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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-13292
----------------
McGRATH---------------
MCGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
CALIFORNIA 94-2579843
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5700 LAS POSITAS ROAD, LIVERMORE, CA 94550
(Address of principal executive offices)
Registrant's telephone number: (925) 606-9200
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No.
----- -----[X] No [ ]
At May 11,November 5, 1998, 14,144,73014,000,862 shares of Registrant's
Common Stock were outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
McGRATHSTATEMENTS
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
--------------------------------NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
---------------------------- ----------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Rental $16,980,893 $14,327,001$ 18,385,026 $ 16,067,741 $ 52,705,894 $ 45,138,552
Rental Related Services 2,222,709 2,640,842
----------- -----------4,061,774 3,357,762 9,011,659 8,131,644
------------ ------------ ------------ ------------
Rental Operations 19,203,602 16,967,84322,446,800 19,425,503 61,717,553 53,270,196
Sales 7,952,147 9,601,49721,787,334 25,675,496 42,973,129 51,621,927
Other 194,392 272,170
----------- -----------244,360 251,130 612,450 760,524
------------ ------------ ------------ ------------
Total Revenues 27,350,141 26,841,510
----------- -----------44,478,494 45,352,129 105,303,132 105,652,647
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 3,846,691 3,423,4414,617,674 3,649,571 12,274,597 10,537,344
Rental Related Services 1,664,022 1,923,9731,942,766 1,638,057 5,151,252 4,875,059
Other 3,025,471 2,641,926
----------- -----------3,655,957 2,649,772 10,216,041 7,494,923
------------ ------------ ------------ ------------
Total Direct Costs of Rental Operations 8,536,184 7,989,34010,216,397 7,937,400 27,641,890 22,907,326
Costs of Sales 5,249,373 6,261,196
----------- -----------15,580,968 17,878,601 29,553,147 35,533,649
------------ ------------ ------------ ------------
Total Costs 13,785,557 14,250,536
----------- -----------25,797,365 25,816,001 57,195,037 58,440,975
------------ ------------ ------------ ------------
Gross Margin 13,564,584 12,590,97418,681,129 19,536,128 48,108,095 47,211,672
Selling and Administrative 3,704,663 3,357,564
----------- -----------4,560,456 4,962,291 12,103,999 12,008,656
------------ ------------ ------------ ------------
Income from Operations 9,859,921 9,233,41014,120,673 14,573,837 36,004,096 35,203,016
Interest 1,450,846 872,885
----------- -----------1,685,905 1,042,716 4,719,635 2,905,047
------------ ------------ ------------ ------------
Income Before Provision for Income Taxes 8,409,075 8,360,52512,434,768 13,531,121 31,284,461 32,297,969
Provision for Income Taxes 3,313,176 3,307,367
----------- -----------4,899,299 5,445,015 12,326,078 12,796,659
------------ ------------ ------------ ------------
Income Before Minority Interest 5,095,899 5,053,1587,535,469 8,086,106 18,958,383 19,501,310
Minority Interest in Income of Subsidiary 128,200 133,670
----------- -----------447,125 383,752 928,004 797,821
------------ ------------ ------------ ------------
Net Income $ 4,967,6997,088,344 $ 4,919,488
=========== ===========7,702,354 $ 18,030,379 $ 18,703,489
============ ============ ============ ============
Earnings Per Share:
Basic $ 0.34 0.33
=========== ===========0.50 $ 0.51 $ 1.27 $ 1.25
============ ============ ============ ============
Diluted $ 0.34 0.33
=========== ===========0.50 $ 0.51 $ 1.25 $ 1.23
============ ============ ============ ============
Shares Used in Per Share Calculation:
Basic 14,435,790 14,976,51814,062,112 15,015,918 14,217,977 15,001,462
============ ============ ============ ============
Diluted 14,634,560 15,123,004
- ---------------------------------------------------------------------------------------14,231,078 15,242,764 14,405,525 15,192,887
============ ============ ============ ============
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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McGRATHMCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
- ---------------------------------------------------------------------------------------------
MARCH 31,------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
---------------------------------------------- -------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 1,442,839546,775 $ 537,875
Accounts Receivable, less allowance for doubtful
accounts of $650,000 in 1998 and 1997 20,323,91126,720,545 21,794,028
Rental Equipment, at cost:
Relocatable Modular Offices 200,067,260209,507,315 196,132,895
Electronic Test Instruments 52,341,46060,747,136 50,350,777
------------- -------------
252,408,720270,254,451 246,483,672
Less Accumulated Depreciation (74,405,307)(79,793,338) (72,398,374)
------------- -------------
Rental Equipment, net 178,003,413190,461,113 174,085,298
------------- -------------
Land, at cost 20,495,975 20,495,975
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $3,500,913$3,983,826
in 1998 and $3,177,213 in 1997 29,350,04331,566,195 28,921,513
Prepaid Expenses and Other Assets 7,351,8735,140,947 6,557,534
------------- -------------
Total Assets $ 256,968,054274,931,550 $ 252,392,223
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 97,746,987100,000,000 $ 82,000,000
Accounts Payable and Accrued Liabilities 16,535,97621,312,813 27,047,173
Deferred Income 7,900,2797,347,482 6,928,532
Minority Interest in Subsidiary 1,651,2582,507,403 1,523,058
Deferred Income Taxes 39,546,91242,714,887 36,247,956
------------- -------------
Total Liabilities 163,381,412173,882,585 153,746,719
------------- -------------
Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000,000 shares
Outstanding -- 14,107,89014,000,862 shares in 1998 and
14,521,790 shares in 1997 7,697,5317,648,364 7,756,054
Retained Earnings 85,889,11293,400,601 90,889,450
------------- -------------
Total Shareholders' Equity 93,586,643101,048,965 98,645,504
------------- -------------
Total Liabilities and Shareholders' Equity $ 256,968,055274,931,550 $ 252,392,223
=============
============= - ---------------------------------------------------------------------------------------------=============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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McGRATHMCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- -------------------------------------------------------------------------------------------
THREE--------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31,
----------------------------------SEPTEMBER 30,
-------------------------------
1998 1997
------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,967,69918,030,379 $ 4,919,48818,703,489
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 4,201,698 3,657,61413,380,816 11,191,451
Gain on Sale of Rental Equipment (1,390,658) (1,513,842)(4,396,941) (5,453,700)
Proceeds from Sale of Rental Equipment 3,496,525 3,542,73511,247,675 14,756,222
Change In:
Accounts Receivable 1,470,117 2,224,004(4,926,517) (5,929,848)
Prepaid Expenses and Other Assets (794,339) (1,642,300)1,416,587 (4,097,182)
Accounts Payable and Accrued Liabilities (10,635,727) 1,364,540(4,988,358) 7,313,283
Deferred Income 971,747 (213,330)418,950 2,086,436
Deferred Income Taxes 3,298,956 2,524,5536,466,931 757,389
------------ ------------
Net Cash Provided by Operating Activities 5,586,018 14,863,46236,649,522 39,327,499
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment (9,870,673) (9,980,850)(35,501,146) (41,240,592)
Purchase of Land, Buildings, Land Improvements,
Equipment and Furniture (783,537) (1,782,391)(3,750,901) (6,498,689)
------------ ------------
Net Cash Used in Investing Activities (10,654,210) (11,763,241)(39,252,047) (47,739,281)
------------ ------------
Cash Flow from Financing Activities:CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings Under Lines of Credit 15,746,987 (1,850,000)18,000,000 11,950,000
Net Proceeds from the Exercise of Stock Options 183,175 478,057214,632 556,894
Repurchase of Common Stock (8,795,263)(11,617,155) --
Payment of Dividends (1,161,743) (1,037,814)(3,986,052) (3,439,447)
------------ ------------
Net Cash Provided (Used) by Financing
Activities 5,973,156 (2,409,757)2,611,425 9,067,447
------------ ------------
Net Increase in Cash 904,964 690,4648,900 655,665
Cash Balance, Beginning of Period 537,875 686,333
------------ ------------
Cash Balance, End of Period $ 1,442,839546,775 $ 1,376,7971,341,998
============ ============
Interest Paid During the Period $ 3,302,3804,442,593 $ 892,8672,859,790
============ ============
Income Taxes Paid During the Period $ 14,2205,523,542 $ 731,2008,274,674
============ ============
Dividends Declared but not yet Paid $ 1,414,4731,400,086 $ 1,200,681
============1,201,753
============ - -------------------------------------------------------------------------------------------============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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McGRATHMCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,SEPTEMBER 30, 1998
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the threenine months ended
March
31,September 30, 1998 has not been audited, but in the opinion of management, all
adjustments (consisting of only normal recurring accruals, consolidation and
eliminating entries) necessary for the fair presentation of the consolidated
results of operations, financial position, and cash flows of McGrath RentCorp
(the "Company") have been made. The consolidated results of the threenine months
ended March 31,September 30, 1998 should not be considered as necessarily indicative of
the consolidated results for the entire year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest Form 10-K.
NOTE 2. NOTES PAYABLE
In AprilOn July 31, 1998, the Company entered intorestructured a portion of its debt to a
fixed rate by completing a private placement of $40,000,000 of 6.44% senior
notes due in 2005 through BancAmerica Robertson Stephens. Interest on the notes
is due semi-annually in arrears and the principal is due in 5 equal installments
commencing on July 31, 2001. Upon completion of the private placement, the
Company repaid a $15,000,000 interim loan agreement (the
"Agreement") with one of its banksbanks. The remainder
of the proceeds was applied to reduce the existing revolver.
In August 1998, the Company reduced its capacity to borrow $15,000,000 onunder its
unsecured line of credit with its banks from $90,000,000 to $75,000,000. All
other terms and conditions under this facility remained the same. In addition,
the Company extended the expiration date of its $3,000,000 committed line of
credit facility related to its cash management services to June 30, 1999 and
allowed the $10,000,000 of uncommitted optional facilities to expire.
NOTE 3. STOCK OPTIONS
The Company adopted a short-term basis.1998 Stock Option Plan (the "1998 Plan"),
effective March 9, 1998, under which 2,000,000 shares are reserved for the grant
of options to purchase common stock to directors, officers, key employees and
advisors of the Company. The loan is required to be repaidplan provides for the award of options at a price
not less than the fair market value of the stock as determined by the Board of
Directors on the earlierdate the options are granted. Under the 1998 Plan, 242,000
options have been granted with exercise prices ranging from $20.25 to $20.81. Of
the 242,000 options granted, key employees received 192,000. The options become
exercisable during term of July 31, 1998 or the funding
date of a contemplated private offering of debt securities. The Agreement
requires the Company to pay interest at prime minus one-half percent or, at the
Company's election, other rate options available under the Agreement.
4related option agreement and expire ten years
after grant.
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 1998 AND 1997
Rental revenues for the three and nine months ended March 31,September 30, 1998
increased $2,653,892 (19%$2,317,285 (14%) and $7,567,342 (17%), respectively, over the
comparative periodperiods in 1997, with1997. Of the nine-month increase, Mobile Modular
Management Corporation ("MMMC") contributing $1,922,046contributed $5,046,487 (67%) increasing from
$30,311,031 to $35,357,518 and electronics
contributing $731,846.ELECTRONICS contributed $2,520,855 (33%)
increasing from $14,827,521 to $17,348,376. The significant rental revenue
increase by MMMC resulted from the large quantities of equipment shipped to
schools in the latter part of 1997.1997 and the ELECTRONICS rental revenue increase
resulted in part from market penetration by telemarketing and regional sales
efforts on the East Coast. As of September 30, 1998, rental equipment on rent
increased for MMMC by $19,224,379 and for ELECTRONICS increased by $4,961,500
compared to a year earlier. Average utilization for electronicsELECTRONICS during the first
quarternine months increased from 53.9%54.7% in 1997 to 56.4%55.0% in 1998 and declinedincreased for
modulars from 79.3%81.0% in 1997 to 76.6%82.7% in 1998. Modular utilization declined as a result of a substantial
increase in the level of inventory through the addition1998, exclusive of new equipment.equipment not
previously rented.
Rental related services revenues for the first quarter ofthree and nine months ended
September 30, 1998 declined
$418,133 (16%increased $704,102 (21%) and $880,015 (11%), respectively, as
compared to the same periodperiods in 1997 as a result of less
shipments and site requirements in 1998.1997. Gross margins declinedincreased from 27%40% to 43% in
1997
to 25% in 1998.1998 for the comparative nine-month period.
Sales for the three and nine months ended March 31,September 30, 1998 declined
$1,649,350$3,888,162 (15%) and $8,648,798 (17%), respectively, as compared to the same
periodperiods in 1997 due to fewer new equipmentclassroom sales to school districts by MMMC.
Enviroplex and ELECTRONICS sales volumes increased 9% and 6%, respectively, over
the 1997 comparative nine-month period which partially offset MMMC's expected
decline in new classroom sales. (See 1997 Form 10-K Management Discussion and
Analysis for Fiscal Years 1997 and 1996.) Consolidated gross margin on sales
remained constant at 31% for 1997 and 1998. The single largest sale was for
$6,109,692 by MMMC to a school districts. Electronicsdistrict during the third quarter of 1998
consisting of new classrooms of which 69% of the total contract was the
demolition of existing buildings, site improvements and Enviroplex sales volumes were
consistentinstallation of the new
classrooms. This sale was unique as to the volume of new classrooms sold in
conjunction with the 1997 comparative period. However, Enviroplex's deferred
income increased $1,614,262 as it experienced delaysamount of site work performed and is not likely to be
repeated in shipment to school
districts as a result of the inclement weather in California. Gross margin on
sales declined slightly for the quarter from 35% in 1997 to 34% in 1998.future. Sales continue to occur routinely as a normal part of
the Company's rental business; however, these sales can fluctuate from quarter
to quarter and year to year depending on customer demands and requirements.
Depreciation on rental equipment for the three and nine months ended
March 31,September 30, 1998 increased $423,250 (12%$968,103 (27%) and $1,737,253 (16%) over the
comparative periodperiods in 1997 dueas a result of additions to the additional rental equipment purchased during 1997.of
both modulars and electronics. Rental equipment, at cost, increased 21%18% between
March 31,September 30, 1997 and March 31,September 30, 1998. Other direct costs of rental
operations for the three and nine months ended September 30, 1998 increased
$383,545 (15%$1,006,185 (38%) and $2,721,118 (36%) over the first quartercomparative periods in 1997. This
increase1997
primarily resulted from moredue to increased maintenance and repair expenses of the modular fleet.
Additionally, during 1997, a significant number of customers requesting that certain lease
costs be chargedopted to theminclude
upfront charges in the rental rate rather than as a one-time charge resulting in higher amortization expense of
these related upfront costs over the lease costs ($256,748) for items
recoveredterm in the customer's rental rate.subsequent periods.
Selling and administrative expenses increased $347,099 (10%) for the three and nine months ended
March 31,September 30, 1998 decreased $401,835 (8%) and increased $95,343 (1%),
respectively, compared to the same periods in 1997. Even though selling and
administrative expenses for the nine month comparative period in 1997were approximately
the same, the three-month comparative period declined by 8% primarily due to
higher expenses for facility and equipment depreciation ($174,819) and personnel
costs. Personneland benefit costs ($176,883) offset by reduced performance and incentive bonuses
($528,384), fewer bad debt writeoffs ($114,023), and eliminated facility rental,
cleanup and moving expenses ($114,215).
Interest expense for the three and nine months ended September 30, 1998
increased $318,095$643,189 (62%) and $1,814,588 (62%) over the comparative quarterperiods in 1997 resulting from additional staff for sales and support, including
the addition of electronics sales people on the East Coast.
Interest expense increased $577,961 (66%) in 1998 over
1997 as a result of a corresponding 66% higher average borrowing
level6
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levels in 1998. The debt increase funded part of the significantwas primarily due to rental equipment
purchases made during 1997.
Income before provision1997 and 1998.
Net income for taxes, net incomethe three and basic earnings per
share increasednine months ended September 30, 1998
decreased slightly in 1998 as compared to 1997 and amounted to $8,409,075,
$4,967,699 and $0.34the comparative periods in 1997. Earnings per
share respectively.decreased slightly for the three-month and increased for the nine-month
periods in 1998 to $0.50 per share and $1.27 per share, respectively, due to
fewer shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a total liabilities to equity ratio of 1.751.72 to 1 and 1.56
to 1 as of March 31,September 30, 1998 and December 31, 1997, respectively. The debt
(notes payable) to equity ratio was 1.040.99 to 1 and 0.83 to 1 as of March 31,September 30,
1998 and December 31, 1997, respectively.
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The Company has made purchases of shares of its common stock from time
to time in the over-the-counter market (NASDAQ) and/or through privately
negotiated, large block transactions under an authorization of the Board of
Directors. Shares repurchased by the Company are cancelled and returned to the
status of authorized but unissued stock. During the three months ended March 31,As of November 5, 1998, the Company has
repurchased 439,450587,050 shares of its outstanding common stock during the year for
an aggregate purchase price of $8,795,263$11,617,155 (or an average price of $20.01$19.79 per
share). On March 26,As of November 5, 1998, the Board of Directors852,400 shares remain authorized the repurchase of
up to an additional 1,000,000 shares of its common stock; no repurchases have
been made to date under this new authorization.for repurchase.
The Company believes that its needs for working capital and capital
expenditures through 1998 and beyond will adequately be met by cash flow and
bank borrowings.
PART II OTHER INFORMATION
ITEM 3. OTHER INFORMATION
On March 26,September 18, 1998, the Company declared a quarterly dividend on its
Common Stock; the dividend was $0.10 per share. Subject to its continued
profitability and favorable cash flow, the Company intends to continue the
payment of quarterly dividends.
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
4.1 Third Amendment toFacility Reduction Letter for the Restated Credit
Agreement Filed herewith.
4.2 $15,000,000 Short-Term Business LoanSecond Extension to the $3,000,000 Committed
Credit Facility Filed herewith.
4.3 Note Purchase Agreement Filed herewith.
27.110.1 The 1998 Stock Option Plan Filed herewith.
10.2 Examplar of Incentive Stock Option for
Employees Under the 1998 Stock Option Plan Filed herewith.
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NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
10.3 Examplar of Non-Qualified Stock Option for
Directors under the 1998 Stock Option Plan Filed herewith.
10.4 Schedule of Options Granted to Members of
the Board of Directors Filed herewith.
10.5 Examplar Form of Indemnification Agreement Filed herewith.
27 Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K.
No reports on formForm 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D)15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: May 11,November 5, 1998 MCGRATH RENTCORP
by: /s/ Delight Saxton
---------------------------------------------------------
Delight Saxton
Senior Vice President, Chief
Financial Officer (Chief Accounting
Officer) and Secretary
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89
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
4.1 Third Amendment toFacility Reduction Letter for the Restated Credit
Agreement Filed herewith.
4.2 $15,000,000 Short-Term Business LoanSecond Extension to the $3,000,000 Committed
Credit Facility Filed herewith.
4.3 Note Purchase Agreement 27.1 Financial Data ScheduleFiled herewith.
10.1 The 1998 Stock Option Plan Filed herewith.
10.2 Examplar of Incentive Stock Option for
Employees Under the 1998 Stock Option Plan Filed herewith.
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10
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
10.3 Examplar of Non-Qualified Stock Option for
Directors under the 1998 Stock Option Plan Filed herewith.
10.4 Schedule of Options Granted to Members of
the Board of Directors Filed herewith.
10.5 Examplar Form of Indemnification Agreement Filed herewith.
27 Financial Data Schedule Filed herewith.
10