McGrath RentCorp — FY2017 Form 10-K
Business and period: This annual report covers the fiscal year ended December 31, 2017; quarterly figures below include Q4. McGrath RentCorp rents and sells modular buildings and portable storage, electronic test equipment, and liquid and solid containment tanks and boxes. Its four reportable segments are Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex. Rental operations, including rental-related services, generated about 80% of 2017 revenue.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $462.0 million | $424.1 million |
| Gross profit | $206.3 million; 44.7% margin | $184.2 million; 43.4% margin |
| Operating income | $94.7 million; 20.5% margin | $79.3 million; 18.7% margin |
| Income before tax | $83.5 million | $66.9 million |
| Net income / diluted EPS | $153.9 million / $6.34 | $38.3 million / $1.60 |
| Adjusted EBITDA | $178.3 million; 39% margin | $163.4 million; 39% margin |
| Cash from operating activities | $122.4 million | $140.7 million |
Important earnings qualification: 2017 net income includes a $102.8 million deferred-tax benefit from remeasuring deferred tax liabilities after the Tax Cuts and Jobs Act, partly offset by a $0.3 million provisional repatriation tax expense. The company reported a net Tax Act impact of approximately $102.5 million, or $4.23 per diluted share. The reported effective tax rate was an 84.4% benefit, versus a 42.9% tax provision in 2016; therefore, the net-income increase is not a comparable measure of underlying operating growth.
Q4 2017: Revenue was $122.2 million, gross profit $54.7 million, operating income $26.8 million, pretax income $23.9 million, and net income $117.7 million, or $4.82 diluted EPS. The unusually high quarterly net income chiefly reflects recognition of the Tax Act benefit.
Cash, debt, and liquidity: Year-end cash was $2.5 million. Notes payable totaled $303.4 million, down from $326.3 million; shareholders’ equity was $524.2 million, up from $394.3 million. The company had $183.5 million outstanding under unsecured revolving lines with stated total capacity of $432.0 million and $248.5 million of additional borrowing capacity. It reported compliance with debt covenants: leverage ratio 1.70 versus a 2.75 maximum, and fixed-charge coverage 6.82 versus a 2.50 minimum. Cash from operations fell 13%; rental-equipment purchases were $94.6 million, property and equipment purchases $14.6 million, and proceeds from used equipment sales $38.3 million. Cash dividends paid were $24.9 million.
Material changes versus 2016
- Revenue rose 9%, with rental revenue up 7% and equipment sales up 23%. Consolidated rental-related service revenue increased 3%.
- Gross profit increased 12%; selling and administrative expenses rose 6%. Interest expense fell 5% to $11.6 million, mainly due to lower average debt, partly offset by higher average interest rates.
- Mobile Modular revenue rose 10% and pretax income rose 17%; year-end utilization was 77.8%, versus 77.3%.
- TRS-RenTelco revenue was nearly flat, down 1%, while pretax income increased 23%; average utilization improved to 62.9% from 60.6%.
- Adler Tanks revenue rose 9% and pretax income increased 61%; average utilization recovered to 56.0% from 50.1%. Oil and gas exploration and production represented 9% of Adler’s 2017 rental revenue.
- Rental-equipment impairment was $1.6 million, relating to modular assets in Southern California deemed beyond economic repair. No impairment of goodwill or intangible assets was recorded.
Outlook, risks, and other notable items
- No specific earnings or revenue guidance is provided. Management said operating cash flow, used-equipment sale proceeds, and bank borrowing should meet working-capital and capital-expenditure needs through 2018 and beyond. In February 2018, the board declared a $0.34 quarterly dividend, 31% above the comparable prior-year quarter; continued dividends are subject to profitability and cash flow.
- Key demand risks include economic downturns, public-school funding and bond timing, educational policy changes, cyclical demand in test-equipment end markets, and oil-and-gas activity affecting Adler Tanks. Modular rentals and sales to K-12 public schools were 26% of consolidated rental and sales revenue in 2017.
- Other risks include competition and pricing pressure, equipment utilization and residual-value risk, technology obsolescence, supplier concentration and delivery delays, rising labor/material/fuel costs, environmental or product-liability claims, and seasonality. The company also identifies variable-rate borrowing exposure; it had $183.5 million of variable-rate debt and no interest-rate hedges at year-end.
- The Series A senior notes had $20.0 million outstanding and were due in April 2018. The company also had $40.0 million of Series B notes due in 2021 and $60.0 million of Series C notes due in 2022. The filing describes ordinary-course litigation and claims; management did not expect uninsured exposure to have a material adverse effect.
- Grant Thornton issued unqualified opinions on the financial statements and internal controls. Management also concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Most important facts for investors to verify
- Separate the $102.5 million Tax Act benefit from recurring earnings; review the final tax accounting and ongoing effective tax rate.
- Assess whether utilization and rental pricing gains, particularly at Adler Tanks and TRS-RenTelco, are sustained and translate into cash generation.
- Compare operating cash flow with rental-fleet investment, dividends, and debt repayment; track receivables and the decline in operating cash flow.
- Confirm repayment or refinancing of the $20.0 million Series A notes due in April 2018 and monitor variable-rate debt costs and covenant headroom.
- Monitor school funding and classroom demand, Southern California modular impairment and residual values, and Adler’s exposure to cyclical oil-and-gas markets.