MCGRATH RENTCORP annual report, FY2022

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McGrath RentCorp — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement in the supplied text. McGrath RentCorp rents modular buildings and portable storage, electronic test equipment, and containment tanks and boxes, and manufactures classroom buildings through Enviroplex.

Financial performance and liquidity

  • Revenue: $733.8 million, up 19% from $616.8 million in 2021. Rental operations contributed $578.6 million; equipment sales contributed $150.7 million.
  • Profit: Gross profit was $336.9 million (about 45.9% of revenue); operating income was $165.6 million (about 22.6%); net income was $115.1 million, up 28%, or $4.70 per diluted share versus $89.7 million and $3.66 in 2021.
  • Costs and tax: Selling and administrative expense rose 15% to $171.3 million. Interest expense increased 45% to $15.2 million. The effective tax rate fell to 23.2% from 26.3%.
  • Cash flow and investment: Operating cash flow was $194.4 million, compared with $195.7 million in 2021. Rental-equipment purchases were $187.7 million; proceeds from used-equipment sales were $73.9 million. Dividends paid were $44.3 million.
  • Adjusted EBITDA: $288.9 million, up 16%; adjusted EBITDA margin was 39%, versus 40%. This is a non-GAAP measure and includes transaction costs under the company’s definition.
  • Balance sheet and debt: Cash was $1.0 million; notes payable were $413.7 million; total liabilities were $903.9 million. Of debt, $313.8 million was outstanding on revolving credit lines and $100 million consisted of fixed-rate senior notes. The $650 million unsecured revolving facility matures in 2027.
  • Liquidity and covenants: Management said operating cash flow, equipment-sale proceeds and bank borrowing should meet working-capital and capital needs. The company reported covenant compliance. Covenant ratios differ between sections of the filing; see investor checks below.

Material changes versus 2021

  • Revenue increased across the major rental businesses. Mobile Modular revenue grew 27% to $461.7 million, TRS-RenTelco grew 8% to $150.8 million, and Adler Tanks grew 19% to $98.2 million. Enviroplex revenue was $23.2 million, down from $31.1 million.
  • Mobile Modular’s year-end utilization rose to 80.7% from 76.4%; TRS-RenTelco’s fell to 59.4% from 62.9%; Adler Tanks’ rose to 57.1% from 47.6%.
  • Capital spending on rental equipment increased to $187.7 million from $114.1 million. Investing cash use fell to $131.4 million from $351.7 million, principally because 2021 included acquisitions.
  • Interest expense increased as average debt and interest rates rose. The company reported a 3.55% net average interest rate in 2022, versus 2.81% in 2021.

Outlook, transactions and risks

  • On February 1, 2023, the company announced completion of the sale of Adler Tanks for $265 million and acquisition of Vesta Modular for $400 million, each subject to adjustments. Management described the strategy as concentrating on modular and storage businesses, with expected growth, synergies and a greater share of longer-term rental contracts. These are expectations, not guarantees.
  • The board declared a $0.465-per-share dividend for the quarter ending March 31, 2023, 2% higher than the comparable prior-year quarter. The filing provides no specific earnings or revenue guidance.
  • Key risks include variable-rate debt and higher interest costs (management estimated about $3.1 million additional annual debt service per 1% rate increase on the year-end variable-rate balance), economic and customer-demand weakness, inflation and supply constraints, school-funding dependence, competition, equipment utilization and resale values, and acquisition integration.
  • Management said COVID-19 had not significantly affected 2022 financial results, but noted uncertainty about future effects. It also disclosed an immaterial 2021 ransomware incident involving copied personal information; the incident did not materially disrupt operations or financial performance.
  • Auditors issued an unqualified opinion on the financial statements and internal controls; they reported no critical audit matters. Management assessed internal control over financial reporting as effective.

Investor verification priorities

  1. Confirm the February 2023 Adler Tanks sale and Vesta Modular acquisition terms, final adjustments, funding and post-transaction debt and liquidity. Note: Note 15 in the supplied filing text appears to say February 1, 2022 for these events, while other sections and the exhibit descriptions say February 1, 2023.
  2. Reconcile covenant ratios: the filing reports fixed-charge coverage and leverage ratios as 4.27 and 1.43 in some sections, but 4.20 and 1.45 in the debt note.
  3. Assess whether rising modular utilization and rental rates can offset lower electronics utilization, increased operating costs and the substantial rental-equipment investment.
  4. Review cash generation alongside equipment purchases, debt maturities and variable-rate exposure; reported cash at year-end was only $1.0 million.
  5. Track dependence on public-school funding and contract timing: K-12 school rentals and sales represented 19% of consolidated rental and sales revenue in 2022.