1
================================================================================
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, 2001 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 May 8, 2001, 12,173,046 shares of Registrant's Common Stock were
outstanding.
================================================================================
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(in thousands, except per share amounts) 2001 2000
- -------------------------------------------------------------------------------------
REVENUES
Rental ........................................... $ 26,107 $ 21,381
Rental Related Services .......................... 4,178 3,322
-------- --------
Rental Operations ............................. 30,285 24,703
Sales ............................................ 5,721 6,693
Other ............................................ 276 247
-------- --------
Total Revenues ........................ 36,282 31,643
-------- --------
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation .................................. 6,420 5,356
Rental Related Services ....................... 2,342 1,732
Other ......................................... 4,708 3,781
-------- --------
Total Direct Costs of Rental Operations 13,470 10,869
Costs of Sales ................................... 3,848 4,821
-------- --------
Total Costs ........................... 17,318 15,690
-------- --------
Gross Margin ....................... 18,964 15,953
Selling and Administrative ....................... 5,797 4,695
-------- --------
Income from Operations ........................ 13,167 11,258
Interest ......................................... 2,144 1,944
-------- --------
Income Before Provision for Income Taxes ...... 11,023 9,314
Provision for Income Taxes ....................... 4,387 3,632
-------- --------
Income Before Minority Interest ............... 6,636 5,682
Minority Interest in Income (Loss) of Subsidiary . 1 (21)
-------- --------
Net Income .................................. $ 6,635 $ 5,703
======== ========
Earnings Per Share:
Basic ............................................ $ 0.55 $ 0.46
Diluted .......................................... $ 0.54 $ 0.45
Shares Used in Per Share Calculation:
Basic ............................................ 12,147 12,500
Diluted .......................................... 12,285 12,593
- -------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
1
3
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
(unaudited)
- -----------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
----------- ------------
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
ASSETS
Cash .................................................. $ 1,036 $ 643
Accounts Receivable, less allowance for doubtful
accounts of $700 in 2001 and $650 in 2000 .......... 35,370 45,687
Rental Equipment, at cost:
Relocatable Modular Offices ........................ 265,715 261,081
Electronic Test Instruments ........................ 97,786 92,404
--------- ---------
363,501 353,485
Less Accumulated Depreciation ...................... (110,305) (106,083)
--------- ---------
Rental Equipment, net .............................. 253,196 247,402
--------- ---------
Land, at cost ......................................... 19,303 19,303
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $7,292
in 2001 and $6,815 in 2000 ......................... 33,444 33,233
Prepaid Expenses and Other Assets ..................... 11,540 10,978
--------- ---------
Total Assets ............................. $ 353,889 $ 357,246
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes Payable ...................................... $ 121,300 $ 126,876
Accounts Payable and Accrued Liabilities ........... 34,999 37,012
Deferred Income .................................... 16,086 19,241
Minority Interest in Subsidiary .................... 3,507 3,506
Deferred Income Taxes .............................. 64,084 61,653
--------- ---------
Total Liabilities ........................ 239,976 248,288
--------- ---------
Shareholders' Equity:
Common Stock, no par value -
Authorized -- 40,000 shares
Outstanding -- 12,167 shares in 2001 and
12,125 shares in 2000 .................... 9,238 8,971
Retained Earnings .................................. 104,675 99,987
--------- ---------
Total Shareholders' Equity ............... 113,913 108,958
--------- ---------
Total Liabilities and Shareholders' Equity $ 353,889 $ 357,246
========= =========
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
4
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................................. $ 6,635 $ 5,703
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization ....................................... 6,897 5,802
Gain on Sale of Rental Equipment .................................... (1,390) (1,426)
Change In:
Accounts Receivable .............................................. 10,317 2,150
Prepaid Expenses and Other Assets ................................ (562) (507)
Accounts Payable and Accrued Liabilities ......................... (2,260) 871
Deferred Income .................................................. (3,155) (1,010)
Deferred Income Taxes ............................................ 2,431 703
-------- --------
Net Cash Provided by Operating Activities ..................... 18,913 12,286
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment ........................................... (14,568) (13,315)
Purchase of Land, Buildings, Land Improvements, Equipment
and Furniture ........................................................ (688) (405)
Proceeds from Sale of Rental Equipment ................................. 3,744 3,866
-------- --------
Net Cash Used in Investing Activities ......................... (11,512) (9,854)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings (Payments) Under Notes Payable .......................... (5,576) 3,700
Proceeds from the Exercise of Stock Options ............................ 267 19
Repurchase of Common Stock ............................................. -- (4,379)
Payment of Dividends ................................................... (1,699) (1,505)
-------- --------
Net Cash Used in Financing Activities ......................... (7,008) (2,165)
-------- --------
Net Increase in Cash .......................................... 393 267
Cash Balance, Beginning of Period .......................................... 643 490
-------- --------
Cash Balance, End of Period ................................................ $ 1,036 $ 757
======== ========
Interest Paid During the Period ............................................ $ 2,988 $ 2,400
======== ========
Income Taxes Paid During the Period ........................................ $ 1,956 $ 2,929
======== ========
Dividends Declared but not yet Paid ........................................ $ 1,947 $ 1,723
======== ========
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
5
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the three months ended
March 31, 2001 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 three months
ended March 31, 2001 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. ACCOUNTING FOR DERIVATIVES
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by SFAS 138, which establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Company does not own any derivative instruments, and as such, the implementation
of this statement did not have a material impact on the Company's financial
position or result of operations.
NOTE 3. BUSINESS SEGMENTS
The Company defines its business segments based on the nature of
operations for the purpose of reporting under SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". The Company's three
reportable segments are Mobile Modular Management Corporation (Modulars),
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 three months ended March 31, 2001 and 2000 for the
Company's reportable segments is shown in the following table:
4
6
- -----------------------------------------------------------------------------------------------------------------
(in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED
THREE MONTHS ENDED MARCH 31, ----------- -------------- ---------- ------------
2001
Rental Revenues ........................... $ 15,180 $ 10,927 $ -- $ 26,107
Rental Related Services Revenues .......... 3,958 220 -- 4,178
Sales and Other Revenues .................. 2,909 2,136 952 5,997
Total Revenues ............................ 22,047 13,283 952 36,282
Depreciation on Rental Equipment .......... 3,158 3,262 -- 6,420
Interest Expense .......................... 1,627 625 (108) 2,144
Income before Income Taxes ................ 5,462 5,698 (137) 11,023
Rental Equipment Acquisitions ............. 6,400 8,168 -- 14,568
Accounts Receivable, net (period end) ..... 20,019 12,774 2,577 35,370
Rental Equipment, at cost (period end) .... 265,715 97,786 -- 363,501
Utilization (Period end)(3) ............... 85.0% 58.2%
Average Utilization(3) .................... 85.1% 60.8%
2000
Rental Revenues ........................... $ 13,669 $ 7,712 $ -- $ 21,381
Rental Related Services Revenues .......... 3,136 186 -- 3,322
Sales and Other Revenues .................. 3,089 2,405 1,446 6,940
Total Revenues ............................ 19,894 10,303 1,446 31,643
Depreciation on Rental Equipment .......... 2,838 2,518 -- 5,356
Interest Expense .......................... 1,501 526 (83) 1,944
Income before Income Taxes ................ 5,563 3,913 (162) 9,314
Rental Equipment Acquisitions ............. 5,415 7,900 -- 13,315
Accounts Receivable, net (period end) ..... 10,246 9,102 3,598 22,946
Rental Equipment, at cost (period end) .... 241,950 78,449 -- 320,399
Utilization (Period end)(3)................ 80.4% 57.2%
Average Utilization(3) .................... 80.4% 56.3%
- -----------------------------------------------------------------------------------------------------------------
(1) Operates under the trade name Mobile Modular Management Corporation
(2) Operates under the trade name RenTelco
(3) Utilization is calculated each month by dividing the cost of rental
equipment on rent by the total cost of rental equipment excluding new
equipment inventory and accessory equipment. The average utilization for
the period is calculated using the average costs of rental equipment.
5
7
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 MONTHS ENDED MARCH 31, 2001 AND 2000
The Company's core rental businesses grew significantly. Rental
revenues for the three months ended March 31, 2001 increased $4.7 million (22%)
over the comparative period in 2000. Mobile Modular Management Corporation
("MMMC") contributed $1.5 million and RenTelco contributed $3.2 million of the
three-month increase. MMMC's rental revenues increased as a result of having an
average of $30.9 million more equipment on rent compared to a year earlier with
the average monthly yield for all modular equipment increasing from 1.99% in
2000 to 2.01% in 2001. At March 31, 2001, modular utilization, excluding new
equipment inventory, was 85.0% and average utilization for the three months
ended March 31, 2001and 2000 was 85.1% and 80.4%, respectively. RenTelco's
rental revenue increase can be attributed to strong communication equipment
rental activity, which resulted in an average of $15.8 million more equipment on
rent compared to a year earlier. Additionally, the average monthly yield for all
electronics equipment increased from 3.45% in 2000 to 3.84% in 2001. At March
31, 2001, electronics utilization was 58.1% and average utilization for the
three months ended March 31, 2001 and 2000 was 60.8% and 56.3%, respectively.
Depreciation on rental equipment for the three months ended March 31,
2001 increased $1.1 million (20%) over the comparative periods in 2000 due to
higher amounts of rental equipment. For the three months ended March 31, 2001,
average modular rental equipment, at cost, increased $23.3 million (10%) and
average electronics rental equipment, at cost, increased $20.7 million (28%)
over the 2000 comparative period. Other direct costs of rental operations for
the three months ended March 31, 2001 increased $927,000 (25%) over the same
period in 2000 due to higher maintenance and repair expenses of the modular
fleet and increased amortization expense related to costs, such as delivery and
installation, which are charged to customers in the rental rate. Consolidated
gross margin on rents for the three-month period increased slightly from 57.3%
in 2000 to 57.4% in 2001.
Rental related services revenues for the three months ended March 31,
2001 increased $856,000 (26%) from $3.3 million in 2000 to $4.2 million in 2001
due to the increased modular rental activity. Gross margin on rental related
services for the three-month period decreased from 47.8% in 2000 to 43.9% in
2001.
Sales for the three months ended March 31, 2001 decreased $972,000
(15%) from $6.7 million in 2000 to $5.7 million in 2001. Consolidated gross
margin on sales for the three months ended March 31, 2001 was 32.7% compared to
28.0% for the same period in 2000. 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, requirements
and funding. Looking forward, in a slowing economy, the Company would anticipate
fewer sales opportunities for the remainder of
6
8
2001 as companies in an effort to conserve capital are less likely to purchase
modular and electronics equipment.
Enviroplex's backlog of orders as of March 31, 2001 and 2000 was $9.3
million and $16.3 million, respectively. Backlog is not significant in MMMC's
modular business or in RenTelco's electronics business.
Selling and administrative expenses for the three months ended March
31, 2001 increased $1.1 million (23%) over the comparative period in 2000
primarily due to higher personnel and benefit costs, increased marketing and
advertising costs, and increased consultant fees related to legal, accounting,
and investor relations.
Interest expense for the three months ended March 31, 2001 increased
$200,000 (10%) over the 2000 comparative period as a result of a higher average
borrowing level in 2001. The higher debt levels funded part of the Company's
capital expenditures, payment of dividends and repurchases of common stock.
Income before provision for taxes for the three months ended March 31,
2001 increased $1.7 million (18%) from $9.3 million to $11.0 million and net
income increased $932,000 (16%) from $5.7 million to $6.6 million with earnings
per diluted share increasing 20% from $0.45 per share in 2000 to $0.54 per share
in 2001. The lower percentage increase for net income was effected by a higher
tax rate of 39.8% in 2001 as compared to 39.0% in 2000 with the diluted earnings
per share increase impacted by the Company's ongoing stock repurchase program
with fewer shares outstanding.
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 from operations
for the three months ended March 31, 2001 of $18.9 million as compared to $12.3
million for the year earlier period primarily due to the reduction of accounts
receivable. During the first quarter of 2001, the primary uses of cash have been
to purchase additional rental equipment to satisfy customer requirements, other
capital expenditures, payment of dividends to the Company's shareholders, and
debt reduction.
The Company had total liabilities to equity ratios of 2.11 to 1 and
2.28 to 1 as of March 31, 2001 and December 31, 2000, respectively. The debt
(notes payable) to equity ratios were 1.06 to 1 and 1.16 to 1 as of March 31,
2001 and December 31, 2000, respectively. Both ratios have decreased since
December 31, 2000 as a result of earnings and debt reduction.
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 2001, no shares have been
repurchased. As of March 31, 2001, 805,800 shares remain authorized for
repurchase.
The Company believes that its needs for working capital and capital
expenditures through 2001 and beyond will be adequately met by cash flow and
bank borrowings.
MARKET RISK
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 March 31, 2001, the Company believes that the carrying
amounts of its financial instruments (cash and notes payable) approximate fair
value.
7
9
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. The Company has entered into an agreement to settle this lawsuit on terms
that it believes will have no material adverse impact on its operations or
financial condition.
ITEM 3. OTHER INFORMATION
On March 16, 2001, the Company declared a quarterly dividend on its
Common Stock; the dividend was $0.16 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.
None.
(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 May 8, 2001 MCGRATH RENTCORP
By: /s/ Thomas J. Sauer
------------------------------
Thomas J. Sauer
Vice President and Chief Financial
Officer (Chief Accounting Officer)
8