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Mc Grath Rent Corp (MGRC 0.25%)
Q3Â 2020 Earnings Call
Oct 29, 2020, 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 2020 Conference Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 29, 2020.
Before we begin, note that the matters 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 third quarter 2020 financial 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.
Furthermore, it should notice that the impact of the COVID-19 pandemic continues to evolve. As such, the full magnitude the pandemic will have on the company's financial condition, liquidity and future results of operations is uncertain. The following discussion by management about the company's financial condition is subject to the future effects of the COVID-19 pandemic.
In addition to the COVID-19 pandemic, important factors that could cause actual results to differ materially from the company's expectations are discussed -- disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Expect as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to press release issued today, the company also filed with the SEC the earnings release on Form 8-K and the Form 10-Q. 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. Go ahead, sir.
Joseph F. Hanna -- President, Chief Executive Officer
Thank you, Dilem. Good afternoon and thank you for joining us on today's call. I will start the call with some overall remarks and comment on our third quarter 2020 performance and our look ahead. Keith will provide additional detail in his financial review and outlook comments. Following the COVID-19 disruption we experienced in the second quarter, we were hopeful that conditions would improve in the third quarter and that materialized. Across the enterprise, we navigated uncertain conditions with the pandemic and I am pleased to say we completed the quarter with our teams on the job with minimal COVID-19 operational interference. I am proud of the job all of our employees did during the quarter to support each other and serve our customers.
Mobile Modular rental revenues grew both year-over-year and sequentially versus the second quarter by 1%. Portable Storage rental revenues grew year-over-year by 2% and sequentially by 3%. We had varying demand conditions across our geographies. In education, we saw more students back in classrooms on the eastern half of the country, less so on the West Coast. Projects under way have continued and school districts are currently focused on safety and learning conditions for the students returning to campus.
Commercially, rental revenues year-over-year were flat for the quarter. We receive both rental and sale orders for hurricane relief, as well as COVID-19-related projects. Utilization dipped slightly in the quarter due to fewer shipments and normal return activity. Overall, the division executed well and delivered solid results. At TRS-RenTelco rental revenues grew year-over-year by 3% and sequentially by 6%. General Purpose rental revenues were up sequentially 4% with continued strength in aerospace and defense and semiconductor, as well as 5G testing in the lab for new product development.
Communications rental revenues increased 10% sequentially, as carriers resumed their rollout of 5G infrastructure in the field, although at a slow pace. We were pleased with how the business performed in the quarter. At Adler rental revenues decreased year-over-year by 22%, but grew sequentially 3%. We saw low demand for oil and gas related projects, as well as downstream refinery turnarounds. We hope that the second quarter troughed and believe that to be the case, as overall conditions improved in markets with less exposure to oil and gas.
However, activity was at a slower pace compared to a year ago and the pricing environment was competitive. We are running the business to maximize cash for the enterprise, with discipline cost management and minimal new rental fleet investment. At Mobile Modular we made it a priority over the last year to bring more service offerings to our customer base to be further viewed as a solutions provider, not just an equipment supplier. Some of those services involve site improvements that occupy -- that accompany a building rental.
Other options include the ability to offer a sale of a permanent modular solution as an alternative to a rental solution. The benefits of modular construction have gained momentum in the market and customer behavior reflects it. We are positioning ourselves to take full advantage of that trend and it is showing in our results. Sales at Mobile Modular increased by $12 million compared to the third quarter of 2019.
Assessing the demand picture as we go forward, we still have the uncertainty of COVID-19 and how it may impact the economy. We are hopeful that some of the positive demand conditions that we've recently experienced during the third quarter will continue with a reminder that we typically experienced seasonal fluctuations in demand based on weather, the holidays and other factors that are normal fourth quarter occurrences. Companywide we continue to operate effectively, despite the pandemic disruptions to serve our customers with the exceptional service they have come to expect over time. We are working hard to complete 2020 with the enterprise on solid footing.
Now, let me turn the call over to Keith, who will take you through our financial review.
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
Thank you, Joe. Since the COVID-19 pandemic began, our teams have continued to do a great job in adapting to the new operating norms. They did all this while also delivering good third quarter results. For the third quarter of 2020, total revenues decreased 10% to $156.4 million from $173.6 million a year ago. The company's 20% operating profit decrease for the quarter was primarily driven by a $6.1 million decrease in gross profit from sales revenues and $2.5 million decrease in gross profit from rental revenues. The decrease in total company revenue and operating profit was primarily a result of lower new modular classroom sales at our Enviroplex business, which in 2019 had a large concentration of its annual sales completed in the third quarter. Net income decreased 13% to $28.1 million from $32.5 million and earnings per diluted share decreased 13% to $1.15 from $1.32 cents.
Now, I will break the results down by reviewing rental division operating results and performance, compared to the third quarter of 2019. Mobile Modular total revenues increased $9.1 million or 11% to $95.4 million on higher sales and rental revenues, partly offset by lower rental related services revenues. Rental revenues for the quarter increased 1% from a year ago, which was driven by higher average monthly rental rates. Sales revenues increased $12.6 million or 76% to $29.3 million primarily on hire new equipment sales to educational customers. We achieve -- we achieved rental revenue growth from our education markets, as well as in our Portable Storage business, despite the softer business conditions compared to a year ago.
Equipment preparation costs, included in other direct costs of rental operations decreased 8% to $11.8 million, due in part to lower shipment activity levels during the quarter. As a result, rental margins increased to 63% from 61%. Average modular rental equipment for the quarter was $829 million, which was an increase of $27 million. Average fleet utilization for the third quarter decreased to 76.3% from 79.4%. At TRS-RenTelco, total revenues increased $1.8 million or 5% to $35.9 million on higher sales and rental revenues. Rental revenues for the quarter increased 3%, primarily driven by 7% higher average equipment on rent, which was partly offset by 4% lower average monthly rental rates. The lower average rental rates reflect a continued mix shift toward more General Purpose Equipment rentals that tend to have longer term transactions compared to communications. Rental margins decreased to 41% from 45%.
We saw 12% growth in rental revenues from General Purpose, partly offset by 11% lower revenues from communications. Average electronics rental equipment for the quarter was $336 million, which was an increase of $22 million. Average utilization for the third quarter increased to 67.1% from 66.9%. At Adler tank rentals, total revenues decreased $5.5 million or 22% to $19.3 million on lower rental and rental related services revenues. Rental revenues for the quarter decreased 22% primarily from 19% lower average equipment on rent and 4% lower average monthly rental rates.
The rental revenue decrease reflected weaker demand caused by COVID-19 related business disruptions and the lower price of oil and gas, with five of our six end markets having lower rental revenues compared to last year's third quarter. Rental margins decreased to 55% from 60%. Adler's average rental equipment for the quarter was $315 million, which was an increase of $1 million. Average utilization for the third quarter decreased to 44.1% from 54.5%.
Moving on, the remainder of my comments will be on a total company basis. Total company equipment sales revenues decreased to $42.3 million from $50.9 million a year ago. This decrease was primarily due to $22.4 million lower sales revenues at Enviroplex, which had a large concentration of its sales in the third quarter of 2019, partly offset by higher sales revenues at Mobile Modular and TRS-RenTelco. 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. We currently expect total company sales revenues for the fourth quarter to be higher than a year ago and total full year sales to be 9% to 13% above 2019.
Selling and administrative expenses decreased $0.7 million or 2% to $30.9 million, reflecting disciplined cost management. Interest expense was $2 million, a decrease of 38% as a result of 28% lower average interest rates and 14% lower average debt levels. The third quarter provision for income taxes was based on an effective tax rate of 20.8%, compared to 25.3% a year earlier. Our 2020 year-to-date cash flow highlights include, net cash provided by operating activities was $131.5 million, a decrease of $5.4 million compared to 2019. The continued solid year-to-date cash flows, supported organic investment in the business, increased dividend payments and share repurchases, while also reducing debt. These strong cash flow characteristics demonstrate the company's resilient business model during a period of economic weakness.
We invested $65.7 million for rental equipment purchases, mostly at TRS-RenTelco and Mobile Modular, and $9.6 million for property, plant and equipment purchases. Partly offsetting these investments was $33.8 million of proceeds from sales of us rental equipment. Dividend payments to shareholders were $29.6 million. The company repurchased 282,000 shares of common stock, totaling 13.6 million or an average price of $48.25 per share. There were no repurchases of common stock during 2019. Net borrowings decreased $43.5 million to $250 million during the first nine months of 2020.
At quarter end, the company had capacity to borrow an additional $282 million under its lines of credit and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.04 to one. Third quarter 2020 adjusted EBITDA decreased 11% to $62.7 million compared to a year ago and the consolidated adjusted EBITDA margin was 40%, compared to 41% a year ago. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in the quarters press release.
Finally, turning to our financial outlook. For the fourth quarter of 2020, we expect total revenue between $140 million and $150 million, adjusted EBITDA between $58 million and $63 million, gross rental equipment capital expenditures between $10 million and $13 million. Keep in mind the following regarding our outlook. The impact of COVID-19 on the economy and on our business continues to evolve and is difficult to assess. In addition, visibility is limited at Adler tank rentals and TRS-RenTelco because of the short rental terms in both businesses.
That concludes our prepared remarks. Dilem, you may now open the lines for questions.
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] I show our first question comes from the line of Scott Schneeberger from Oppenheimer. Please go ahead.
Scott Schneeberger -- Oppenheimer -- Analyst
Thanks very much. Good afternoon. In Mobile Modular, just curious, the rental revenue growth decelerated year -- on a year-over-year basis in third quarter from second quarter. You guys touched on it a little bit, but I'm just curious what you're seeing, it sounds like the growth was rate and not volume. So just curious, is there seasonality at play here? Is there a slowdown from trend, just looking to get a little bit more behind the demand environment?
Joseph F. Hanna -- President, Chief Executive Officer
Yeah. Scott, I can give you some color on that. I would say it's -- just mostly due to just a slower economic backdrop that we're experiencing right now and results varied pretty significantly from region-to-region in Mobile Modular. I mean, we saw strong government work. We saw some continued project work from school districts. We saw general construction infrastructure, some projects there continue and we've continued to land some of those. I would just say that the pace is just a little slower this year than it was last year and that's what contributed to the slowing topline growth there.
Scott Schneeberger -- Oppenheimer -- Analyst
Thanks. How should we think about, I know, it's early, you're not going to guide next year, but how should we think about trends heading into next year, I know, visibility is tough. But is this slower economic environment, COVID driven? Have you seen any activity kind of on a net basis of pickup and classroom activity based on COVID or just not material and maybe just kind of hears on those right now? Thanks.
Joseph F. Hanna -- President, Chief Executive Officer
Yeah. Sure. Well, I wish I could answer with clarity into next year. It's just a -- an uncertain environment. And so to go into next year, I think is, we need to see how some things are going to play out here. One, we have an election. Two, we still have uncertainty due to COVID, that I think is really going to be difficult for us to project very far out. And so getting into 2021, it's just hard to see where school districts are going to be spending their money and what their appetite is going to be for projects and so just real difficult to predict at this point past the end of this year.
Scott Schneeberger -- Oppenheimer -- Analyst
Okay. And then on the classrooms, any here and now activity, that's worth reporting?
Joseph F. Hanna -- President, Chief Executive Officer
I would say, we have, like I said, in the prepared remarks, we've seen projects that are in the field continue. And I would say that school districts at this point are really focused on trying to provide a good learning environment for kids that have come back. And I think what we've seen them do for the most part, is instead of, getting additional facilities to facilitate social distancing, they've really tried to solve that with split schedules. And so I can't really say that, we've seen an uptick in order activity because of COVID and we really haven't seen significant returns because of COVID, too, because at the same time, districts are holding on to the classrooms that they have and so it's been pretty steady.
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
Scott, if I could just add just to remember, the education business is seasonal. We've really completed the season that typically is busy in the summer months. And again, for the third quarter, I think, they have albeit a slight increase, but an increase in rental revenue that was accounted for by the education part of the business is pretty good under the circumstances. And really, from this point, for the next number of months, education tends to be a little quieter and more of the activities on the commercial side.
Scott Schneeberger -- Oppenheimer -- Analyst
Okay. Thanks. Appreciate that from both of you. On -- if we can go over to TRS, just -- if we can get an update what you're seeing in 5G currently versus your internal expectations from a few months ago and how you think that carries forward? Thanks.
Joseph F. Hanna -- President, Chief Executive Officer
Sure. We've been very pleased. Well, let me back up a second, I think is, as we've communicated in the past. We're seeing demand for 5G both in the labs and that supports our General Purpose rentals. And then there's the field work, which is both wired and wireless communications rentals. So if you look at our General Purpose rentals, we've been very pleased with the level of activity that we've seen related to 5G. There is quite a bit of R&D work that's taking place in the labs right now and we're benefiting from that in renting General Purpose Equipment.
Now, as far as the communications fleet, I would say that, the pandemic seems to have slowed down some of the deployment of 5G related upgrades that carriers are introducing in the field and so that's taken just a little bit longer to pick back up. But it really does not worry me at all, because there is just -- there is so much momentum with 5G that this is just merely a pause or just a timing issue before this work continues in the field. I know when carriers are going to start to introduce upgraded handsets that have 5G capability, it's certainly going to drive that demand out in the field and I'm sure we're going to benefit from that. It's just a little slower, but overall, not alarming at this point.
Scott Schneeberger -- Oppenheimer -- Analyst
Okay. And I just round out with touching upon Adler, continues to be pressured, not surprised. You are seeing any inflection points for better or for worse, particularly in the upstream oil and gas. I know you said five of the six and mortgages serve were challenged. Is it -- is the worst by far upstream and then the others down a little bit or is everyone down universally? And are you seeing inflection points one way or the other in any one particularly upstream? Thanks.
Joseph F. Hanna -- President, Chief Executive Officer
Sure. Yeah. Well, it's -- I'll note that our upstream oil and gas rents from Adler are now just 5% of our total rental revenue stream there and that's down from 10% a year ago. So it has affected our rental revenue. I would say that, we're not really seeing any significant uptick in demand there. As we said in the prepared remarks, we believe it is troughed. And I think as folks get back into their cars and the economy continues to pick up, I think we'll see more demand on the downstream side, and at this point, most of the downstream turnarounds and activity in refineries has been pushed, as those folks are really trying to watch their spending. But we believe we hope that that will pick up again next year as they -- as an economy continues to pick up. And of course, today we saw Q3 economic data was very good. And so if that trend continues, I think that we'll see -- we're cautiously optimistic that we should see more activity there.
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
And Scott, I just emphasize, even though conditions are tough, the business did grow rental revenues sequentially. And that growth was in markets that don't have much upstream or downstream oil and gas in the mix. So, there are some positives there. I think the team's done a great job capturing the opportunities that are available in the market. And again, growth sequentially is a good sign.
Scott Schneeberger -- Oppenheimer -- Analyst
Is that execution by your sales team? Is that seasonality or otherwise, just curious the driver there?
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
Yeah. I think it's a bit of both. I think, clearly, the second quarter was a very difficult period, all of the initial uncertainty around COVID and customers hesitating on starting project. And I think we've seen some of that start to fall and then as that has occurred, our team, like others in the market, have gone out and try to win over customers and support them in their projects and I think we made good progress.
Scott Schneeberger -- Oppenheimer -- Analyst
Excellent. Well, thanks to the color. I'll turn it over.
Operator
Thank you. [Operator Instructions] I show our next question comes from the line of Marc Riddick from Sidoti. Please go ahead.
Marc Riddick -- Sidoti -- Analyst
Hi. Good evening, gentlemen.
Joseph F. Hanna -- President, Chief Executive Officer
Hi, Marc.
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
Hi, Marc.
Marc Riddick -- Sidoti -- Analyst
So wanted to touch this, first of all, as we're approaching elections, are we looking in any particular, thinking about the funding environments that you're dealing with? Are we looking at any particular election situations are valid from a local funding basis for schools? Are there anything that we should be keeping an eye on going into next week?
Joseph F. Hanna -- President, Chief Executive Officer
Well, I think, from a national perspective, I've -- but it's not -- we're not really factoring anything in there and it's probably not worthy of a comment at this point as to how things will go one way or the other. I can comment, though, that there are bond referendums on ballots. And to give you an example, here in California, there are $13 billion worth of local bond referendums that voters will decide related to facilities -- school facilities that we'll know about it next week at some point. So that's a pretty healthy environment -- that's a pretty -- even though the number of bond referendum is down, compared to other years, still $13.4 billion is a pretty healthy amount and...
Marc Riddick -- Sidoti -- Analyst
Right.
Joseph F. Hanna -- President, Chief Executive Officer
And we like that, I mean, that's a positive indicator for us. The other thing I would say, too, is, an example would be in California. They've continued to sell bonds based on Prop 51, which was passed back in 2016 and they just...
Marc Riddick -- Sidoti -- Analyst
Right.
Joseph F. Hanna -- President, Chief Executive Officer
... passed $9706 million, they sold $976 million worth of bonds to fund over 300 projects. And so we're very happy that this money is going to be flowing into the market And we stand to benefit from that. So even though, overall economic conditions are tighter than they were, there still are these nice green shoot indicators out there that that we keep a close eye on that indicate that money is going to continue to flow to a certain degree.
Marc Riddick -- Sidoti -- Analyst
That's certainly encouraging. And then I wanted to shift gears and if you can sort of give us an update on thoughts on maybe what you're seeing from an acquisition pipeline perspective, either maybe some regional opportunities or some tuck-in opportunities to take advantage of or maybe how that's that pipeline has evolved during the course of the pandemic?
Joseph F. Hanna -- President, Chief Executive Officer
Sure. I would say that, were there are always opportunities for us, we pay very close attention to the market and we have quite an active process for folks to bring those opportunities to us. We are always looking at potential M&A and I think that's demonstrated in past acquisitions that we made, where we're patient and we will wait for the right thing for the company and that has to be at the right price and a good valuation and have good equipment for us to purchase too. And so those conditions arrived and it's in the right sweet spot for us we will definitely be at the table.
Marc Riddick -- Sidoti -- Analyst
And then a last thing for me, I was wondering if you can sort of give an update on access to HR growth or I mean, I'm sort of thinking along the lines of the old days of having shortages of drivers and alike, and I'm trying to get a sense of whether or not that you have given the employment challenges out there, if there's an opportunity for you to add folks or sort of reconfigure personnel opportunities going forward? Thanks.
Joseph F. Hanna -- President, Chief Executive Officer
Yeah. Yeah. Well, I can say this definitively, because we are continuing to hire and we do have open positions. There's always a certain amount of turnover that we have in the business. We have seen there are more folks available for us to hire and that's a welcome change, even though, it reflects weaker economy overall, which is not good for us.
The fact that we are -- we have -- feel like we have more access to quality people out there. That's a really good thing for us and we will -- we -- our intention is, if we can take advantage of that we find a good person out there and even if it might not be a need that we have right now, but we might project that we might have in the near future, we could move to hire that person, just based on their availability. So I'm pleased that things I think I've loosened up a little bit for us regarding personnel.
Marc Riddick -- Sidoti -- Analyst
That's encouraging. I appreciate the commentary and colors. Thanks, guys.
Joseph F. Hanna -- President, Chief Executive Officer
Yeah. Thank you, Marc.
Operator
Thank you. I show no further questions in the queue at this time, sir. At this time, I'd like to turn the call back to Mr. Hanna for closing remarks.
Joseph F. Hanna -- President, Chief Executive Officer
All right. Well, thank you Dilem. Ladies and gentlemen, I'd like to thank everyone for being us on -- being on the call today and for your continuing interest in our company. We wish you all health and safety in the months ahead and we look forward to speaking with you again in late February 2021 to review our fourth quarter results.
Operator
[Operator Closing Remarks]
Duration: 36 minutes
Call participants:
Joseph F. Hanna -- President, Chief Executive Officer
Keith E. Pratt -- Executive Vice President, Chief Financial Officer
Scott Schneeberger -- Oppenheimer -- Analyst
Marc Riddick -- Sidoti -- Analyst
