Executive Summary / Key Takeaways

• McGrath RentCorp is a diversified business-to-business rental company with a resilient model focused on modular buildings, portable storage, and electronic test equipment, underpinned by a strategic emphasis on rentals and expanding service offerings.
• The Mobile Modular segment is the primary growth engine, benefiting from strong demand in education and specific commercial verticals, a favorable pricing tailwind, and successful initiatives like Mobile Modular Plus and site-related services.
• First quarter 2025 results demonstrated solid consolidated performance with revenue up 4% and net income up 23%, driven by Mobile Modular's gross profit strength and lower interest expense, despite softness in Portable Storage.
• A key strategic shift in 2025 involves leveraging existing Modular fleet inventory due to current utilization levels, leading to lower capital expenditures but higher operating expenses for fleet preparation, impacting near-term Adjusted EBITDA margins.
• While the company is in a strong financial position with comfortable leverage and capital allocation flexibility (enhanced by the $180 million merger termination fee), the primary risk to the 2025 outlook is potential customer hesitation and project delays in the second half of the year due to broader economic uncertainty.

A Foundation in Rentals: Building Value Over Decades

McGrath RentCorp, established in 1979, has built its business on the fundamental principle of providing essential equipment rentals across diverse sectors. From its origins focusing on modular buildings and electronic test equipment, the company has evolved into a multi-segment rental provider, structured around four key areas: Mobile Modular, Portable Storage, TRS-RenTelco, and Enviroplex. This model emphasizes capital-intensive investment in rental inventory, recovering costs and generating returns through rental revenues and equipment sales. The company's history is marked by a consistent focus on operational efficiency, disciplined capital allocation, and adapting to market dynamics, including successfully navigating past economic downturns and, more recently, the unique environment surrounding a terminated merger agreement.

Within the competitive landscape of the B2B equipment rental market, McGrath operates alongside much larger, more diversified players like United Rentals (URI), Herc Holdings (HRI), and Ashtead Group (AHT). While these giants command significant market share through scale and broad equipment portfolios, McGrath has carved out a niche by focusing on specialized rental solutions and cultivating strong customer relationships. The company's strategic positioning leverages its expertise in specific asset classes – modular buildings for education and commercial needs, portable storage for temporary space, and electronic test equipment for specialized industries. This allows McGrath to differentiate itself through tailored service offerings and deep market knowledge, even if it trails larger competitors in overall scale and certain efficiency metrics.

McGrath's strategic response to this competitive environment centers on enhancing its value proposition beyond basic rentals. The Mobile Modular segment, in particular, is focused on becoming a comprehensive solutions provider. This involves expanding service offerings like Mobile Modular Plus, which adds amenities directly to rental contracts, and Site Related Services, providing essential on-site support. These initiatives aim to increase revenue per unit and deepen customer engagement, offering a competitive edge against more commoditized offerings. Geographic expansion and strategic tuck-in acquisitions, particularly in the Modular and Portable Storage segments, remain key pillars of the growth strategy, allowing McGrath to enter new markets or strengthen its presence in existing ones.

While not a technology developer in the traditional sense like a semiconductor firm, McGrath's TRS-RenTelco segment operates at the intersection of technology and rentals. This business provides electronic test equipment crucial for research and development, manufacturing, and communications infrastructure across industries like aerospace, defense, and semiconductors. The performance of this segment is directly tied to investment cycles and activity levels in these high-tech sectors. MGRC's role here is as a provider of access to cutting-edge equipment, enabling customers to avoid large capital outlays. The company actively manages this specialized fleet, adapting to market demand shifts and technological obsolescence by strategically selling unutilized equipment and adjusting capital expenditures. The TRS segment's ability to navigate the cyclical demand of technology markets is a key operational challenge and differentiator for McGrath.

Performance Reflecting Strategic Execution and Market Headwinds

McGrath RentCorp delivered a solid start to 2025, with consolidated revenues increasing 4% to $195.4 million for the first quarter compared to the same period in 2024. This growth was primarily fueled by the continued positive momentum in the Mobile Modular segment. Consolidated net income saw a more significant increase, rising 23% to $28.2 million, resulting in diluted earnings per share of $1.15, also up 23% year-over-year. This improvement was largely attributable to higher gross profit generated by rental operations, particularly within Mobile Modular, and a notable reduction in interest expense.

Segment performance in Q1 2025 presented a mixed picture, highlighting the varying demand conditions across McGrath's markets. Mobile Modular continued its strong trajectory, with total revenues growing 3% to $131.9 million. This was driven by a 3% increase in rental revenues and a substantial 22% jump in rental-related services revenues, partly offset by an 11% decline in sales revenues. Gross profit for the segment rose 6% to $65.5 million, with rental margins improving to 60% from 58%. Adjusted EBITDA for Mobile Modular increased 10% to $47.6 million, underscoring its role as the primary growth driver. Despite a slight dip in average utilization to 74.6% from 78.7%, the segment saw an 8% increase in average monthly revenue per unit on rent, reaching $831, with new shipments over the last twelve months commanding an even higher average of $1,194, demonstrating a favorable pricing tailwind.

In contrast, the Portable Storage segment experienced ongoing market softness, leading to a 14% decrease in total revenues to $21.3 million. Rental revenues declined 13% to $16.1 million, and rental-related services revenues were down 23%. This resulted in an 18% decrease in gross profit to $13.9 million and a 25% drop in Adjusted EBITDA to $8.6 million. Average utilization for Portable Storage fell to 60.2% from 69.8%, reflecting the impact of lower commercial construction activity. Management noted starting the year with a lower rental revenue run rate in this segment compared to the prior year.

The TRS-RenTelco segment showed signs of stabilization and modest improvement in Q1 2025. Total revenues increased 4% to $35.0 million, with rental revenues growing slightly – the first quarterly increase since Q1 2023. Sales revenues saw a significant 17% increase to $8.0 million, although with lower gross margins compared to the prior year. Gross profit for TRS-RenTelco increased 7% to $14.9 million, and rental margins improved to 40% from 36%. Adjusted EBITDA decreased slightly by 3% to $17.9 million. Utilization improved substantially during the quarter, ending at 64.9%, up from 59% in the fourth quarter of 2024, supported by broad-based improvement across equipment categories and some previously delayed projects commencing.

Consolidated costs reflected these operational dynamics. Selling and administrative expenses saw a modest 1% increase to $50.9 million. A significant factor impacting year-over-year comparisons was the $9.4 million in transaction costs related to the terminated merger incurred in Q1 2024, which did not recur in Q1 2025 and were reported separately. Interest expense decreased substantially by 35% to $8.2 million, benefiting from lower average debt levels and a reduced effective interest rate (5.70% in Q1 2025 vs. 6.53% in Q1 2024).

Financial Strength and Strategic Capital Deployment

McGrath's rental-focused business model is inherently capital intensive, requiring ongoing investment in its fleet. However, the company's operations generate significant cash flows, providing flexibility in managing its capital structure and funding growth. In the first quarter of 2025, net cash provided by operating activities was $53.9 million, a decrease from $59.4 million in Q1 2024, primarily due to changes in working capital related to payment timing.

A notable shift in capital deployment was evident in investing activities. Net cash used in investing activities decreased dramatically to $2.7 million in Q1 2025, down from $78.1 million in the prior year period. This significant reduction was primarily driven by substantially lower rental equipment purchases, which totaled only $11.5 million in Q1 2025 compared to $78.6 million in Q1 2024. This reflects a strategic decision to leverage existing fleet inventory, particularly in the Modular segment where utilization levels allow for satisfying customer orders from owned assets rather than purchasing new equipment.

Financing activities in Q1 2025 resulted in net cash used of $48.6 million, a significant change from net cash provided of $19.7 million in Q1 2024. This was largely due to reduced borrowings under bank lines of credit, aligning with the lower capital expenditure requirements for rental equipment during the period. As of March 31, 2025, the company's net borrowings stood at $559 million.

McGrath maintains a strong balance sheet and comfortable liquidity position. As of March 31, 2025, the company had $338.5 million in available borrowing capacity under its unsecured lines of credit. The company remains well within its debt covenants, reporting a Consolidated Fixed Charge Coverage Ratio of 3.38 to 1.00 (above the 2.50 minimum) and a Consolidated Leverage Ratio of 1.58 to 1.00 (below the 2.75 maximum). This financial health provides ample flexibility for capital allocation decisions.

The $180 million termination fee received in September 2024 from the terminated merger, which resulted in approximately $86 million in net cash after transaction costs and taxes, further enhanced this flexibility. These proceeds were used to reduce debt, positioning the company favorably to pursue its strategic priorities. Capital allocation focuses include continued organic investment in the business, pursuing M&A opportunities (particularly in Modular and Portable Storage), returning value to shareholders through dividends (marking its 34th consecutive annual increase), and potential share repurchases.

Outlook Tempered by Macro Uncertainty

McGrath's full-year 2025 financial outlook reflects a blend of confidence in its strategic execution and caution regarding the broader economic environment. Management expects total revenue for the year to be between $920 million and $960 million. Adjusted EBITDA is projected to be between $343 million and $355 million. Gross rental equipment capital expenditures are guided to be between $115 million and $125 million, a significant reduction from prior years, reflecting the strategic shift to utilizing existing fleet.

This outlook is underpinned by specific expectations for the segments. Mobile Modular is anticipated to be the primary driver of Adjusted EBITDA growth in 2025, leveraging its strategic initiatives and favorable market dynamics. Portable Storage, starting the year from a lower run rate due to persistent softness in commercial construction, is expected to contribute lower Adjusted EBITDA compared to 2024. TRS-RenTelco is projected to deliver Adjusted EBITDA comparable to 2024, based on signs of stabilization and potential recovery in its end markets.

A key assumption in the 2025 outlook is the impact of the strategic decision to fulfill more Modular rental demand from existing fleet inventory. This approach, while viewed as a responsible use of capital, is expected to result in $9 million to $13 million higher direct costs of rental operations compared to satisfying demand with new purchases. This operational expense increase will partially offset revenue gains and temper Adjusted EBITDA growth in the near term.

The primary risk highlighted by management is the potential impact of overall economic uncertainty on customer behavior in the second half of 2025. Concerns exist that factors like volatile interest rates, inflation, geopolitics, and trade policy developments could lead to customer hesitation, project delays, or fewer new project starts, particularly in construction-related markets. While the direct impact of tariffs on McGrath's own costs and international revenues is expected to be limited in 2025, the indirect effect of broader economic slowdown could pressure demand. McGrath's resilient business model, diversified customer base, and flexible cost structure are seen as key mitigants against these potential headwinds.

Conclusion

McGrath RentCorp stands as a well-established and financially sound player in the B2B equipment rental market. The company's core investment thesis is centered on its resilient rental model, the strong momentum and strategic initiatives within its Mobile Modular segment, and its disciplined approach to capital allocation. The first quarter 2025 results underscore the strength of the Modular business and the positive impact of cost management and lower interest expenses, providing a solid foundation for the year.

While the Portable Storage segment faces ongoing challenges from commercial construction softness and the TRS-RenTelco segment navigates a nascent recovery in technology markets, the company's strategic focus on expanding service offerings and increasing revenue per unit across segments is yielding tangible results. The significant reduction in planned capital expenditures for 2025, coupled with a shift to leveraging existing fleet, demonstrates operational flexibility and a commitment to responsible capital deployment, further supported by the enhanced financial position following the terminated merger agreement.

Looking ahead, the primary factor for investors to monitor will be the trajectory of market demand in the second half of the year, particularly the potential for project delays stemming from macroeconomic uncertainty. However, McGrath's experienced leadership, diversified business lines, and strong balance sheet position it well to manage through potential volatility and continue executing its long-term growth strategy, including pursuing accretive M&A opportunities as they arise.