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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, 1999
COMMISSION FILE NUMBER 0-13292
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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 [ ]
As of August 6, 1999, 13,319,588 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)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
(in thousands, except per share amounts) 1999 1998 1999 1998
------- ------- ------- -------
REVENUES
Rental $19,099 $17,340 $38,078 $34,321
Rental Related Services 3,100 2,727 5,534 4,950
------- ------- ------- -------
Rental Operations $22,199 20,067 $43,612 39,271
Sales 9,208 13,234 16,071 21,186
Other 232 174 450 368
------- ------- ------- -------
Total Revenues 31,639 33,475 60,133 60,825
------- ------- ------- -------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation 4,753 3,810 9,419 7,657
Rental Related Services 1,825 1,544 3,163 3,208
Other 3,531 3,535 6,664 6,560
------- ------- ------- -------
Total Direct Costs of Rental Operations 10,109 8,889 19,246 17,425
Costs of Sales 6,187 8,723 11,047 13,972
------- ------- ------- -------
Total Costs 16,296 17,612 30,293 31,397
------- ------- ------- -------
Gross Margin 15,343 15,863 29,840 29,428
Selling and Administrative 3,989 3,839 8,188 7,544
------- ------- ------- -------
Income from Operations 11,354 12,024 21,652 21,884
Interest 1,581 1,583 3,097 3,034
------- ------- ------- -------
Income Before Provision for Income Taxes 9,773 10,441 18,555 18,850
Provision for Income Taxes 3,836 4,114 7,283 7,427
------- ------- ------- -------
Income Before Minority Interest 5,937 6,327 11,272 11,423
Minority Interest in Income of Subsidiary 90 353 54 481
------- ------- ------- -------
Net Income $ 5,847 $ 5,974 $11,218 $10,942
======= ======= ======= =======
Earnings Per Share:
Basic $ 0.44 $ 0.42 $ 0.82 $ 0.77
======= ======= ======= =======
Diluted $ 0.43 $ 0.42 $ 0.81 $ 0.75
======= ======= ======= =======
Shares Used in Per Share Calculation:
Basic 13,403 14,122 13,611 14,296
======= ======= ======= =======
Diluted 13,568 14,309 13,780 14,497
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
JUNE 30, DECEMBER 31,
--------- ------------
(in thousands) 1999 1998
--------- ---------
ASSETS
Cash $ 586 $ 857
Accounts Receivable, less allowance for doubtful
accounts of $650 in 1999 and 1998 23,356 21,811
Rental Equipment, at cost:
Relocatable Modular Offices 227,105 216,414
Electronic Test Instruments 67,534 66,573
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$ 294,639 282,987
Less Accumulated Depreciation (88,842) (82,959)
--------- ---------
Rental Equipment, net 205,797 200,028
--------- ---------
Land, at cost 19,303 18,953
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $4,594
in 1999 and $ 3,858 in 1998 32,018 31,460
Prepaid Expenses and Other Assets 5,640 5,567
--------- ---------
Total Assets $ 286,700 $ 278,676
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable $ 102,900 $ 97,000
Accounts Payable and Accrued Liabilities 26,062 22,964
Deferred Income 4,058 5,574
Minority Interest in Subsidiary 2,638 2,584
Deferred Income Taxes 50,199 45,160
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Total Liabilities 185,857 173,282
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Shareholders' Equity:
Common Stock, no par value --
Authorized -- 40,000 shares
Outstanding -- 13,320 shares in 1999 and
13,970 shares in 1998 7,768 8,138
Retained Earnings 93,075 97,256
--------- ---------
Total Shareholders' Equity 100,843 105,394
--------- ---------
Total Liabilities and Shareholders' Equity $ 286,700 $ 278,676
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------
(In thousands) 1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,218 $ 10,942
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 10,215 8,379
Gain on Sale of Rental Equipment (2,674) (2,955)
Change In:
Accounts Receivable (1,545) (1,397)
Prepaid Expenses and Other Assets (74) 1,824
Accounts Payable and Accrued Liabilities 2,953 (10,064)
Deferred Income (1,517) (268)
Deferred Income Taxes 5,039 4,243
-------- --------
Net Cash Provided by Operating Activities 23,615 10,704
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment (19,723) (25,044)
Purchase of Land, Buildings, Land Improvements,
Equipment and Furniture (1,704) (1,996)
Proceeds from Sale of Rental Equipment 7,209 7,545
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Net Cash Used in Investing Activities (14,218) (19,495)
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CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings Under Notes Payable 5,900 21,500
Net Proceeds from the Exercise of Stock Options 28 215
Repurchase of Common Stock (12,583) (9,810)
Payment of Dividends (3,013) (2,576)
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Net Cash Provided by (Used in) Financing Activities (9,668) 9,329
-------- --------
Net Increase (Decrease) in Cash (271) 538
Cash Balance, Beginning of Period 857 538
-------- --------
Cash Balance, End of Period $ 586 $ 1,076
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Interest Paid During the Period $ 2,991 $ 2,996
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Income Taxes Paid During the Period $ 2,107 $ 3,103
======== ========
Dividends Declared but not yet Paid $ 1,598 $ 1,410
======== ========
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, 1999
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the six months ended June 30,
1999 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, 1999 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 1999, the Company amended its $75,000,000 unsecured line of
credit agreement with its banks to extend it to June 30, 2001 (other terms and
conditions remained the same). In addition, the Company amended its committed
line of credit related to its cash management services to increase it to
$4,000,000 and to extend it to June 30, 2000.
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, 1999 and 1998 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,
1999
Rental Operation Revenues $ 30,501 $ 13,111 $ -- $ 43,612
Sales and Other Revenues 7,704 5,035 3,782 16,521
Total Revenues 38,205 18,146 3,782 60,133
Depreciation on Rental Equipment 5,096 4,323 -- 9,419
Interest Expense 2,381 806 (90) 3,097
Income before Income Taxes 11,694 6,538 323 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
1998
Rental Operation Revenues $ 27,872 $ 11,399 -- $ 39,271
Sales and Other Revenues 6,403 4,599 10,552 21,554
Total Revenues 34,275 15,998 10,552 60,825
Depreciation on Rental Equipment 4,233 3,424 -- 7,657
Interest Expense 2,296 690 48 3,034
Income before Income Taxes 10,214 5,768 2,868 18,850
Rental Equipment Acquisitions 15,823 9,221 -- 25,044
Accounts Receivable, net (period end) 10,413 6,666 6,112 23,191
Rental Equipment, at cost (period end) 207,503 56,148 -- 263,651
- --------
(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, 1999 AND 1998
Rental revenues for the three and six months ended June 30, 1999
increased $1,759,000 (10%) and $3,757,000 (11%), respectively, over the
comparative periods in 1998. Mobile Modular Management Corporation ("MMMC")
contributed $2,018,000 and McGrath-RenTelco contributed $1,739,000 of the
six-month increase. MMMC's rental revenues increased as a result of having an
average of $19,177,000 more equipment on rent compared to a year earlier. In
1999, Modulars average monthly yield of 1.91% and average utilization of 82.00%,
exclusive of equipment not previously rented, was approximately the same as the
comparative period in 1998. McGrath-RenTelco's rental revenues increased as a
result of having an average of $13,717,000 more equipment on rent compared to a
year earlier offset by an average monthly yield decline from 3.53% in 1998 to
3.20% in 1999 primarily as a result of average utilization declining from 55.4%
in 1998 to 51.4% in 1999.
Rental related services revenues for the three and six months ended June
30, 1999 increased $373,000 (14%) and $584,000 (12%), respectively, as compared
to the same periods in 1998 as a result of higher volume of modular equipment
movements and site requirements in 1999. Gross margins on these services for the
six-month period increased from 35% in 1998 to 43% in 1999 due to the mix of
services performed in 1999 and approximate the 1998 annual gross margin.
Sales for the three and six months ended June 30, 1999 declined
$4,026,000 (30%) and $5,115,000 (24%), respectively, as compared to the same
periods in 1998 primarily due to a reduction in sales by Enviroplex of
manufactured classrooms to school districts from the high levels in 1998 caused
by California's Class Size Reduction Program. Further, management believes
schools have delayed placing orders until allocation of funds from the $9.2
billion California bond measure, which passed in November 1998 is determined.
Both MMMC and McGrath-RenTelco's sales volumes have increased over the 1998
comparative period. Consolidated gross margin on sales declined for the
six-month period from 34% in 1998 to 31% in 1999 due to lower margin classroom
projects sold during the first six-months of 1999. 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, 1999 and 1998 was
$6,808,000 and $7,788,000, 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, 1999 increased $943,000 (25%) and $1,762,000 (23%) over the comparative
periods in 1998 due to the additional rental equipment purchased during 1998.
Modular rental equipment, at cost, increased 9% and Electronics rental
equipment, at cost, increased 20% between June 30, 1998 and June 30, 1999.
Selling and administrative expenses for the three and six months ended
June 30, 1999 increased $150,000 (4%) and $644,000 (9%), respectively, over the
comparative periods in 1998. For the comparative six-month period
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the increase relates primarily to higher bad debt expense ($330,000) resulting
from an unusual write-off of $282,000 in the first quarter of 1999.
Additionally, higher depreciation expense for facilities and office equipment
($73,000) and advertising expenses ($60,000) for brochure development, web page
design, and yellow page advertising contributed to the increase in selling and
administrative expenses.
Interest expense for the six months ended June 30, 1999 increased
$63,000 (2%) over 1998 as a result of a higher average borrowing level offset by
a lower average interest rate in 1999. The debt increase funded part of the
significant rental equipment purchases made during the last twelve months.
Income before provision for taxes for the three and six months ended
June 30, 1999 decreased $668,000 (6%) and $295,000 (2%), respectively, while net
income decreased $127,000 (2%) and increased $276,000 (3%), respectively, from
the comparative periods in 1998. For the six-month comparative period, net
income increased while pretax income declined as a result of a lower effective
tax rate in 1999 of 39.25% compared to 39.40% in 1998 combined with a lower
contribution to earnings by the majority owned subsidiary, Enviroplex. Earnings
per share for the three and six months ending June 30, 1999 increased to $0.44
per share and $0.82 per share, respectively, on fewer outstanding shares.
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, 1999 of $23,615,000 as compared to $10,704,000 for the
year earlier period. During 1999, 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 1.84 to 1 and 1.64
to 1 as of June 30, 1999 and December 31, 1998, respectively. The debt (notes
payable) to equity ratios were 1.02 to 1 and 0.92 to 1 as of June 30, 1999 and
December 31, 1998, respectively.
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,
1999, the Company repurchased 686,900 shares of its outstanding common stock for
an aggregate purchase price of $12,583,313 (or an average price of $18.32 per
share). As of August 6, 1999, 740,500 shares remain authorized for repurchase.
The Company believes that its needs for working capital and capital
expenditures through 1999 and beyond will be met adequately 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, 1999, the Company believes that the carrying
amounts of its financial instruments (cash and notes payable) approximate fair
value.
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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 "Year 2000" issue is the result of computer programs using two
digits rather than four to determine the applicable year. This could affect
date-sensitive calculations that treat "00" as the year 1900 rather than the
year 2000. An assessment of the Company's exposure related to Year 2000 issues
has been completed and it is not expected to have a significant impact on the
Company.
The Company initiated a number of major system projects in 1997 and 1998
to upgrade core computer hardware, networking and software systems. These
projects are replacing existing systems as opposed to simply fixing Year 2000
problems. Most of these projects have been completed and are operational; the
balance is expected to be operational by September 1999. Capitalized
expenditures for this process totaled $1,600,000 for the period January 1, 1997
to June 30, 1999 for external labor, hardware and software costs. This amount
includes the cost of new software applications installed as a result of
strategic replacement projects. Prior to December 31, 1998, the Company did not
separately track the internal costs incurred related to Year 2000 issues or the
system conversions described above. Such internal costs are principally the
related payroll costs for its information systems personnel and are not
necessarily considered incremental costs to the Company. Effective January 1,
1999, the Company began to track these internal costs in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company estimates approximately
$400,000 for completion of its system upgrades for the remainder of 1999, of
which approximately $150,000 is expected to be related to internal costs. All
future costs will be funded from operating cash flow.
The Company does not significantly rely on "embedded technology" in its
critical processes. Embedded technology, which means microprocessor-controlled
devices as opposed to multi-purpose computers, does control some building and
security operations, such as electric power management, ventilation, and
building access. All building facilities are presently being evaluated, and the
Company expects all systems using embedded technology to be confirmed as Year
2000 ready by September, 1999. The electronics test and measurement rental
equipment has been evaluated, and it appears only minor quantities of equipment
pose a Year 2000 problem. If deemed important, some equipment may be upgraded.
The Company asks its customers to seek definitive Year 2000 compliance guidance
directly from the equipment manufacturers.
The Company cannot predict the likelihood of a significant disruption of
its customers' or suppliers' businesses or the economy as a whole, either of
which could have a material adverse impact on the Company. However, because the
markets for the Company's products are comprised of numerous customers with a
variety of sizes and levels of sophistication, the noncompliance with Year 2000
of any one would not be expected to have a detrimental impact on the Company's
financial position or results of operations. As a normal course of business, the
Company seeks to maintain multiple suppliers where possible. The Company
continues to communicate with vendors, customers, suppliers, service providers,
and government agencies to monitor their compliance.
The Company presently believes that its Year 2000 exposures will not
present a material adverse risk to the Company's future consolidated results of
operations, liquidity, and capital resources. However, if all systems are not
completed in a timely manner, or the level of timely compliance by key suppliers
or service providers is not sufficient, the Year 2000 issue could have a
material adverse effect on the Company's operations. This includes, but is not
limited to, delays of equipment shipments resulting in loss of revenues,
increased operating costs, loss of customers and suppliers, or other significant
disruptions to the Company's business.
The Company's contingency plan includes (1) all critical computer
operating and financial data will be backed-up and printed at key dates to
provide the basis, if necessary, for a manual system, (2) in the event a
significant number of customers are unable to issue payments, the Company has
sufficient liquidity with its existing line of credit to function adequately,
and (3) the Company continues to look for multiple suppliers and is also
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evaluating power and communication alternatives in the event of a loss of
service. The contingency plan is enhanced by the fact that existing management
has been in place since before computer systems were used.
PART II OTHER INFORMATION
ITEM 3. OTHER INFORMATION
On June 3, 1999, the Company declared a quarterly dividend on its Common
Stock; the dividend was $0.12 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 Amended and Restated Credit Agreement Filed herewith.
4.2 $4,000,000 Committed Credit Facility Filed herewith.
(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 6, 1999. MCGRATH RENTCORP
by: /s/ Thomas J. Sauer
---------------------------------
Thomas J. Sauer
Vice President and Chief
Financial Officer
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