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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 JUNE 30, 2000 COMMISSION FILE NUMBER 0-13292
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
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 [ ]
At August 3, 2000, 12,307,918 shares of Registrant's Common Stock were
outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
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REVENUES
Rental $ 22,847 $ 19,019 $ 44,228 $ 38,078
Rental Related Services 3,974 3,100 7,296 5,534
-------- -------- -------- --------
Rental Operations 26,821 22,119 51,524 $ 43,612
Sales 10,315 9,208 17,008 16,071
Other 233 232 480 450
-------- -------- -------- --------
Total Revenues 37,369 31,559 69,012 60,133
======== ======== ======== ========
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 5,745 4,753 11,101 9,419
Rental Related Services 2,324 1,825 4,056 3,163
Other 4,706 3,531 8,487 6,664
======== ======== ======== ========
Total Direct Costs of Rental Operations 12,775 10,109 23,644 19,246
Costs of Sales 6,915 6,187 11,736 11,047
-------- -------- -------- --------
Total Costs 19,690 16,296 35,380 30,293
-------- -------- -------- --------
Gross Margin 17,679 15,263 33,632 29,840
Selling and Administrative 4,787 3,989 9,482 8,188
-------- -------- -------- --------
Income from Operations 12,892 11,274 24,150 21,652
Interest 2,160 1,581 4,104 3,097
-------- -------- -------- --------
Income Before Provision for Income Taxes 10,732 9,693 20,046 18,555
Provision for Income Taxes 4,186 3,805 7,818 7,283
-------- -------- -------- --------
Income Before Minority Interest 6,546 5,888 12,228 11,272
Minority Interest in Income of Subsidiary 157 90 136 54
-------- -------- -------- --------
Income before Effect of Accounting Change 6,389 5,798 12,092 11,218
Cumulative Effect of Accounting Change,
net of tax benefit of $833 -- -- -- (1,367)
-------- -------- -------- --------
Net Income $ 6,389 $ 5,798 $ 12,092 $ 9,851
======== ======== ======== ========
Earnings Per Share:
Basic
Income before Cumulative Effect of Accounting Change $ 0.52 $ 0.43 $ 0.97 $ 0.82
Cumulative Effect of Accounting Change, net of tax -- -- -- (0.10)
-------- -------- -------- --------
Net Income $ 0.52 $ 0.43 $ 0.97 $ 0.72
======== ======== ======== ========
Diluted
Income before Cumulative Effect of Accounting Change $ 0.52 $ 0.43 $ 0.97 $ 0.81
Cumulative Effect of Accounting Change, net of tax -- -- -- (0.10)
-------- -------- -------- --------
$ 0.52 $ 0.43 $ 0.97 $ 0.71
======== ======== ======== ========
Shares Used in Per Share Calculation:
Basic 12,305 13,403 12,402 13,611
Diluted 12,393 13,568 12,494 13,780
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
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JUNE 30, DECEMBER 31,
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(in thousands) 2000 1999
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ASSETS
Cash $ 2,697 $ 490
Accounts Receivable, less allowance for doubtful
accounts of $650 in 2000 and 1999 27,154 25,095
Rental Equipment, at cost:
Relocatable Modular Offices 252,381 238,449
Electronic Test Instruments 81,626 72,832
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334,007 311,281
Less Accumulated Depreciation (99,175) (94,103)
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Rental Equipment, net 234,832 217,178
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Land, at cost 19,303 19,303
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $6,016
in 2000 and $5,116 in 1999 32,267 31,668
Prepaid Expenses and Other Assets 5,702 3,988
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Total Assets $ 321,955 $ 297,722
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 125,800 $ 110,300
Accounts Payable and Accrued Liabilities 29,862 24,811
Deferred Income 8,610 9,511
Minority Interest in Subsidiary 2,971 2,836
Deferred Income Taxes 54,979 54,861
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Total Liabilities 222,222 202,319
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Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000 shares
Outstanding -- 12,308 shares in 2000 and
12,546 shares in 1999 8,631 8,755
Retained Earnings 91,102 86,648
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Total Shareholders' Equity 99,733 95,403
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Total Liabilities and Shareholders' Equity $ 321,955 $ 297,722
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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SIX MONTHS ENDED JUNE 30,
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(In thousands) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 12,092 $ 9,851
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 12,001 10,215
Cumulative Effect of Accounting Change, net of tax -- 1,367
Gain on Sale of Rental Equipment (3,355) (2,674)
Change In:
Accounts Receivable (2,059) (1,545)
Prepaid Expenses and Other Assets (1,714) (74)
Accounts Payable and Accrued Liabilities 4,968 2,953
Deferred Income (901) (1,517)
Deferred Income Taxes 118 5,039
-------- --------
Net Cash Provided by Operating Activities 21,150 23,615
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment (34,234) (19,723)
Purchase of Land, Buildings, Land Improvements, Equipment & Furniture (1,497) (1,704)
Proceeds from Sale of Rental Equipment 8,833 7,209
-------- --------
Net Cash Used in Investing Activities (26,898) (14,218)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable 15,500 5,900
Net Proceeds from the Exercise of Stock Options 62 28
Repurchase of Common Stock (4,379) (12,584)
Payment of Dividends (3,228) (3,012)
-------- --------
Net Cash Provided by (Used in) Financing Activities 7,955 (9,668)
-------- --------
Net Increase (Decrease) in Cash 2,207 (271)
Cash Balance, Beginning of Period 490 857
-------- --------
Cash Balance, End of Period $ 2,697 $ 586
======== ========
Interest Paid During the Period $ 3,930 $ 2,990
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Income Taxes Paid During the Period $ 7,700 $ 2,244
======== ========
Dividends Declared but not yet Paid $ 1,723 $ 1,598
======== ========
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The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the six months ended June 30,
2000 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 six months ended June
30, 2000 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 June 2000, the Company extended its $5,000,000 line of credit related
to its cash management services from June 30, 2000 to August 31, 2000.
Management expects it will be able to further extend or renew this facility in
the future.
NOTE 3. BUSINESS SEGMENTS
The Company defines its business segments based on the nature of
operations for the purpose of reporting under Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). The Company's three reportable segments are Mobile
Modular Management Corporation (Modulars), McGrath-RenTelco (Electronics), and
Enviroplex. The operations of these three segments are described in the notes to
the consolidated financial statements included in the Company's latest Form
10-K. As a separate corporate entity, Enviroplex revenues and expenses are
separately maintained from Modulars and Electronics. Excluding interest expense,
allocations of revenues and expenses not directly associated with Modulars or
Electronics are generally allocated to these segments based on their pro-rata
share of direct revenues. Interest expense is allocated between Modulars and
Electronics based on their pro-rata share of average rental equipment, accounts
receivable and customer security deposits. The Company does not report total
assets by business segment. Summarized financial information for the six months
ended June 30, 2000 and 1999 for the Company's reportable segments is shown in
the following table:
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(in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED
----------- -------------- ---------- ------------
SIX MONTHS ENDED JUNE 30,
2000
Rental Operation Revenues $ 34,311 $ 17,213 $ -- $ 51,524
Sales and Other Revenues 7,036 5,347 5,105 17,488
Total Revenues 41,347 22,560 5,105 69,012
Depreciation on Rental Equipment 5,821 5,280 -- 11,101
Interest Expense (Income) 3,139 1,117 (152) 4,104
Income before Income Taxes 10,696 8,733 617 20,046
Rental Equipment Acquisitions 19,330 14,904 -- 34,234
Accounts Receivable, net (period end) 12,330 10,564 4,260 27,154
Rental Equipment, at cost (period end) 252,381 81,626 -- 334,007
1999
Rental Operation Revenues $ 30,508 $ 13,104 $ -- $ 43,612
Sales and Other Revenues 7,704 5,035 3,782 16,521
Total Revenues 38,212 18,139 3,782 60,133
Depreciation on Rental Equipment 5,096 4,323 -- 9,419
Interest Expense (Income) 2,381 806 (90) 3,097
Income before Income Taxes 11,700 6,532 323 18,555
Rental Equipment Acquisitions 13,771 5,952 -- 19,723
Accounts Receivable, net (period end) 11,648 8,391 3,317 23,356
Rental Equipment, at cost (period end) 227,105 67,534 -- 294,639
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(1) Operates under the trade name Mobile Modular Management Corporation
(2) Operates under the trade name McGrath-RenTelco
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains statements, which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places.
Such statements can be identified by the use of forward-looking terminology such
as "believes", "expects", "may", "estimates", "will", "should", "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from those in the forward-looking statements as a result of various factors.
These factors include the effectiveness of management's strategies and
decisions, general economic and business conditions, new or modified statutory
or regulatory requirements and changing prices and market conditions. This
report identifies other factors that could cause such differences. No assurance
can be given that these are all of the factors that could cause actual results
to vary materially from the forward-looking statements.
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
The Company's core rental businesses continue to grow steadily. Rental
revenues for the three and six months ended June 30, 2000 increased $3,828,000
(20%) and $6,150,000 (16%) over the comparative periods in 1999. Mobile Modular
Management Corporation ("MMMC") contributed $2,162,0000 and McGrath-RenTelco
contributed $3,988,000 of the six-month increase. MMMC's rental revenues
increased as a result of having an average of $19,056,000 more equipment on rent
compared to a year earlier even though the average monthly yield for all modular
equipment has declined from 1.91% in 1999 to 1.87% in 2000. At June 30, 2000,
modular utilization, excluding new equipment inventory, was 82.4% and average
utilization for the six months ended June 30, 2000 was 81.0% compared to 82.0%
for the same period in 1999. McGrath-RenTelco's rental revenue increase can be
attributed to strong communication equipment rental activity, which resulted in
an average of $11,074,000 more equipment on rent compared to a year earlier.
Additionally, the average monthly yield for all electronics equipment increased
from 3.20% in 1999 to 3.63% in 2000. At June 30, 2000, electronics utilization
was 65.4% and average utilization for the six months ended June 30, 2000 was
58.8% compared to 51.4% for the same period in 1999.
Rental related services revenues for the three and six months ended June
30, 2000 increased $874,000 (28%) and $1,762,000 (32%) over the comparative
periods in 1999. Two large projects with extensive modification and site related
work accounted for 42% of the six month increase. Gross margin on rental related
services for the six-month period increased from 43% in 1999 to 44% in 2000.
Sales for the three and six months ended June 30, 2000 increased
$1,107,000 (12%) and $937,000 (6%) as compared to the same periods in 1999 with
most of the sales growth from Enviroplex. Consolidated gross margin on sales was
consistent for each of the reported six-month periods at 31%. 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.
Enviroplex's backlog of orders as of June 30, 2000 and 1999 was
$12,326,000 and $6,808,000, respectively. Backlog is not significant in MMMC's
modular business or in McGrath-RenTelco's electronics business.
Depreciation on rental equipment for the three and six months ended June
30, 2000 increased $992,000 (21%) and $1,682,000 (18%) over the comparative
periods in 1999 due to higher amounts of rental equipment. For the six months
ended June 30, 2000, average modular rental equipment, at cost, increased
$23,709,000 (11%) and average electronics rental equipment, at cost, increased
$10,480,000 (16%) over the 1999 comparative period.
Other direct costs of rental operations for the three and six months ended
June 30, 2000 increased $1,175,000 (33%) and $1,823,000 (27%) over the same
periods in 1999 primarily due to an $832,000 write-off of rental equipment in
the second quarter identified as equipment which was beyond economic repair.
Additionally, higher maintenance and repair expenses of the modular fleet
contributed to these increases.
Selling and administrative expenses for the three and six months ended
June 30, 2000 increased $798,000 (20%) and $1,294,000 (16%) over the comparative
periods in 1999 primarily due to higher personnel and benefit costs, including
performance and incentive bonuses.
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Interest expense for the three and six months ended June 30, 2000
increased $579,000 (37%) and $1,007,000 (33%) over the 1999 comparative periods
as a result of a higher average borrowing level and a higher average interest
rate in 2000. The average debt increase resulted from rental equipment
purchases, repurchases of the Company's common stock and dividend payments made
during the last twelve months.
Income before provision for taxes for the three months ended June 30, 2000
increased $1,039,000 (11%) to $10,732,000 while net income increased $591,000
(10%) to $6,389,000 or $0.52 per diluted share over the comparative period in
1999. Income before provision for taxes for the six months ended June 30, 2000
increased $1,491,000 (8%) to $20,046,000 while net income increased $2,241,000
(23%) to $12,092,000 or $0.97 per diluted share over the comparative period in
1999. The higher percentage increase in net income is due to the impact of a
one-time charge of $1,367,000 recognized in the first quarter of 1999
representing the cumulative effect of an accounting change, net of tax.
Excluding the impact of this one-time charge, net income for the six months
ended June 30, 1999 was $11,218,000 or $0.81 per diluted share resulting in
comparative earnings increasing 8% and comparative earnings per share increasing
20% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company's operations produced a positive cash flow for the six months
ended June 30, 2000 of $21,150,000 as compared to $23,615,000 for the year
earlier period. During 2000, the primary uses of cash have been to purchase
additional rental inventory to satisfy customer requirements, to repurchase
shares of the Company's common stock on the open market, and to pay dividends to
the Company's shareholders.
The Company had total liabilities to equity ratios of 2.23 to 1 and 2.12
to 1 as of June 30, 2000 and December 31, 1999, respectively. The debt (notes
payable) to equity ratios were 1.26 to 1 and 1.16 to 1 as of June 30, 2000 and
December 31, 1999, respectively. Both ratios have increased since December 31,
1999 partially as a result of the Company's stock repurchase program.
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 six months ended June 30,
2000 the Company repurchased 265,360 shares of its outstanding common stock for
an aggregate purchase price of $4,379,000 (or an average price of $16.50 per
share). As of August 3, 2000, 975,500 shares remain authorized for repurchase.
The Company believes that its needs for working capital and capital
expenditures through 2000 and beyond will be adequately met by cash flow and
bank borrowings.
MARKET RISK
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company currently has no material derivative financial instruments
that expose the Company to significant market risk. The Company is exposed to
cash flow and fair value risk due to changes in interest rates with respect to
its notes payable. As of June 30, 2000, the Company believes that the carrying
amounts of its financial instruments (cash and notes payable) approximate fair
value.
YEAR 2000
This section contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See the statement at the beginning of this Item for cautionary
information with respect to such forward-looking statements.
The Company experienced no disruption in operations due to transition to
the Year 2000. A number of major system projects were initiated in 1997, 1998
and 1999 to upgrade core computer hardware, networking and software
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systems. These projects replaced existing systems as opposed to simply fixing
Year 2000 problems; they are now complete and operational. There are no known
trends or deferred capital spending related to Year 2000 issues that are likely
to affect the Company's results of operations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
McGrath RentCorp has been named along with a number of other companies as
a defendant in a lawsuit alleging a failure to warn about certain chemicals
associated with building materials used in portable classrooms in California.
The lawsuit was filed by As You Sow, a corporation that has served as a
plaintiff in numerous lawsuits alleging similar failures to warn. The Company
and its subsidiary Enviroplex, Inc. are two of nineteen named defendants, all of
whom are involved in the portable classroom industry in the State of California.
While the plaintiff alleges that materials used to construct portable classrooms
require certain warnings, there is no allegation that any individual has
suffered any injury or harm. The plaintiff does not allege that any particular
classroom leased, sold or manufactured by the Company or Enviroplex has exposed
anyone to any such chemicals; and the Company believes that in fact none of the
portable classrooms it leases or sells and none of the portable classrooms
manufactured by Enviroplex pose any health risk. The Company believes the
lawsuit is without merit, and it intends to defend against the suit vigorously.
The lawsuit was filed in the Superior Court of the State of California for
the County of San Francisco on July 7, 2000. The complaint seeks a court
injunction ordering the defendants to post warning signs in portable classrooms,
recovery of a fine of $2,500 for each failure to post a warning sign where
required, and recovery of monies the defendants may have made by selling or
leasing classrooms without appropriate warnings. Plaintiff also asks for payment
of attorneys' fees.
ITEM 3. OTHER INFORMATION
On May 31, 2000, the Company declared a quarterly dividend on its Common
Stock; the dividend was $0.14 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. No exhibits included.
(b) Reports on Form 8-K.
No reports on Form 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) 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 August 3, 2000 MCGRATH RENTCORP
By: /s/ Thomas J. Sauer
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Thomas J. Sauer
Vice President and Chief
Financial Officer (Chief
Accounting Officer)
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INDEX TO EXHIBITS
Number Description
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27 Financial Data Schedule