Business context and reporting period
McGrath RentCorp’s Form 10-K covers the fiscal year ended December 31, 2011. The company rents relocatable modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes; it also manufactures and sells classroom buildings through Enviroplex. The filing’s fourth-quarter figures are unaudited.
Financial and operating highlights
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $342.7 million | $291.4 million |
| Gross profit | $166.8 million | $130.8 million |
| Operating income | $88.7 million | $65.2 million |
| Net income | $49.6 million | $36.5 million |
| Diluted EPS | $2.00 | $1.50 |
| Operating cash flow | $129.3 million | $100.6 million |
| Adjusted EBITDA (non-GAAP) | $161.3 million | $132.0 million |
Revenue increased 18% and net income increased 36%. Calculated from reported figures, gross margin was approximately 48.7% versus 44.9%, operating margin 25.9% versus 22.4%, and net margin 14.5% versus 12.5%. Adjusted EBITDA is a company-defined measure and is not a substitute for GAAP results or cash flow.
Fourth-quarter revenue was $85.2 million versus $79.9 million in Q4 2010; net income was $13.2 million versus $12.7 million, and diluted EPS was $0.53 versus $0.52.
Segment developments: Adler Tanks revenue grew 59% to $72.0 million and pretax income more than doubled to $31.3 million; TRS-RenTelco revenue rose 16% to $125.3 million and pretax income rose 51% to $29.0 million. Mobile Modular revenue declined 2% to $124.6 million and pretax income fell 24% to $19.0 million. Enviroplex revenue increased to $20.8 million from $11.7 million.
Cash, debt and liquidity
Year-end cash was $1.2 million, notes payable $296.5 million, total assets $918.9 million and shareholders’ equity $333.1 million. Cash from operations was $129.3 million; rental-equipment purchases were $155.0 million, purchases of property, plant and equipment were $17.2 million, and proceeds from used rental-equipment sales were $28.5 million. Cash used in investing activities was $143.7 million. Dividends paid were $22.3 million.
Debt included $196.5 million outstanding under unsecured revolving facilities, with $158.5 million of stated borrowing capacity remaining, and $100 million of 4.03% senior notes due 2018. The principal revolving facility matures in May 2013. The company issued the senior notes in April 2011 and used the proceeds to repay bank-line borrowings; it also paid the final $12 million principal installment on its 5.08% notes due 2011. The company reported compliance with its debt covenants at year-end. Most debt was variable-rate; management estimated annual debt service would rise about $2.0 million for each 1 percentage-point increase in average interest rates, based on variable-rate debt outstanding at year-end.
Changes, outlook and risks
- Growth was led by Adler Tanks and TRS-RenTelco, while modular operations remained pressured. Mobile Modular reported lower rental revenue and average rental rates; management cited decreased demand and lower pricing in California.
- Adler Tanks’ average utilization rose to 86.2% from 76.0%, although year-end utilization declined to 79.8% from 84.9%. Management attributed growth to broad-based demand across its markets.
- Management estimated a 39.2% effective tax rate for 2012, based on expected revenue distribution by state. It said 2012 and later working-capital and capital-expenditure needs should be met through operating cash flow, used-equipment sales and bank borrowings. No revenue or earnings guidance is provided in the filing.
- The board declared a $0.235-per-share dividend for Q1 2012, a 2% increase from the comparable prior-year quarter. The company said it intended to continue quarterly dividends subject to profitability and favorable cash flow.
- Key risks include school-district funding and California classroom demand; economic and industry cycles; competition and pricing pressure; interest-rate exposure and the 2013 credit-facility maturity; equipment utilization, returns and obsolescence; and environmental, product-liability and regulatory risks. The company highlighted possible changes to hydraulic-fracturing oversight as a risk to Adler Tanks’ demand.
- Adler Tanks purchased $30.3 million of tanks in 2011 from Sabre Manufacturing, controlled by Adler Tanks’ president; $3.0 million was owed to related parties at year-end. Management described purchase terms as negotiated at arm’s length.
- Routine lawsuits and claims were disclosed; management did not expect uninsured liabilities to materially affect financial position or results. No long-lived-asset or goodwill impairment was recorded for 2011. The company implemented a new Oracle financial system in Q4; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether Adler Tanks’ rapid growth and utilization can be sustained, and how demand tied to oil and gas activity and hydraulic fracturing regulation evolves.
- Whether modular rental rates and utilization stabilize, particularly in California, and whether school funding supports future demand.
- The refinancing plan and terms for the revolving facility maturing in May 2013, remaining borrowing capacity, covenant headroom and sensitivity to variable rates.
- Whether operating cash generation continues to fund substantial rental-fleet investment, dividends and other capital needs.
- The scale, pricing and governance of related-party purchases from Sabre Manufacturing.
- Whether the 2012 tax-rate estimate and dividend policy remain consistent with actual results and cash flows.