McGrath RentCorp — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The annual filing also provides unaudited fourth-quarter results; it is not a standalone quarterly report. McGrath RentCorp is a diversified B2B rental company operating Mobile Modular (including portable storage), TRS-RenTelco electronic test equipment, Adler Tanks containment products, and Enviroplex classroom manufacturing.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $572.6 million | $570.2 million |
| Gross profit / margin | $263.7 million / 46.1% | $266.2 million / 46.7% |
| Operating income / margin | $140.8 million / 24.6% | $141.4 million / 24.8% |
| Net income | $102.0 million | $96.8 million |
| Diluted EPS | $4.16 | $3.93 |
| Cash from operations | $180.5 million | $188.0 million |
| Cash / notes payable at year-end | $1.2 million / $222.8 million | $2.3 million / $293.4 million |
Rental equipment was $1.53 billion at cost and $938.1 million net at year-end. The company paid $39.8 million in dividends and repurchased $13.6 million of stock in 2020. Adjusted EBITDA, a company-defined non-GAAP measure, was $241.0 million, up 2%; operating cash flow was below that figure.
In fourth-quarter 2020, revenue was $149.0 million, net income was $31.2 million, and diluted EPS was $1.27, compared with $147.2 million, $26.4 million, and $1.07, respectively, in fourth-quarter 2019.
Material changes versus 2019
- Annual revenue was nearly flat, up about 0.4%; net income rose about 5%. Sales increased 13% to $124.6 million, while rental and rental-related services revenue declined.
- Mobile Modular revenue rose 7% to $321.5 million and pretax income rose 18% to $82.3 million. Its year-end utilization declined to 76.0% from 79.1%.
- TRS-RenTelco revenue rose 7% to $140.8 million, while pretax income was approximately flat at $34.5 million. Year-end utilization improved to 67.4% from 64.5%, but rental margins weakened.
- Adler Tanks revenue fell 21% to $77.5 million and pretax income fell 49% to $7.2 million. Average utilization dropped to 44.6% from 54.7%; management cited COVID-19 disruptions and weaker oil and gas activity.
- Operating cash flow declined 4%. Rental-equipment purchases fell to $86.3 million from $167.7 million, and net cash used in investing fell to $53.0 million. Debt decreased by about $70.7 million.
Outlook, risks, and notable items
- Management provided no specific numerical revenue or earnings guidance. It said operating cash flow, used-equipment sale proceeds, and borrowing capacity should meet working-capital and capital-expenditure needs through 2021 and beyond.
- COVID-19 impacts remained uncertain. Potential effects included project delays, early equipment returns, weaker rental and sales demand, and delayed or missed customer payments. The company said it had not seen a significant overall impact on 2020 results, and had deferred or reduced nonessential spending.
- The renewed unsecured revolving facility provides $420 million, plus a $12 million sweep facility; $122.8 million was outstanding at year-end. The company reported covenant compliance, with a 4.34x fixed-charge coverage ratio against a 2.50x minimum and 0.92x leverage against a 2.75x maximum. A $40 million Series B note matured in March 2021; the filing described a rate-locked potential $40 million, seven-year note issuance, not as completed funding.
- Key exposures include utilization and residual values of rental equipment, especially technology obsolescence in test equipment; public-school funding and building-code changes; cyclical oil and gas demand; competition, supplier concentration, interest-rate exposure, environmental and product-liability claims, and customer credit risk. Variable-rate debt was $122.8 million; management estimated each 1 percentage-point rate increase would add about $1.2 million to annual debt service.
- The company reported no rental-asset impairments in 2020 and no material unreserved litigation exposure in management’s opinion. The auditor issued unqualified opinions on the financial statements and internal controls; a critical audit matter concerned valuation of TRS-RenTelco rental equipment.
- In February 2021, the board declared a quarterly dividend of $0.435 per share, 4% above the prior-year comparable quarter.
Important facts for investors to verify
- Whether Adler Tanks’ utilization and rental demand recover, and how much of its 2020 decline was related to pandemic disruption versus oil and gas market weakness.
- Whether Mobile Modular can sustain rental growth and margins as utilization declined, and how public-school funding and seasonal demand develop.
- Actual issuance, proceeds, and refinancing treatment of the Series B maturity and the proposed $40 million senior-note financing.
- Future rental-equipment purchases, cash generation, dividends, and share repurchases; reported cash was only $1.2 million despite substantial operating cash flow and borrowing capacity.
- Assumptions supporting rental-equipment useful lives, residual values, utilization, and impairment assessments, particularly for electronic test equipment.