McGrath RentCorp — FY 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. McGrath RentCorp rents relocatable modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes, and also manufactures classroom buildings through Enviroplex. Rental operations are the primary business; rentals and rental-related services generated about 81% of 2012 revenue.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $364.1 million | $342.7 million |
| Gross profit / margin | $168.3 million / 46.2% | $166.8 million / 48.7% |
| Operating income / margin | $82.0 million / 22.5% | $88.7 million / 25.9% |
| Net income | $44.8 million | $49.6 million |
| Diluted EPS | $1.78 | $2.00 |
| Operating cash flow | $126.4 million | $129.3 million |
| Capital purchases of rental equipment | $131.8 million | $155.0 million |
| Adjusted EBITDA (non-GAAP) | $158.3 million; 43% margin | $161.3 million; 47% margin |
At year-end, cash was $1.6 million, notes payable were $302.0 million, total assets were $972.4 million, and shareholders’ equity was $364.7 million. The company had $228 million of additional borrowing capacity under its revolving facilities. Debt included $202 million of variable-rate revolver borrowings and $100 million of 4.03% senior notes. A 1 percentage-point increase in the average rate on variable debt would add approximately $2 million to annual debt service, based on year-end variable-rate debt.
The company declared $0.94 per share in dividends in 2012 and paid $23.1 million in cash dividends. It declared a $0.24-per-share dividend for the quarter ending March 31, 2013, 2% above the year-earlier comparable quarter.
Material changes versus the prior comparable period
- Revenue increased 6%, primarily on higher rental and rental-related service revenue, but net income fell 10% and diluted EPS declined from $2.00 to $1.78.
- Operating income decreased 7.5%, while gross profit rose only 1%; selling and administrative expense increased 10% to $86.3 million. Management cited higher bad-debt expense, compensation, depreciation, facility rent, and advertising.
- Interest expense increased 20% to $9.1 million, reflecting higher average debt and a higher average net interest rate.
- Mobile Modular revenue fell 4% to $119.8 million and pretax income fell 29% to $13.4 million. Lower sales, rental rates, and rental gross margin weighed on results; average utilization edged down to 66.4% from 67.1%.
- TRS-RenTelco revenue rose 6% to $133.2 million and pretax income rose 16% to $33.6 million. Rental gross profit improved, while equipment sales gross margin declined. The company decided in July 2012 to exit its environmental test equipment rental business and sold those assets in November for $3.7 million, recording a $0.4 million loss.
- Adler Tanks revenue increased 21% to $87.3 million, but pretax income fell 15% to $26.7 million. Average utilization dropped to 71.5% from 86.2%, partly reflecting lower demand in the Marcellus region; higher operating and administrative costs also affected earnings.
- Cash flow from operations exceeded rental-equipment purchases by $25.5 million, before other capital expenditures and shareholder distributions. Cash used in investing activities declined to $115.0 million.
For the fourth quarter alone, revenue was $102.0 million versus $85.2 million in Q4 2011; net income was $11.9 million versus $13.2 million. Quarterly figures are unaudited.
Outlook, risks and unusual items
- Outlook: The filing provides no clear revenue or earnings guidance. Management estimated a 39.2% effective tax rate for 2013, subject to actual revenue distribution by state, and said operating cash flow, used-equipment sales, and bank borrowings should meet anticipated 2013 and future working-capital and capital needs. Management intended to continue quarterly dividends subject to profitability and favorable cash flow.
- Demand and pricing: Management reported decreased demand and lower pricing in California modular operations. Public-school funding, bond measures, educational policy, and construction budgets affect classroom demand. Electronics and containment rentals are exposed to cyclical customer industries, seasonality, and competition.
- Containment business exposure: Adler’s growth is tied in part to oil and gas activity, including hydraulic fracturing. Regulatory changes, commodity-price declines, customer concentration, equipment returns, environmental claims, and the ability to redeploy fleet assets could affect results.
- Debt and rates: Borrowings are subject to financial covenants and most debt is variable-rate. The company reported compliance at year-end, including a 4.04:1 fixed-charge coverage ratio and a 1.91:1 leverage ratio, against minimum/maximum thresholds of 2.50:1 and 2.75:1, respectively.
- Credit and related parties: Bad-debt provision rose to $4.3 million from $1.8 million, and the allowance for doubtful accounts doubled to $3.0 million. Adler purchased $38.3 million of tanks from Sabre Manufacturing, controlled by Adler’s president; management stated purchases were negotiated at arm’s length.
- Other exposures: Risks include supplier concentration, equipment obsolescence and residual-value estimates, environmental and product liability, severe weather and earthquakes, information-security disruptions, and acquisition/integration risks. Routine litigation is disclosed; management did not expect pending claims, individually or in aggregate, to materially affect financial position or results.
- Controls and audit: Management and Grant Thornton concluded internal control over financial reporting was effective as of December 31, 2012. The auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Review whether revenue growth can translate into profit growth given falling operating and net margins, higher overhead, and rising interest expense.
- Track Mobile Modular pricing and utilization, school-district funding, and the redeployment of returned units.
- Assess Adler utilization, Marcellus-region demand, customer concentration, and exposure to hydraulic-fracturing regulation and related-party supplier purchases.
- Monitor receivables, bad-debt expense, cash generation after rental-fleet investment, and the company’s use of revolver capacity.
- Check variable-rate debt costs and covenant headroom, and whether the dividend remains supported by earnings and cash flow.
- Confirm the ongoing effects of the environmental test-equipment exit and the stated 2013 tax-rate estimate against subsequent filings.