McGrath RentCorp — FY2023 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2023. McGrath rents relocatable modular buildings, portable storage containers and electronic test equipment, and manufactures classroom buildings through Enviroplex. The report presents four segments: Mobile Modular, Portable Storage, TRS-RenTelco and Enviroplex.
Comparisons are affected by two major portfolio changes completed February 1, 2023: the $437.2 million acquisition of Vesta Modular, included in Mobile Modular from that date, and the $268.0 million sale of Adler Tanks, reported as discontinued operations. Portable Storage was separately reported as a segment beginning in the fourth quarter; prior-period segment information was restated.
Financial performance and position
| Metric | FY2023 | Prior comparable period |
|---|---|---|
| Continuing-operations revenue | $831.8 million | $635.7 million in 2022; +31% |
| Gross profit / gross margin | $393.6 million / 47% | $290.2 million / 46% in 2022 |
| Operating income / margin | $189.7 million / 23% | $147.3 million / 23% in 2022 |
| Continuing-operations net income | $111.9 million; diluted EPS $4.56 | $103.3 million; diluted EPS $4.21 |
| Net income, including discontinued operations | $174.6 million; diluted EPS $7.12 | $115.1 million; diluted EPS $4.70 |
| Operating cash flow | $95.3 million | $194.4 million in 2022 |
| Adjusted EBITDA, continuing operations | $322.0 million; 39% margin | $251.2 million; 40% margin |
The $61.5 million after-tax gain on the Adler Tanks sale materially lifted reported net income. Excluding that gain, management reported 2023 net income of $113.1 million, or $4.61 per diluted share, versus $115.1 million, or $4.70, in 2022. The financial statements report continuing-operations revenue of $831.8 million; including $9.4 million of discontinued-operation revenue, total revenue was $841.3 million. The MD&A’s stated total-revenue growth rate does not match the disclosed 2022 and 2023 amounts arithmetically.
Segment trends were mixed: Mobile Modular revenue rose 48% to $562.2 million and pretax income rose 36% to $92.0 million; Portable Storage revenue rose 23% to $101.1 million and pretax income rose 12% to $32.9 million. TRS-RenTelco revenue declined 2% to $148.3 million and pretax income fell 33% to $24.6 million. Average utilization declined to 77.3% for Portable Storage from 84.8%, and to 58.9% for TRS-RenTelco from 64.2%.
At year-end, cash was $0.9 million, accounts receivable $227.4 million, and net rental equipment $1.329 billion. Notes payable totaled $763.0 million, up from $413.7 million; shareholders’ equity was $933.8 million. The $650 million revolving facility had $588 million drawn, leaving approximately $62 million undrawn. Debt included $588 million in revolving borrowings and $175 million of senior notes. The company was in compliance with its covenants; reported leverage was 2.34x against a 2.75x maximum and fixed-charge coverage was 3.33x against a 2.50x minimum.
Cash flow from operations fell by $99.1 million, primarily reflecting the noncash sale gain and lower accounts payable and accrued liabilities. Investing activities used $391.9 million, including $462.1 million for acquisitions, partly offset by Adler sale proceeds. Financing activities provided $296.4 million, largely from increased borrowing. Rental-equipment purchases were $229.7 million; dividends paid were $45.6 million. Interest expense increased to $40.6 million from $12.2 million, reflecting higher average debt and rates. Income taxes paid were $91.6 million, including tax obligations associated with the divestiture.
Material changes, outlook and risks
On January 28, 2024, McGrath agreed to be acquired by WillScot Mobile Mini. Subject to shareholder and regulatory approvals and other customary conditions, shareholders may elect $123 cash per share or 2.8211 WillScot shares, with the overall consideration allocated 60% cash and 40% stock. The deal had no financing condition and was pending when the 10-K was filed. The company could owe a $120 million termination fee in specified circumstances.
Management said it expects working capital and capital expenditures to be funded by operating cash flow, used-equipment sales and bank borrowings, and believes it can continue to access credit and issue senior notes as needed. No specific earnings or revenue guidance was provided. The board declared a $0.475-per-share dividend for the quarter ending March 31, 2024, a 2% increase from the prior-year comparable quarter.
Key disclosed risks include the pending merger and potential disruption or failure to close; rising interest costs on predominantly variable-rate debt (the filing estimates about $5.9 million of additional annual debt service per 1% rate increase on the year-end variable-rate balance); covenant limits; acquisition integration and goodwill valuation; equipment utilization, resale values and technology obsolescence; school-funding and seasonal demand; supplier concentration; and economic, regulatory, environmental, litigation and cybersecurity exposures. The company reported no material legal contingency, no 2023 rental-equipment impairment, and no cybersecurity threat known to have materially affected or likely to affect the company. A 2021 ransomware incident exposed some personal information but did not materially disrupt operations.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Vesta Modular’s controls from the year-end control assessment; Vesta represented approximately 13% of revenue and 14% of assets excluding goodwill and intangibles. The auditor identified valuation of Vesta’s acquired customer relationships as a critical audit matter.
Important facts for investors to verify
- Merger status, shareholder election and allocation mechanics, regulatory approvals, closing timing, and potential termination-fee or deal-failure consequences.
- Reconciliation of reported total-revenue growth: the 10-K gives $841.3 million for 2023 and $733.8 million for 2022, while its stated growth percentage does not reconcile to those amounts.
- Underlying cash generation and liquidity after the sharp decline in operating cash flow, increased borrowings, acquisition spending and unusually high tax payments.
- Trends in Portable Storage and TRS-RenTelco utilization and the effect of lower test-equipment rental demand on segment earnings.
- Variable-rate exposure, covenant headroom, and the company’s ability to fund fleet investment and dividends while managing debt.
- Integration results and valuation assumptions for Vesta Modular, including acquired customer relationships, goodwill and controls excluded from the year-end assessment.