased to 66.9% from 61.9%. At Adler Tank Rentals total revenues decreased $1.2 million or 5% to $24.8 million on the lower rental and sales revenues which was partly offset by higher rental-related services. Rental revenues for the quarter decreased 8% primarily from 12% lower average equipment on rent that was partly offset by 4% higher average monthly rental rates. The rental revenue decrease was due to softer demand across 5 of our 6 end markets compared to last year's strong third quarter. Rental margins decreased to 60% from 61%. The combined result was a 10% decrease in gross profit on rents. Now with this division review complete the remainder of my comments will be on a total company basis. Total company equipment sales revenues increased to $50.9 million from $36.1 million a year ago. The majority of this increase was due to higher sales revenues at Enviroplex reflecting strong demand for education projects in California. In addition a favorable mix of projects at Enviroplex increased sales margins for the quarter. The timing of sales revenues can fluctuate from quarter-to-quarter and year-to-year depending on customer requirements availability of used equipment for sale and other factors.
With a high percentage of expected new sales projects already completed by the end of the third quarter we currently expect sales revenues in the fourth quarter to be lower than a year ago and total full year sales to be higher than 2018. Selling and administrative expenses increased $3.3 million or 12% to $31.5 million primarily due to increased salaries and employee benefit costs. Interest expense for the third quarter 2019 was $3.2 million an increase of 1%. Higher net average interest rates were partly offset by lower average debt levels. The third quarter provision for income taxes was based on an effective tax rate of 25.3% compared to 23.9% a year earlier. Next I would like to review our 2019 year-to-date cash flow highlights. Net cash provided by operating activities was $136.9 million an increase of $40.1 million compared to 2018. The increase was primarily attributable to improved income from operations increased accounts payable and accrued liabilities and other balance sheet changes. We invested $127.2 million for rental equipment purchases compared to $84.7 million for the same period in 2018 mostly on higher purchases at Mobile Modular and TRS-RenTelco. Property plant and equipment purchases were $6.8 million compared to $12.5 million for the same period a year ago.
Dividend payments to shareholders were $26.4 million. Net borrowings increased $2.9 million from $298.6 million at the end of 2018 to $301.5 million at the end of the third quarter of 2019. At quarter end the company had capacity to borrow an additional $230.5 million under its lines of credit and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.31:1. Third quarter 2019 adjusted EBITDA increased 24% and to $70.8 million compared to a year ago. And consolidated adjusted EBITDA margin was 41% compared to 40% a year ago. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in the quarter's press release. Finally turning to our 2019 financial outlook. Based upon the company's year-to-date results and current outlook for the remainder of the year we are raising our financial outlook and expect 2019 full year operating profit to increase 15% to 19% above 2018 results as compared to our prior expectation of a 9% to 14% increase.
That concludes the prepared remarks on our quarterly results. Chris you may now open the lines for questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from the line of Scott Schneeberger with Oppenheimer. Your line is now open.
Scott Schneeberger -- Oppenheimer -- Analyst
Good afternoon. I want to ask about the acquisition first. And it's not huge but in Tulsa Oklahoma City I'm just curious is that a new market for you? Does that establish an adjacency? Just curious of the footprint of your portable storage containers.
Joseph F. Hanna -- President and Chief Executive Officer
Sure Scott. I can answer that. Yes it's a new market for us. And as I said in my comments it was one that was on a short list of potential expansion markets for us in the next year or two. And the fact that we found this operator there who had this well-established business young fleet good broad base of customers we thought it was a great option for us to get in the market with a jump start and so we moved it up in the list.
Scott Schneeberger -- Oppenheimer -- Analyst
Joe the how is your footprint with I guess I'll ask it relative to your broader modular footprint with regard to portable storage containers. And a few years ago you were somewhat on pause with growth spending. Obviously we've had some tailwinds of weight and that's picked up. Just curious about the strategy particularly in the Mobile Modular segment going forward. I guess it's a two-parter there.
Joseph F. Hanna -- President and Chief Executive Officer
Sure. Yes yes. Sure. Well when we initially started the business our strategy was to open in legacy markets that the modular business was operating in. And we followed that for the first number of years. And then decided to expand the business outside of markets that we serve with Mobile Modular and we will continue to do that. And so this the actual 2 greenfields that we went in this year in Nashville and Lake Charles Louisiana as well as now this acquisition are really kind of markets that are not really served by the Modular business in any big capacity. And so we're definitely interested in expanding outside of that and we'll continue to do so. We did take a pause a few years ago to just take a breath and allow some of the investments that we made to start really producing for us. And so we could do that it just depends on how well the business grows and how well our profitability grows as we open these new locations.
Scott Schneeberger -- Oppenheimer -- Analyst
And so Joe is the penetration 100%? More than 100%? Or still a good bit less of Portable overlapping with Modular?
Joseph F. Hanna -- President and Chief Executive Officer
I mean I would say it's pretty much 100%. It's yes.
Scott Schneeberger -- Oppenheimer -- Analyst
Okay fair enough. I just want to be clear on that.
Joseph F. Hanna -- President and Chief Executive Officer
Yes.
Scott Schneeberger -- Oppenheimer -- Analyst
Okay. The just kind of latching onto one of the things you mentioned. Obviously there's been solid state and local funding now and you're clearly reaping the benefit from that. I just want to talk about if we have a slowdown in the economy how that may impact the I'm thinking more on the educational spending I think we can all draw parallels to what would happen with other end market more cycled end markets but more specifically on education in modular.
Joseph F. Hanna -- President and Chief Executive Officer
Well here it's a good question and here's my thoughts on it. I believe as long as there is a capacity in local economies and state economies to sell bonds bond passages that have taken place in prior years we'll continue to do so. And so I think there is I wouldn't say immunity but I would say there's less impact of construction cycles on the school construction market just because of that stability in the funding. And I'll add that we got some good news recently in California through the passage or not the passage but the approval of AB 48 which is a $15 billion-state bond to make it on to the California March 2020 ballot. And that's received very good support from state legislators as well as the Governor who's going to support it and campaign for it. So this is another really substantial facilities bond that will give us a nice runway for a number of years. And so we view this as just a pretty stable funding environment that should continue for us.
Scott Schneeberger -- Oppenheimer -- Analyst
Just one more for me. A little more detail on the 5G update. It looks like TRS-RenTelco is moving along quite nicely. Just if you could take us a few layers deep on what you're seeing and specifically with 5G?
Joseph F. Hanna -- President and Chief Executive Officer
Sure. So what we've said before and holds true for this particular quarter is that we're seeing demand in both general purpose test equipment and communications test equipment and both of those product segments are supporting 5G work. General purpose is work that's being done in the labs as automotive manufacturers and medical devices and industrial manufacturers are developing products for to connect via 5G to the network. And so we're seeing that work take place. And then we're also seeing work on the communications side through the backhaul fiber to the towers pipe expansion for bandwidth improvements all that requires testing. And so we're seeing that demand also. There's also actually some 4G buildout that's continuing. And so there's some tower work that's being done there. And that all is filtered in to good rental demand for us.
Scott Schneeberger -- Oppenheimer -- Analyst
Thank you.
Operator
And our next question comes from the line of Sam England with Berenberg. Your line is now open.
Sam England -- Berenberg -- Analyst
Hi guys, Just a couple from me. The first one was just could you give a little bit more color on the strength in the Enviroplex business in the quarter? And just as we look ahead to 2020 should we assume that business resets back to the level it's been at over the last couple of years? Was there anything more sustainable in the growth? That's the first one.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yes. Sam, this is Keith. And, I would really piggyback on some of Joe's comments about the funding environment for education and we've seen that as a key driver of demand for the Enviroplex business. And again just as a reminder that business is a manufacturer of education product for the California market. So the business had a very strong third quarter $28 million in revenue compared to $14 million in the third quarter of last year. Even already the year-to-date revenue from that part of the business is at $32 million and that's essentially an all-time high for the business for on a full year basis even at the end of September. So, it's been a very strong year-to-date number and a great outlook for the year obviously. And couple of comments. One is just to clarify that business is very seasonal.
Most of the business is in the third quarter some in the fourth. For us this year the fourth quarter will not be as strong as the fourth quarter of the year ago but on a full year basis still up nicely. Looking ahead to next year I would say at a very high level the demand environment looks very good. It all gets into the details when we come to next year of which projects actually get completed and executed. What kind of mix they have what kind of margin profile. And it's too far out to really make a determination there. But we did benefit from really 3 things this year: very good demand environment our team won a very attractive mix of projects and they did an excellent job of executing and getting them done. So next year we'll have to just see again what the demand looks like. We think it's going to be strong based on what we know today. It will be to be determined what mix of projects will actually land during 2020. And then we always have the job of executing well and capitalizing on whatever opportunity we win.
Great. Then the next one was around the Adler business. You said in your prepared comments that there were some other weak markets outside oil and gas that were in part driven by the weakness in the oil and gas market. Could you just touch on where the areas of weakness were and whether you think those will persist sort of over the next few quarters? Or whether there's any that are more sort of temporary in nature?
Joseph F. Hanna -- President and Chief Executive Officer
Sure Sam I can provide some color on that. And what I tried to allude to in my comments was the following. When overall the demand for oil has just not been as robust as it has been in the past due to general economic and global growth slowdown and what happens is that we can feel that in several different ways. If there's less drilling activity and exploration then you're going to see that upstream there's going to be some upstream weakness. And then that can kind of flow into some other product segments for us. As an example an environmental services company would be called in to clean out a tank at a refinery or something. And so if demand is weaker they're just not going to do those projects they'll push them. And so that weakness then we kind of feel in those other product segments. And that's really kind of how the quarter played out for us. Does that make sense?
Sam England -- Berenberg -- Analyst
Yes yes. That's great. And then the last question was just around capex plans. You've obviously had a couple of quarters where you've invested reasonably heavily in the fleet particularly in the modular side. What's the sort of capex plans for Q4 and early 2020?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yes. Sam we've spent heavily this year really driven by great demand opportunity and the electronics business TRS-RenTelco similarly very good demand for the modular business. We spent $127 million year-to-date this year compared to $85 million in the first nine months last year. I think that will taper off a bit in Q4. On a full year basis I think the number will be somewhere in the neighborhood of $150 million. It's too early to tell for next year. We'll be doing our planning work later this year. We'll look across all the opportunities that we can identify and run them through our normal process of both financial returns that we would expect and really an assessment of the competitive environment and the macro environment before we decide what to fund. And then the other comment I would make is every year as we get into funding the business we're really not committed too far in advance. In most instances we have an ability to throttle up or down based on our comfort and what we're seeing in the environment.
Sam England -- Berenberg -- Analyst
Okay, great. Thanks very much.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Thanks.
Joseph F. Hanna -- President and Chief Executive Officer
Thank you.
Operator
Thank you. And our last question comes from the line of Marc Riddick with Sidoti. Your line is now open.
Marc Riddick -- Sidoti -- Analyst
Hi, good evening, I wanted to talk a little bit about Portable Storage. And I wonder if you could give a little detail around excuse me sorry about that. Around Mobile Modular and if you could give more detail around geographic footprint performance and what you were seeing? If it was kind of across the spotty as far as the performance around the country?
Joseph F. Hanna -- President and Chief Executive Officer
Sure. Mark we let's characterize a list. I'll just give you each of the regions essentially. And what I can say is that California the Mid-Atlantic and Florida have actually been good performers for us this year. I'd say our weak area in the Modular business was Texas over this past year. And a lot of that had to do with returns. There have been we have put some fairly large projects out in the prior years and we got some fairly heavy returns over the course of the last year. And we just have to get that product back out on rent. But from a demand perspective it's actually been pretty good. And so and that covers both the commercial and the education demand in each of those markets.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
And Marc I would just clarify all those regions that is California Texas Florida and the Mid-Atlantic all experienced growth in rental revenues on a year-over-year basis. And so when we talk about relative strength Texas on a percentage basis was not up as much. But it did show an increase.
Marc Riddick -- Sidoti -- Analyst
Okay. Great. And then I wanted to shift back to Enviro for a moment. I was wondering if there was a how we should think about the order patterns that you're seeing there? Is it sort of coming from multiple orders? Or is it sort of maybe 2 or 3 big orders? How should we think about how that sort of played out in the quarter and how you look at that going forward for future projects?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yes. It's a project basis or a project business. So we receive the opportunity to bid on projects if we win them. We then need to execute. As Joe mentioned in his remarks with the education work that we do through Enviroplex it tends to be heavily weighted to the summer months for completing those projects and getting them installed. And then probably the next busiest period is in the fourth quarter and some of those projects get installed during the winter break at school. So timing is always an issue in any particular year as to when projects are actually completed and recognized by us.
Joseph F. Hanna -- President and Chief Executive Officer
Yes. I would say Mark I can add to that a little bit. The I would say the project ranges that we get in that business could be anything from a $400000-project to a several million-dollar project. And depending on where they fall in during the year then indicates that you can get some lumpiness there. This particular third quarter we had 3 large projects land in the quarter that we had to close out prior to the start of the school year and that's what contributed to an exceptional quarter for Enviroplex.
Marc Riddick -- Sidoti -- Analyst
Okay. Great. And then I wanted to shift over to the sort of if you could give a bit of an update on acquisition pipeline and what you're looking at and maybe what those what those valuations may look like given the completion of a targeted market? Maybe what if you have some updated thoughts on that and what we might see going forward there?
Joseph F. Hanna -- President and Chief Executive Officer
Yes. Mark I mean we're we have a very active process to look at different opportunities. And we're choosy and we will not overpay. And so it just depends on what that opportunity is and how it pencils out the kind of financial returns that we're going to get from it as to whether we would do it or not.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yes. As with all M&A Marc and I would echo Joe's comments we're always monitoring the marketplace engaging in opportunities. The tricky things in any business to get right are that the potential acquisition makes financial sense. You're looking for a fair price for a good business. In our rental business the quality of fleet is always very important to us particularly for longer-lived assets where we need to be able to make our return over future years. And then obviously with any business we are bringing on team members. Cultural fit is another important factor. And those are all things we and I'm sure most companies like us have to look at very hard. I think if you look at our success over the last few years it's been heavily driven by organic investment in the business. It lets us pace our new activities appropriate to the market opportunities that we see. It lets us control the quality of our equipment. And in some instances lets us look for some feature differentiations. So we'd be very pleased with the way we've been operating. Our tilt has been toward organic and we've added to our fleet we've improved utilization we've done a lot of good work with pricing and it's a recipe that's worked pretty well for us so far.
Joseph F. Hanna -- President and Chief Executive Officer
Yes. And I might add too does not bring goodwill onto the balance sheet too when we do an acquisition. It's our new product that we want specified for our fleet. And so it's very attractive for us to do organic growth.
Marc Riddick -- Sidoti -- Analyst
Okay, great. Thank you for answering my questions. You bet.
Operator
And ladies and gentlemen this appears to be the last question. I will now turn the call back to Mr. Hanna for any further remarks.
Joseph F. Hanna -- President and Chief Executive Officer
All right. Thank you. Thank you Chris. And I'd like to thank everyone for joining us on the call today for your continuing interest in our company. We look forward to speaking with you again in late February 2020 to review our fourth quarter 2019 results.
Operator
[Operator Closing Remarks]
Duration: 37 minutes
Call participants:
Joseph F. Hanna -- President and Chief Executive Officer
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Scott Schneeberger -- Oppenheimer -- Analyst
Sam England -- Berenberg -- Analyst
Marc Riddick -- Sidoti -- Analyst
