FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission File No. 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.)
2500 GRANT AVENUE
SAN LORENZO, CALIFORNIA 94580
(Address of principal executive offices)
Registrant's telephone number: (510) 276-2626
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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
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At July 29, 1997, 15,011,918 shares of Registrant's Common Stock were
outstanding.
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McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES:
Rental operations-
Rental $14,743,810 $11,694,056 $29,070,811 $23,251,854
Rental related services 2,370,264 2,093,788 5,283,276 3,752,174
----------- ----------- ----------- -----------
17,114,074 13,787,844 34,354,087 27,004,028
Sales and related services 16,344,934 5,853,535 25,946,431 10,342,702
----------- ----------- ----------- -----------
Total revenues 33,459,008 19,641,379 60,300,518 37,346,730
----------- ----------- ----------- -----------
COSTS & EXPENSES:
Direct costs of rental operations-
Depreciation 3,464,332 3,075,168 6,887,773 6,080,821
Rental related services 1,577,558 1,152,907 3,615,051 2,179,497
Other direct rental costs 1,938,696 1,597,978 4,467,102 3,559,334
----------- ----------- ----------- -----------
6,980,586 5,826,053 14,969,926 11,819,652
Cost of sales and related services 11,393,852 4,092,606 17,655,048 7,193,431
----------- ----------- ----------- -----------
18,374,438 9,918,659 32,624,974 19,013,083
----------- ----------- ----------- -----------
Gross margin 15,084,570 9,722,720 27,675,544 18,333,647
Selling and administrative expenses 3,997,950 2,969,553 7,541,094 5,846,800
----------- ----------- ----------- -----------
Income from operations 11,086,620 6,753,167 20,134,450 12,486,847
Interest expense 989,446 682,152 1,862,331 1,317,426
----------- ----------- ----------- -----------
Income before provision
for income taxes 10,097,174 6,071,015 18,272,119 11,169,421
Provision for income taxes 4,015,527 2,418,925 7,270,984 4,443,754
----------- ----------- ----------- -----------
Net income $ 6,081,647 $ 3,652,090 $11,001,135 $ 6,725,667
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share $ 0.40 $ 0.24 $ 0.73 $ 0.43
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
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ASSETS
Cash $ 3,092,435 $ 686,333
Accounts receivable, less allowance for
doubtful accounts of $617,000 in 1997
and $605,000 in 1996 23,841,995 19,919,954
Rental equipment, at cost:
Relocatable modular offices 169,251,231 158,376,950
Electronic test instruments 45,531,470 43,335,413
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214,782,701 201,712,363
Less - Accumulated depreciation (68,439,248) (64,419,888)
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146,343,453 137,292,475
Land 20,167,647 20,167,647
Improvements, furniture and equipment, at cost,
less accumulated depreciation of $2,758,707
in 1997 and $3,376,803 in 1996 23,538,807 19,572,015
Prepaid expenses and other assets 5,955,606 2,396,935
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$222,939,943 $200,035,359
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 65,000,000 $ 53,850,000
Accounts payable and accrued liabilities 16,015,321 15,280,543
Deferred income 6,947,401 5,226,803
Deferred income taxes 37,055,547 36,869,734
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Total liabilities 125,018,269 111,227,080
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Shareholders' equity:
Common stock, no par value -
Authorized - 4O,OOO,OOO shares
Outstanding - 15,011,918 shares in 1997
and 15,386,630 in 1996 7,675,062 7,161,168
Retained earnings 90,246,612 81,647,111
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Total shareholders' equity 97,921,674 88,808,279
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$222,939,943 $200,035,359
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The accompanying notes are an integral part of these financial statements.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash
(Unaudited)
Six months ended
June 30,
-------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net income $ 11,001,135 $ 6,725,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,332,307 6,459,352
Gain on sale of rental equipment (2,885,946) (2,242,807)
Change in:
Accounts receivable (3,922,041) (1,590,440)
Prepaids and other assets (3,558,671) (322,095)
Accounts payable and accrued liabilities 571,639 73,524
Deferred income 1,720,598 (1,294,225)
Deferred income taxes 185,813 1,395,404
------------ ------------
Net cash provided by operating activities 10,444,834 9,204,380
------------ ------------
Cash flows from investing activities:
Purchase of rental equipment (20,630,573) (10,345,648)
Purchase of improvements, furniture and equipment (4,411,326) (2,108,148)
Proceeds from sale of rental equipment 7,577,768 6,314,234
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Net cash used in investing activities (17,464,131) (6,139,562)
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Cash flows from financing activities:
Net borrowings 11,150,000 5,295,000
Payment of dividends (2,238,495) (1,997,348)
Repurchase of Common Stock --- (6,276,090)
Proceeds from the exercise of stock options 513,894 268,656
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Net cash used in financing activities 9,425,399 (2,709,782)
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Net increase (decrease) in cash 2,406,102 355,036
Cash balance, beginning of period 686,333 221,075
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Cash balance, end of period $ 3,092,435 $ 576,111
------------ ------------
------------ ------------
Interest paid during period $ 1,850,899 $ 1,307,290
------------ ------------
------------ ------------
Income taxes paid during period $ 7,085,171 $ 3,096,306
------------ ------------
------------ ------------
Dividends declared but not yet paid $ 1,200,953 $ 1,050,787
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
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1. The consolidated financial information for the six months ended June 30,
1997 has not been audited, but in the opinion of management, all adjustments
(consisting only of 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, 1997 should not be considered as necessarily indicative of the
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.
2. On March 27, 1997, the Company's Board of Directors declared a 2-for-1
stock split to be effective April 15, 1997. All share and per share
calculations retroactively reflect the stock split. The number of outstanding
shares and equivalent shares used in the earnings per common share
calculations were as follows:
Primary Fully Diluted
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Three months ended: June 30, 1997 15,201,573 15,231,979
June 30, 1996 15,326,982 15,343,364
Six months ended: June 30, 1997 15,163,548 15,214,979
June 30, 1996 15,541,480 15,568,044
3. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share", which modifies the
way in which earnings per share (EPS) is calculated and disclosed effective
for periods ending after December 15, 1997. Primary EPS will be replaced by
basic EPS which is computed by dividing reported net income by the weighted
average number of shares of common stock outstanding during the period. Fully
diluted EPS will be replaced with diluted EPS which is computed by dividing
reported net income by the weighted average number of shares of common stock
and dilutive common equivalent shares outstanding during the period. Common
stock equivalents result from dilutive stock options computed using the
treasury stock method with the average share price for the reported period.
When implemented, the effect of this accounting change on previously reported
EPS data is not significant.
4. In July 1997, the Company entered into a new credit agreement amending
and restating it's unsecured line of credit agreement (the "Agreement") with
its banks which expires June 30, 1999 and permits it to borrow up to
$70,000,000. The Agreement requires the Company to pay interest at prime or,
at the Company's election, other rate options available under the Agreement.
In addition, the Company pays a commitment fee on the daily average unused
portion of the available line. Among other terms, the
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
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Agreement requires (i) the Company to maintain shareholders' equity of not
less than $77,800,000 plus 50% of all net income generated subsequent to June
30, 1997, (ii) a debt-to-equity ratio (excluding deferred income taxes) of
not more than 3 to 1, (iii) interest coverage (income from operations
compared to interest expense) of not less than 2 to 1, and (iv) debt service
coverage of not less than 1.15 to 1. If the Company does not amend or
renegotiate this Agreement for an additional time period prior to its
expiration date, the principal amount outstanding at that time will be
converted to a two-year term loan with the principal due and payable in eight
(8) quarterly installments. In addition to the $70,000,000 unsecured line of
credit, the expiration date of a $5,000,000 Optional Advance Facility with
one of the Company's banks was extended to August 31, 1997.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 6
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Three and Six Months Ended June 30, 1997 and 1996
McGrath RentCorp (the "Company") is engaged in the business of renting
and selling relocatable modular offices and classrooms under its trade name
"Mobile Modular," and electronic test and measurement instruments under the
names "McGrath RentCorp" and "Rentelco". Although the Company's primary
emphasis is on rentals, both modulars and electronics are sold to direct-use
customers. The Company also manufactures portable classrooms through its
majority owned (73.2%) subsidiary, Enviroplex, Inc., for direct sale to
school districts.
Rental revenues for the three and six months ended June 30, 1997
increased $3,049,754 (26%) and $5,818,957 (25%), respectively, over the same
periods in 1996. Modulars contributed 80.4% and 78.7% of the rental revenue
increase in 1997 for the three and six months ended June 30, 1997. Average
utilization during the first six months increased for modulars, from 69.4% to
79.0%, and slightly declined for electronics, from 55.6% to 53.9% as compared
to the same period in 1996. The increase in utilization for modulars is a
result of class size reduction in California schools and has significantly
contributed to the increase in rental revenues for the reported periods.
Rental related service revenues for the three months ended June 30, 1997
increased $276,476 (13%) and for the six months ended June 30, 1997 increased
$1,531,102 (41%), respectively, compared to the same periods in 1996. The six
month increase was primarily due to one commercial project which occurred in
the first quarter of 1997 with significant site work requirements performed
at a lower gross margin. Partially for reason noted above, gross margins for
rental related services declined for the six month comparative period from
42% in 1996 to 32% in 1997.
Sales and related services for the three and six months ended June 30,
1997 increased $10,491,399 (179%) and $15,603,729 (151%), respectively, over
the same periods in 1996. Of the six month increase in sales and related
services revenues, $7,749,926 relates to modulars, $6,981,314 relates to
Enviroplex, and $872,489 relates to electronics. The significant increase in
sales for modulars and Enviroplex is directly related to the higher demand by
school districts because of the class size reduction program in California.
Of the total sales and related services of the Company in 1997, approximately
68% were related to school districts. Gross Margins on sales and related
services improved for the six month period from 30.5% in 1996 to 32.0% in
1997.
Depreciation on rental equipment for the three and six months ended June
30, 1997 increased $389,164 (13%) and $806,952 (13%), respectively over the
same periods in 1996 as a result of additions to the rental equipment for
both modulars and electronics. Other direct rental costs increased $340,718
(21%) and $907,768 (26%), respectively, for the three
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 7
and six months ended June 30, 1997 due to material, repair, and labor costs
related to the modular equipment movement occurring in 1997.
Selling and administrative expenses for the three and six months ended
June 30, 1997 increased $1,028,397 (35%) and $1,694,294 (29%),
respectively, over the same periods in 1996. The increased business
activity in the modular business for class size reduction has also
translated into higher personnel costs for the six months ended June 30,
1997 over the same six month period in 1996. Personnel costs increased
$886,127 over the same period in 1996 and include additional staff for
sales and support, increased temporary contract labor, and increased
sales and performance bonuses. Additionally, selling and administrative
expenses for Enviroplex increased $619,750 during the six month comparative
period due to increased sales activity and includes the reduction of net
income by the portion of earnings of Enviroplex related to the minority
shareholder's interest.
Income before provision for income taxes for the three and six
months ended June 30, 1997 increased $4,026,159 (66%) and $7,102,698 (64%),
respectively, over the same periods in 1996. Net income increased
$2,429,557 (67%) for the three month period and $4,275,468 (64%) for the
six month period over the same periods in 1996. Earnings per share for the
three and six months ended June 30, 1997 increased 67%, from $0.24 to
$0.40, and 70%, from $0.43 to $0.73. Outstanding shares declined slightly.
LIQUIDITY AND CAPITAL RESOURCES.
The debt (notes payable) to equity ratio was 0.66 to 1 at June 30,
1997 compared to 0.61 to 1 at December 31, 1996. The debt (total
liabilities) to equity ratio at the end of the current period was 1.28 to 1
as compared to 1.25 to 1 as of December 31, 1996.
The Company has made purchases of shares of its common stock from time
to time in the over-the-counter market (NASDQ) and/or through privately
negotiated, large block transactions under an authorization of the Board of
Directors. The Board of Directors believes that the repurchase of its
shares continues to be a good investment for the Company. Shares
repurchased by the Company will be cancelled and returned to the status of
authorized but unissued stock. The Company has not repurchased any of its
common stock during 1997 and currently has 1,000,000 shares authorized for
repurchase.
The Company's primary use of funds is to purchase rental equipment
and sales inventory, and funds will continue to be used for this purpose in
the future. Additionally, the Company plans to make further improvements
to the land at their inventory facility located in Northern California.
The Company also pays quarterly dividends, which will constitute an
additional use of cash in 1997.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 8
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In June 1997, the Company declared a quarterly dividend on its Common
Stock; the dividend was $0.08 per share. Subject to its continued
profitability and favorable cash flow, the Company intends to continue the
payment of quarterly dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Index to exhibits filed herewith as part of this report:
Exhibit
Number Title
4.1 Credit Agreement (Amended and Restated) dated July 10, 1997
between the Company and Union Bank of California, N.A.,
Fleet Bank, N.A., and Bank of America National Trust
and Savings Association
4.2 $5,000,000 Optional Advance Facility Extension dated July
29, 1997 between the Company and Union Bank of California,
N.A.
(b) REPORTS ON FORM 8-K. No reports on form 8-K have been filed during the
quarter for which this report is filed.
McGrath RentCorp
Second Quarter 1997 Form 10-Q
Page 9
SIGNATURES
Pursuant to the requirements 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 1, 1997 McGRATH RENTCORP
By: /s/ Delight Saxton
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Delight Saxton, Chief Financial
Officer and Vice President
of Administration