McGrath RentCorp — FY2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021; it is not a standalone fourth-quarter report. McGrath RentCorp is a business-to-business equipment rental company with four reportable segments: Mobile Modular (modular buildings and portable storage), TRS-RenTelco (electronic test equipment), Adler Tanks (liquid and solid containment equipment), and Enviroplex (classroom manufacturing).
Financial performance and condition
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $616.8 million | $572.6 million |
| Gross profit / gross margin | $281.0 million / approximately 45.6% | $263.7 million / approximately 46.1% |
| Operating income | $132.4 million | $140.8 million |
| Net income | $89.7 million | $102.0 million |
| Diluted EPS | $3.66 | $4.16 |
| Operating cash flow | $195.7 million | $180.5 million |
| Adjusted EBITDA (non-GAAP) | $246.6 million | $241.0 million |
Revenue grew 8%, driven mainly by higher rental and rental-related service revenue. Net income fell about 12%, as selling and administrative expense rose 21% to $148.6 million, interest expense increased 19% to $10.5 million, and the effective tax rate rose to 26.3% from 22.8%. Operating income margin was approximately 21.5%, compared with 24.6% in 2020; net margin was approximately 14.5%, compared with 17.8%.
Cash, investment and debt. Cash at year-end was $1.5 million. Investing activities used $351.7 million, including $114.1 million of rental-equipment purchases and $292.2 million of cash paid for acquisitions; financing activities provided $156.2 million. Used-equipment sale proceeds were $57.3 million. The company reported $426.5 million of notes payable, including $266.5 million drawn on unsecured revolving lines with $432.0 million of aggregate capacity. It also had $60 million of Series C notes due in 2022, $60 million of Series E notes due in 2026 and $40 million of Series D notes due in 2028. The company was in compliance with its financial covenants; leverage was 1.73x against a 2.75x maximum, and fixed-charge coverage was 4.08x against a 2.50x minimum.
Cash dividends paid were $42.2 million; dividends declared were $1.74 per share for 2021. In February 2022, the company announced a $0.455-per-share dividend for the quarter ending March 31, 2022, 5% above the prior-year comparable quarter.
Material changes versus FY2020
- Mobile Modular: Revenue increased 13% to $363.3 million. Rental revenue rose 17%, supported by acquired businesses, 11% more average rental equipment on rent and 6% higher average monthly rental rates. Pre-tax income fell 6% to $77.0 million, reflecting substantially higher selling and administrative expenses; rental gross margin declined to 60% from 63%.
- TRS-RenTelco: Revenue was nearly flat at $140.2 million. Rental revenue increased 4%, offset by a 16% decrease in equipment sales; pre-tax income declined 2% to $33.8 million. Average utilization was 67.0%, versus 66.2%.
- Adler Tanks: Revenue increased 6% to $82.2 million, but pre-tax income fell 18% to $5.9 million. Higher rental-related operating costs reduced rental gross margin to 50% from 53%. Year-end utilization improved to 47.6% from 39.8%.
- Enviroplex: Gross profit declined $3.0 million, or 24%, primarily due to lower sales and a lower gross margin.
- Acquisitions expanded Mobile Modular: Design Space for $267.3 million (May), Kitchens To Go for $18.3 million (April), and Titan Storage Containers for approximately $6.9 million (December, including a remaining seller liability).
Outlook, commentary, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management said operating cash flow, used-equipment sale proceeds and borrowing capacity should meet working-capital and capital-expenditure needs, while noting uncertainty about the duration and effects of COVID-19.
- Management reported no significant FY2021 financial impact from COVID-19, but identified possible project and supply-chain delays, higher materials and labor costs, early equipment returns, lower demand and customer payment delays or defaults.
- Other material risks include school-facility funding and policy changes affecting classroom demand; cyclical end markets and low utilization, particularly for containment equipment; rental-equipment residual values and technological obsolescence; supplier concentration (one manufacturer supplied 41% of Mobile Modular’s modular units purchased in 2021); and competition.
- Most debt is variable-rate. The filing estimates annual debt service would rise approximately $2.7 million for each 1 percentage-point increase in average rates, based on $266.5 million of variable-rate debt at year-end. The company had no interest-rate hedges.
- The company disclosed an immaterial 2021 ransomware incident: some personal information was copied, but the attack did not materially disrupt operations or affect financial performance. It also warned of future cybersecurity and privacy risks.
- No rental-asset impairments were recorded in 2021, 2020 or 2019. Management stated pending routine claims and litigation were not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control; controls were assessed as effective.
Important facts for investors to verify
- Whether acquisition-driven Mobile Modular growth translates into sustained earnings after integration costs and increased amortization.
- Whether rental utilization, rental rates and margins improve or weaken by segment, especially Adler Tanks’ utilization and TRS-RenTelco’s year-end utilization.
- The company’s refinancing or repayment plan for the $60 million Series C notes due November 2022, and its ongoing access to revolving credit.
- Whether cash generation covers rental-fleet investment, dividends and future acquisitions without materially increasing leverage.
- How supply-chain constraints, labor and materials inflation, school funding, COVID-19 effects and interest-rate changes affect demand, costs and covenant headroom.
- Whether acquired customer relationships, goodwill and rental-equipment valuations remain supportable; the Design Space customer-relationship valuation was identified as a critical audit matter.