McGrath RentCorp — FY 2013 Form 10-K
Business context and period: Diversified B2B equipment-rental company reporting the fiscal year ended December 31, 2013, with 2012 comparisons. Its businesses are modular buildings and portable storage (Mobile Modular), electronic test equipment (TRS-RenTelco), containment tanks and boxes (Adler Tanks), and California classroom manufacturing (Enviroplex). Rental operations generated about 81% of revenue.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $379.3 million | $364.1 million |
| Gross profit / margin | $168.8 million / 44.5% | $168.3 million / 46.2% |
| Operating income / margin | $80.1 million / 21.1% | $82.0 million / 22.5% |
| Net income | $43.4 million | $44.8 million |
| Diluted EPS | $1.67 | $1.78 |
| Operating cash flow | $133.6 million | $126.4 million |
| Rental-equipment purchases | $132.6 million | $131.8 million |
- Revenue rose 4%; rental and rental-related services increased 5%, while sales increased 3%. Net income declined 3%, and diluted EPS fell 6%.
- Segment revenue: Mobile Modular $132.7 million (+11%); TRS-RenTelco $134.9 million (+1%); Adler Tanks $93.9 million (+8%); Enviroplex $17.9 million (-25%). Pretax income increased at TRS-RenTelco to $36.6 million, but fell at Mobile Modular to $9.6 million and Adler Tanks to $24.0 million.
- Rental utilization at year-end was 70.7% for Mobile Modular, 58.2% for TRS-RenTelco and 57.7% for Adler Tanks. Adler’s average utilization fell to 64.2% from 71.5%; electronics utilization fell to 62.7% from 65.8%.
- Cash from operations exceeded rental-equipment purchases by $1.0 million in 2013; used-equipment sale proceeds were $33.4 million. Investing activities used $111.2 million and financing activities used $22.4 million. Cash at year-end was $1.6 million.
- Year-end notes payable were $290.0 million, down from $302.0 million; shareholders’ equity was $401.0 million. The company had $240.0 million of additional borrowing capacity under its $430.0 million unsecured facilities. $190.0 million of borrowings were variable-rate; management estimated each 1 percentage-point rate increase would add about $1.9 million to annual debt service.
- Quarterly dividend declared was $0.24 per share in each 2013 quarter ($0.96 for the year). In February 2014, the board declared $0.245 per share for the quarter ending March 31, 2014.
Material changes and management commentary
- Revenue growth did not translate into higher operating or net income: gross profit was nearly flat as direct rental-operation costs rose 11% and selling and administrative expenses rose 3%.
- Mobile Modular’s rental revenue increased, but higher direct costs reduced rental gross margin to 45% from 53%; pretax income declined 28%. Adler Tanks also reported lower rental gross margin (65% versus 71%) and lower utilization amid fleet growth. TRS-RenTelco’s pretax income rose 9%, supported by stronger equipment-sale margins and lower selling and administrative expenses.
- Adjusted EBITDA, a non-GAAP measure, was $160.6 million, up 1% from $158.3 million; adjusted EBITDA margin was 42% versus 43%. Operating cash flow increased 6%.
- No 2014 revenue or earnings guidance is provided in the supplied filing text. Management said it expected operating cash flow, used-equipment proceeds and bank borrowings to meet working-capital and capital-expenditure needs, and intended to continue quarterly dividends subject to profitability and cash flow.
Risks, contingencies and unusual items
- Key demand risks include public-school funding and policy changes affecting classroom rentals, cyclical industrial and technology markets, and oil-and-gas activity and regulation affecting Adler Tanks. Weather and seasonal demand can also affect quarterly results.
- Other material exposures include competitive pricing, falling utilization or delayed redeployment of returned equipment, equipment obsolescence and resale values, supplier concentration and lead times, environmental or product-liability claims involving tanks and boxes, and variable interest rates. The company reported no derivative hedges for interest-rate or foreign-currency exposure.
- Sabre Manufacturing, formerly controlled by Adler Tanks’ president, was sold to an unrelated party on August 16, 2013. McGrath purchased $13.6 million of tanks from Sabre during 2013, compared with $38.3 million in 2012; no amount was due at year-end 2013.
- The company reported no long-lived-asset or goodwill impairment charges for 2013. Management and Grant Thornton reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls. Management said pending litigation and routine claims were not expected to have a material adverse effect.
Investor verification priorities
- Check whether utilization and rental margins recover, particularly at Adler Tanks and TRS-RenTelco, and whether fleet investment generates adequate returns.
- Review the drivers of rising rental-service and other direct costs, and whether the decline in operating margin persists.
- Assess cash generation against fleet purchases, dividends and scheduled debt payments, including the first $20 million senior-note principal installment due in 2014.
- Monitor variable-rate debt, covenant headroom and the company’s stated sensitivity to higher interest rates.
- Track school-facility funding and oil-and-gas market/regulatory developments, along with equipment resale values and customer concentration in Adler Tanks.