Business context and reporting period
McGrath RentCorp’s Form 10-K covers the fiscal year ended December 31, 2014. The company rents relocatable modular buildings, electronic test equipment, and liquid and solid containment tanks and boxes; it also manufactures and sells modular classrooms through Enviroplex. The filing includes unaudited fourth-quarter results.
Financial and operating results
- FY 2014 revenue: $408.1 million, up 7.5% from $379.5 million in 2013. Rental and rental-related services totaled $333.7 million; equipment and other sales totaled $74.4 million.
- Profit: Gross profit was $182.2 million (44.6% of revenue), operating income was $85.4 million (20.9%), and net income was $45.7 million (11.2%). Diluted EPS was $1.75. The effective tax rate rose to 40.3% from 39.2%.
- Fourth quarter: Revenue was $111.8 million versus $94.8 million in Q4 2013; net income was $13.9 million versus $11.8 million; diluted EPS was $0.53 versus $0.45.
- Cash flow and investment: Operating cash flow was $123.0 million, down from $133.6 million. Rental-equipment purchases were $152.2 million; proceeds from used-equipment sales were $32.6 million. Investing activities used $129.9 million. Cash at year-end was $1.2 million.
- Debt and liquidity: Notes payable totaled $322.5 million, including $202.5 million drawn on revolving lines and $120.0 million in senior notes. The company reported $227.5 million of additional borrowing capacity. Fixed-charge coverage was 4.02x and leverage was 1.89x; it reported compliance with its covenants.
- Fleet and dividends: Rental equipment was $1.230 billion at cost and $825.8 million net. The quarterly dividend was $0.245 per share during 2014, or $0.98 for the year; the board declared $0.250 per share for the quarter ending March 2015.
Material changes versus the prior comparable period
- Mobile Modular revenue increased 22% to $161.6 million, with pretax income up 76% to $17.0 million. Higher rental fleet utilization and stronger rental, service and sales revenue contributed to growth.
- TRS-RenTelco revenue declined 5% to $128.3 million and pretax income fell 6% to $34.4 million, mainly reflecting lower rental and equipment sales.
- Adler Tanks revenue increased 7% to $100.8 million, while pretax income declined 2% to $23.6 million as higher expenses offset revenue growth.
- Consolidated selling and administrative expenses rose 9% to $96.9 million, primarily from higher headcount, salaries and benefits. Interest expense increased 7% to $9.3 million.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $170.8 million, up 6%; operating cash flow nevertheless declined, including from higher accounts receivable.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said it believed working capital and capital spending needs through 2015 and beyond could be met with operating cash flow, used-equipment sale proceeds and bank borrowings. Continued dividends were subject to profitability and favorable cash flow.
- Management highlighted the late-2014 steep decline in oil prices as a potential threat to Adler Tanks demand, particularly if exploration and production activity weakened. Oil and gas accounted for about 20% of Adler Tanks revenue and 5% of consolidated revenue in 2014.
- Other material risks include school-district funding and policy changes affecting classroom demand; rental utilization, pricing and equipment redeployment; economic and industry cycles; competition; supplier concentration and delivery delays; technology obsolescence; environmental, product-liability and litigation exposure; and variable-rate debt. A 1 percentage-point increase in average rates was estimated to add about $2.0 million to annual debt service based on variable-rate debt outstanding at year-end.
- The company sold an unused property for $2.5 million of net proceeds, recording a $0.8 million gain. No long-lived-asset impairment charges were reported for 2014, 2013 or 2012. Management and the auditor reported effective internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Reconcile the MD&A overview’s statement that 2014 net income was $46.5 million with audited statements reporting $45.709 million; audited diluted EPS is $1.75.
- Assess whether Mobile Modular’s stronger results and higher utilization can persist, and whether weaker electronics results or Adler Tanks’ oil-and-gas exposure could offset that growth.
- Review cash conversion, receivables growth, rental-equipment purchases and funding needs alongside the reported borrowing capacity and covenant headroom.
- Monitor variable-rate exposure, debt maturities and the company’s ability to sustain dividends while funding fleet investment.