McGrath RentCorp (NASDAQ: MGRC) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. The company rents modular buildings and portable storage, electronic test equipment, and containment tanks and boxes; it also manufactures classroom buildings through Enviroplex.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $570.2 million | $498.3 million | +14% |
| Gross profit | $266.2 million | $233.3 million | +14% |
| Operating income | $141.4 million | $117.5 million | +20% |
| Net income | $96.8 million | $79.4 million | +22% |
| Diluted EPS | $3.93 | $3.24 | +21% |
| Operating cash flow | $188.0 million | $142.7 million | +32% |
Gross margin was approximately 46.7% and operating margin approximately 24.8% in 2019, versus 46.8% and 23.6%, respectively, in 2018. Adjusted EBITDA, a company-defined non-GAAP measure, rose 17% to $236.8 million (42% margin). The filing cautions that this measure is not a substitute for GAAP results or cash flow.
Rental operations generated $454.9 million, or about 80% of revenue; equipment sales generated $110.2 million. Rental revenue increased 11%, rental-related services increased 22%, and sales increased 19% year over year.
Segment trends
- Mobile Modular: Revenue increased 18% to $301.0 million; pretax income rose 26% to $70.0 million. Average utilization improved to 79.2% from 78.2%.
- TRS-RenTelco: Revenue increased 11% to $131.5 million; pretax income rose 19% to $34.2 million. Higher rental volume and utilization offset lower equipment sales.
- Adler Tanks: Revenue increased 2% to $97.9 million, but pretax income fell 4% to $14.3 million. Average utilization dropped to 54.7% from 59.9%; year-end utilization was 48.4%, versus 56.4%.
- Enviroplex: Revenue increased to $39.8 million from $29.0 million, supporting higher segment profit.
Cash flow, debt and liquidity
Cash from operations was $188.0 million. Investing activities used $143.1 million, including $167.7 million of rental-equipment purchases and $12.1 million of property and equipment purchases; proceeds from used rental-equipment sales were $44.4 million. Financing activities used $44.0 million, including $35.5 million of dividends. Year-end cash was $2.3 million.
Notes payable totaled $293.4 million, down from $298.6 million; shareholders’ equity was $634.0 million. The company had $193.5 million drawn on $432.0 million of unsecured credit lines, leaving $238.5 million available. The majority of debt was variable-rate; management estimated each 1 percentage-point rate increase would add about $1.9 million to annual debt service at the year-end variable-debt balance. Fixed-rate notes include $40 million due in 2021 and $60 million due in 2022. The company reported compliance with debt covenants, including a 1.24x leverage ratio and 4.27x fixed-charge coverage ratio.
Material changes, outlook and risks
- Growth was led by modular rentals and services, electronics rentals, and higher modular sales. Selling and administrative expense increased 8% to $124.8 million, mainly from salaries and benefits; interest expense was essentially unchanged at $12.3 million.
- Adler Tanks faced weaker rental demand: rental revenue fell 3%, average equipment on rent declined 8%, and rental gross margin decreased from 61% to 58%.
- In August 2019, the company acquired TuffBox Container’s container-rental business for $7.8 million; results were included in Mobile Modular from the acquisition date.
- The 2017 comparison is distorted by a $102.5 million net tax benefit from the Tax Cuts and Jobs Act. The 2019 effective tax rate was 25.0%, compared with 24.2% in 2018.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management said operating needs should be met through operating cash flow, used-equipment sale proceeds, and borrowings. In February 2020, the board declared a quarterly dividend of $0.42 per share, 12% above the year-earlier comparable quarter.
- The filing identified the emerging coronavirus outbreak as a potential risk to customers, suppliers, and logistics providers; its effect was then uncertain. Other principal risks include economic and industry cyclicality, school-facility funding and policy changes, equipment utilization and resale values, technological obsolescence, supplier concentration, competition, variable interest rates, environmental and product-liability exposure, and natural disasters. School K-12 rental and sales represented 25% of consolidated rental and sales revenue in 2019. Oil and gas exploration and production represented about 10% of Adler rental revenue and 2% of company revenue.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor highlighted valuation of TRS-RenTelco rental equipment as a critical audit matter because technological change may affect obsolescence and impairment estimates. Management reported no material pending litigation exposure, no off-balance-sheet arrangements, and effective internal controls.
Important facts for investors to verify
- Whether Adler Tanks’ utilization and rental demand stabilize or continue to weaken, and the resulting effect on margins and asset impairment risk.
- Whether Mobile Modular and electronics growth and utilization can be sustained as the rental fleet expands and capital spending remains substantial.
- Exposure to variable rates and the refinancing or maturity plan for the credit facility and Series B notes due in 2021; facility maturity is March 2021.
- Assumptions underlying rental-equipment useful lives, residual values, and used-equipment sale proceeds, especially for electronics and modular buildings.
- Developments in coronavirus-related business disruption, public-school funding, oil and gas activity, and environmental or product-liability claims.
- Whether operating cash flow continues to fund rental-fleet investment, dividends, and debt obligations; cash at year-end was low at $2.3 million, with liquidity relying in part on available credit.