McGrath RentCorp (NASDAQ: MGRC) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Amounts below are U.S. dollars unless noted. McGrath is a diversified equipment rental company with modular buildings and portable storage, electronic test equipment, liquid and solid containment equipment, and classroom manufacturing businesses.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $404.5 million | $408.1 million | (0.9%) |
| Rental operations revenue | $347.0 million | $333.7 million | +4.0% |
| Sales revenue | $55.4 million | $72.2 million | (23.4%) |
| Gross profit / margin | $176.9 million / 43.7% | $182.2 million / 44.6% | Profit (2.9%) |
| Operating income / margin | $77.0 million / 19.0% | $85.4 million / 20.9% | Income (9.8%) |
| Net income | $40.5 million | $45.7 million | (11.5%) |
| Diluted EPS | $1.59 | $1.75 | (9.1%) |
| Adjusted EBITDA | $164.1 million | $170.8 million | (3.9%) |
| Cash from operations | $144.6 million | $123.0 million | +17.5% |
Rental operations generated approximately 86% of total revenue. The decline in consolidated revenue primarily reflected lower equipment sales, partly offset by growth in rental and rental-related services revenue. Higher operating costs and weaker results at TRS-RenTelco and Adler Tanks contributed to lower profit. The effective tax rate was 39.0%, versus 40.3% in 2014.
Fourth quarter: Revenue was $105.3 million, compared with $111.8 million in Q4 2014; net income was $11.5 million versus $13.9 million. Q4 2015 diluted EPS was $0.48, versus $0.53.
Balance sheet and liquidity: At year-end, total assets were $1.153 billion, rental equipment net book value was $869.6 million, notes payable were $381.4 million, shareholders’ equity was $379.7 million, and cash was $1.1 million. Operating cash flow exceeded rental equipment purchases: $144.6 million of operating cash flow and $26.2 million of used-equipment sale proceeds versus $131.0 million of rental equipment purchases. Investing activities used $114.1 million; financing activities used $30.5 million.
Debt included $221.4 million outstanding on revolving lines and $160.0 million of senior notes. The company reported $208.6 million of additional borrowing capacity under its $430 million combined credit lines, which mature in June 2017. The variable-rate debt balance was $221.4 million; management estimated that a 1 percentage-point rate increase would add about $2.2 million to annual debt service. The company was in compliance with debt covenants at year-end: fixed-charge coverage was 3.85x and leverage was 2.32x, against minimum/maximum thresholds of 2.50x and 2.75x, respectively.
Material changes and segment performance
- Mobile Modular: Revenue increased 14% to $184.3 million and pretax income rose 59% to $26.9 million. Higher rental fleet utilization and rates supported growth; year-end utilization was 76.9%, versus 75.0%.
- TRS-RenTelco: Revenue decreased 10% to $115.0 million and pretax income fell 35% to $22.2 million. Lower rental rates and sales contributed; year-end utilization was 58.7%, versus 59.8%.
- Adler Tanks: Revenue decreased 6% to $94.6 million and pretax income fell 27% to $17.2 million. Average utilization declined to 58.3% from 62.9%; year-end utilization was 49.7%, versus 63.9%.
- Enviroplex: Classroom sales revenue declined to $10.6 million from $17.5 million; its pretax contribution was immaterial in 2015.
- Rental equipment at cost grew to $1.310 billion from $1.230 billion. The company repurchased 2.4 million shares for $64.0 million and paid $25.8 million in dividends. Shares outstanding fell to 23.9 million from 26.1 million.
Outlook, commentary, risks, and unusual items
Management said operating cash flow, used-equipment sale proceeds, and available borrowing were expected to fund working capital and capital expenditures through 2016 and beyond. No specific earnings or revenue guidance was provided. The company declared a $0.255-per-share dividend for Q1 2016, a 2% increase from the prior-year comparable quarter. In February 2016, it also extended the period for issuing shelf notes under its private note agreement.
- Adler Tanks faces exposure to weak oil and gas activity: oil and gas exploration and production represented 16% of Adler revenue and 4% of consolidated revenue in 2015. Hydraulic fracturing projects represented approximately 10% of Adler revenue and 2% of consolidated revenue.
- Public-school funding, bond approvals, enrollment and education policy affect modular classroom demand. K-12 school rentals and sales represented 16% of consolidated rental and sales revenue in 2015.
- Other material risks include cyclical demand, competition and pricing pressure, equipment utilization and resale values, supplier concentration (one manufacturer supplied 43% of Mobile Modular’s modular units), interest-rate increases, debt covenant limits, seasonality, environmental and product liability, and foreign exchange exposure.
- Management reported no rental-equipment or goodwill impairment charges in 2015, 2014 or 2013; no off-balance-sheet arrangements; and no pending litigation expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the 2014 net-income comparison: audited financial statements report $45.7 million, while one MD&A passage states $46.5 million. Confirm the intended comparative figure; the quarterly data and selected financial data support $45.7 million.
- Assess whether the sharp decline in Adler Tanks’ utilization and the oil and gas downturn are continuing, and how they affect revenue, margins, credit losses and asset values.
- Review the 2017 revolving-credit maturity, refinancing plans, borrowing headroom, variable-rate exposure and covenant cushion.
- Evaluate the sustainability of rental-fleet investment, used-equipment sale proceeds, dividends and share repurchases against operating cash flow and earnings.
- Monitor whether Mobile Modular’s growth and higher utilization can offset continued weakness in electronics, containment and classroom sales.