McGrath RentCorp — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018, with quarterly results for 2018 and 2017 also provided. McGrath RentCorp rents relocatable modular buildings and portable storage, electronic test equipment, and containment tanks and boxes; it also manufactures and sells modular classrooms through Enviroplex. Most revenue comes from rentals and related services.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $498.3 million | $462.0 million |
| Gross profit / margin | $233.3 million / 46.8% | $206.3 million / 44.7% |
| Operating income / margin | $117.5 million / 23.6% | $94.7 million / 20.5% |
| Net income | $79.4 million | $153.9 million |
| Diluted EPS | $3.24 | $6.34 |
| Adjusted EBITDA / margin | $203.1 million / 41% | $178.3 million / 39% |
| Operating cash flow | $142.7 million | $122.4 million |
| Rental equipment purchases | $123.1 million | $94.6 million |
| Cash / notes payable at year-end | $1.5 million / $298.6 million | $2.5 million / $303.4 million |
| Total assets / shareholders’ equity at year-end | $1,217.3 million / $571.5 million | $1,147.9 million / $524.2 million |
| Dividends declared per share | $1.36 | $1.04 |
Material changes versus prior comparable period
- Revenue increased 8%; rental and related-services revenue rose 9%, while sales revenue rose 1%. Gross profit increased 13% and operating income increased 24%.
- Net income and diluted EPS fell year over year primarily because 2017 included a $102.5 million net tax benefit from the Tax Cuts and Jobs Act. The 2018 effective tax rate was 24.2%; 2017 reported a tax benefit and an 84.4% negative effective rate.
- By segment, Mobile Modular revenue increased 10% to $254.6 million, TRS-RenTelco increased 10% to $118.7 million, and Adler Tanks increased 5% to $96.1 million. Enviroplex revenue was $29.0 million, down from $31.4 million.
- Average utilization improved at Mobile Modular (78.2% versus 76.8%) and Adler Tanks (59.9% versus 56.0%); TRS-RenTelco was nearly unchanged (62.7% versus 62.9%).
- Fourth-quarter 2018 revenue was $133.1 million, operating income $35.2 million, and net income $24.2 million. Fourth-quarter 2017 net income was $117.7 million, reflecting the tax benefit noted above.
- Operating cash flow increased 17%. Investing cash outflow rose to $104.5 million, principally reflecting higher rental-equipment purchases. Notes payable declined about $4.9 million; the final $20 million Series A note payment was made in April 2018.
Liquidity, debt, and outlook
- At year-end, $198.6 million was drawn under unsecured revolving facilities with $233.4 million of additional borrowing capacity. The facilities mature in 2021. The company also had $40 million of Series B notes due in 2021 and $60 million of Series C notes due in 2022.
- Most debt was variable-rate. Management estimated annual debt service would increase about $2.0 million for each 1 percentage-point increase in the average rate on the $198.6 million variable-rate balance. The company reported no interest-rate hedges.
- Debt covenants were met: fixed-charge coverage was 4.11x against a 2.50x minimum, and leverage was 1.47x against a 2.75x maximum. Management said it expected operating cash flow, used-equipment sale proceeds, and borrowings to meet working-capital and capital needs.
- No specific earnings or revenue guidance is provided in the supplied filing text. In February 2019, the board declared a quarterly dividend of $0.375 per share, 10% above the prior-year comparable quarter.
- Management reported no material unoff-balance-sheet arrangements and no pending litigation expected to have a material adverse effect, in its opinion. Grant Thornton issued unqualified opinions on the financial statements and internal controls; management also assessed disclosure controls as effective.
Management commentary, risks, and unusual items
- Management attributed growth chiefly to higher rental revenue, equipment on rent, and improved rental margins. Mobile Modular’s average monthly rental rate increased 8%; Adler Tanks’ average utilization improved, while year-end utilization there declined to 56.4% from 57.5%.
- The 2017 Tax Act remeasurement produced a reported $102.8 million net deferred-tax benefit, with a $102.5 million net impact on 2017 net income. The 2018 tax provision also included $2.0 million of excess stock-compensation tax benefits.
- Key risks include cyclical demand in customer industries; school funding, policy, and building-code changes; intense competition and pricing pressure; equipment utilization, obsolescence, and resale-value uncertainty; supplier concentration and delivery delays; and fuel, labor, and raw-material cost increases.
- Other disclosed exposures include variable interest rates, environmental and product-liability claims involving containment equipment, customer credit and equipment recovery, natural disasters (including earthquake and hurricane exposure), cybersecurity, foreign-exchange movements, and acquisition integration. Oil and gas exploration and production generated about 10% of Adler Tanks rental revenue and 2% of consolidated revenue in 2018.
- The filing identifies seasonality: school-related modular shipments are concentrated in the second and third quarters; electronic-test and containment rentals may soften in December and January–February. Management recorded $0.1 million of modular rental-asset impairment in 2018, versus $1.6 million in 2017; no goodwill impairment was recorded in 2018.
Important facts for investors to verify
- Separate recurring operating growth from the unusually large 2017 tax benefit when comparing earnings and EPS.
- Track utilization, rental rates, and rental margins by segment, particularly Adler Tanks’ year-end utilization and industry exposure.
- Assess whether operating cash flow can sustain rental-fleet investment, property spending, and dividends, given low year-end cash and substantial capital needs.
- Monitor variable-rate debt, available revolver capacity, 2021–2022 maturities, and covenant headroom.
- Review school-district funding and bond timing, key supplier reliance, competitive developments, equipment residual values, and environmental or product-liability exposure.