10-Q 1 f74696e10-q.txt FORM 10-Q PERIOD ENDED JUNE 30, 2001 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 JUNE 30, 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 August 8, 2001, 12,291,822 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ (in thousands, except per share amounts) 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------- REVENUES Rental $25,768 $22,847 $51,875 $44,228 Rental Related Services 4,317 3,974 8,495 7,296 ------- ------- ------- ------- Rental Operations 30,085 26,821 60,370 51,524 Sales 11,347 10,315 17,068 17,008 Other 305 233 581 480 ------- ------- ------- ------- Total Revenues 41,737 37,369 78,019 69,012 ------- ------- ------- ------- COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 6,742 5,745 13,162 11,101 Rental Related Services 3,028 2,324 5,370 4,056 Other 3,754 4,706 8,462 8,487 ------- ------- ------- ------- Total Direct Costs of Rental Operations 13,524 12,775 26,994 23,644 Costs of Sales 7,671 6,915 11,519 11,736 ------- ------- ------- ------- Total Costs 21,195 19,690 38,513 35,380 ------- ------- ------- ------- Gross Margin 20,542 17,679 39,506 33,632 Selling and Administrative 5,679 4,787 11,476 9,482 ------- ------- ------- ------- Income from Operations 14,863 12,892 28,030 24,150 Interest 1,853 2,160 3,997 4,104 ------- ------- ------- ------- Income Before Provision for Income Taxes 13,010 10,732 24,033 20,046 Provision for Income Taxes 5,178 4,186 9,565 7,818 ------- ------- ------- ------- Income Before Minority Interest 7,832 6,546 14,468 12,228 Minority Interest in Income of Subsidiary 217 157 218 136 ------- ------- ------- ------- Net Income $ 7,615 $ 6,389 $14,250 $12,092 ======= ======= ======= ======= Earnings Per Share: Basic $ 0.63 $ 0.52 $ 1.17 $ 0.97 Diluted $ 0.62 $ 0.52 $ 1.16 $ 0.97 Shares Used in Per Share Calculation: Basic 12,178 12,305 12,162 12,402 Diluted 12,378 12,393 12,336 12,494 ---------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
1 3 MCGRATH RENTCORP CONSOLIDATED BALANCE SHEETS (unaudited)
--------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, --------- ------------ (in thousands) 2001 2000 --------------------------------------------------------------------------------------- ASSETS Cash $ 572 $ 643 Accounts Receivable, less allowance for doubtful accounts of $850 in 2001 and $650 in 2000 39,669 45,687 Rental Equipment, at cost: Relocatable Modular Offices 274,670 261,081 Electronic Test Instruments 100,187 92,404 --------- --------- 374,857 353,485 Less Accumulated Depreciation (114,375) (106,083) --------- --------- Rental Equipment, net 260,482 247,402 --------- --------- Land, at cost 19,303 19,303 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $7,785 in 2001 and $6,815 in 2000 33,154 33,233 Prepaid Expenses and Other Assets 11,177 10,978 --------- --------- Total Assets $ 364,357 $ 357,246 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 122,500 $ 126,876 Accounts Payable and Accrued Liabilities 39,984 37,012 Deferred Income 13,562 19,241 Minority Interest in Subsidiary 3,724 3,506 Deferred Income Taxes 64,676 61,653 --------- --------- Total Liabilities 244,446 248,288 --------- --------- Shareholders' Equity: Common Stock, no par value - Authorized -- 40,000 shares Outstanding -- 12,202 shares in 2001 and 12,125 shares in 2000 9,587 8,971 Retained Earnings 110,324 99,987 --------- --------- Total Shareholders' Equity 119,911 108,958 --------- --------- Total Liabilities and Shareholders' Equity $ 364,357 $ 357,246 ========= ========= --------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
2 4 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
--------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, ------------------------- (in thousands) 2001 2000 --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 14,250 $ 12,092 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 14,132 12,001 Impairment Loss Related to Rental Equipment -- 698 Gain on Sale of Rental Equipment (3,037) (3,355) Change In: Accounts Receivable 6,018 (2,059) Prepaid Expenses and Other Assets (199) (1,714) Accounts Payable and Accrued Liabilities 2,923 4,968 Deferred Income (5,679) (901) Deferred Income Taxes 3,023 118 -------- -------- Net Cash Provided by Operating Activities 31,431 21,848 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Rental Equipment (31,409) (34,932) Purchase of Land, Buildings, Land Improvements, Equipment and Furniture (891) (1,497) Proceeds from Sale of Rental Equipment 8,204 8,833 -------- -------- Net Cash Used in Investing Activities (24,096) (27,596) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Net Borrowings (Payments) Under Notes Payable (4,376) 15,500 Net Proceeds from the Exercise of Stock Options 616 62 Repurchase of Common Stock -- (4,379) Payment of Dividends (3,646) (3,228) -------- -------- Net Cash Provided by (Used in) Financing Activities (7,406) 7,955 -------- -------- Net Increase (Decrease) in Cash (71) 2,207 Cash Balance, Beginning of Period 643 490 -------- -------- Cash Balance, End of Period $ 572 $ 2,697 ======== ======== Interest Paid During the Period $ 4,415 $ 4,064 ======== ======== Income Taxes Paid During the Period $ 6,542 $ 7,700 ======== ======== Dividends Declared but not yet Paid $ 1,966 $ 1,723 ======== ======== --------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
3 5 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 NOTE 1. CONSOLIDATED FINANCIAL INFORMATION The consolidated financial information for the six months ended June 30, 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 six months ended June 30, 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. NOTES PAYABLE In June 2001, the Company amended its unsecured line of credit agreement (the "Agreement") with its banks that extended the expiration date of the Agreement to June 30, 2004. The Agreement allows the Company to borrow $120.0 million of which $82.5 million was outstanding as of June 30, 2001. The Agreement requires the Company to pay interest at prime or, at the Company's election, at 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 restrictions, the Agreement requires (i) the Company to maintain shareholders' equity of not less than $100.0 million plus 50% of all net income generated subsequent to June 30, 2001 plus 90% of any new stock issuance proceeds, (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 (earnings before interest, taxes, depreciation and amortization compared to the following year's principal payments plus the most recent twelve months of interest expense) of not less than 1.15 to 1. In addition to the $120.0 million unsecured line of credit, the Company entered into a new $5.0 million credit facility in June 2001 (at prime rate) related to its cash management services which expires June 30, 2004. No amounts were outstanding at June 30, 2001. NOTE 4. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to current year presentation. NOTE 5. SUBSEQUENT EVENT In July 2001, the Company entered into a Stock Exchange Agreement with the minority shareholders of Enviroplex to increase its ownership in Enviroplex from 73.2% to 80.7%. The Company exchanged 85,366 shares of its common stock for 7.5% of Enviroplex. 4 6 NOTE 6. 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 six months ended June 30, 2001 and 2000 for the Company's reportable segments is shown in the following table: 5 7
-------------------------------------------------------------------------------------------------- (in thousands) MODULARS(1) ELECTRONICS(2) ENVIROPLEX CONSOLIDATED ----------- -------------- ---------- ------------ SIX MONTHS ENDED JUNE 30, 2001 Rental Revenues $ 30,653 $ 21,222 $ -- $ 51,875 Rental Related Services Revenues 8,090 405 -- 8,495 Sales and Other Revenues 7,454 4,501 5,694 17,649 Total Revenues 46,197 26,128 5,694 78,019 Depreciation on Rental Equipment 6,427 6,735 -- 13,162 Interest Expense 2,978 1,220 (201) 3,997 Income before Income Taxes 12,583 10,507 943 24,033 Rental Equipment Acquisitions 17,955 13,454 -- 31,409 Accounts Receivable, net (period end) 22,084 12,479 5,106 39,669 Rental Equipment, at cost (period end) 274,670 100,187 -- 374,857 Utilization (Period end)(3) 84.9% 49.3% Average Utilization(3) 85.1% 57.0% 2000 Rental Revenues $ 27,380 $ 16,848 $ -- $ 44,228 Rental Related Services Revenues 6,931 365 -- 7,296 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 3,139 1,117 (152) 4,104 Income before Income Taxes 10,696 8,733 617 20,046 Rental Equipment Acquisitions 20,028 14,904 -- 34,932 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 Utilization (Period end)(3) 82.4% 65.4% Average Utilization(3) 81.0% 58.8% --------------------------------------------------------------------------------------------------
(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. 6 8 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, 2001 AND 2000 Rental revenues for the three and six months ended June 30, 2001 increased $2.9 million (13%) and $7.6 million (17%) over the comparative periods in 2000. Mobile Modular Management Corporation ("MMMC") contributed $3.2 million and RenTelco contributed $4.4 million of the six-month increase. MMMC's rental revenues increased as a result of strong classroom demand in California. As of June 30, 2001, an average of $29.4 million more modular equipment was on rent compared to a year earlier with the average monthly yield for all modular equipment increasing from 1.98% in 2000 to 2.01% in 2001. At June 30, 2001, modular utilization, excluding new equipment inventory, was 84.9% and average utilization for the six months ended June 30, 2001 and 2000 was 85.1% and 81.0%, respectively. RenTelco's rental revenue increased a modest 13% over the second quarter of 2000, but declined by 6% from the levels achieved during the first quarter of 2001, reflecting the broad-based weakness in the telecommunications industry. As of June 30, 2001, an average of $9.8 million more electronics equipment was on rent compared to a year earlier with the average monthly yield for all electronics equipment increasing from 3.64% in 2000 to 3.66% in 2001. At June 30, 2001, electronics utilization was 49.3% compared to 65.4% a year earlier and average utilization for the six months ended June 30, 2001 and 2000 was 57.0% and 58.8%, respectively. Depreciation on rental equipment for the three and six months ended June 30, 2001 increased $1.0 million (17%) and $2.1 million (19%) over the comparative periods in 2000 due to higher amounts of rental equipment. For the six months ended June 30, 2001, average modular rental equipment, at cost, increased $23.0 million (9%) and average electronics rental equipment, at cost, increased $19.7 million (26%) over the 2000 comparative period. Other direct costs of rental operations for the three months ended June 30, 2001 decreased $1.0 million (20%) primarily due to an impairment write-off of $832,000 in the year earlier period of rental equipment beyond economic repair. For the six-month comparative period these costs remained approximately the same. Consolidated gross margin on rents for the three and six months increased from 54.3% and 55.7% in 2000 to 59.3% and 58.3% in 2001, respectively. Rental related services revenues for the three and six months ended June 30, 2001 increased $343,000 (9%) and $1.2 million (16%) over the comparative periods in 2000 due to the increased modular rental activity. Gross margin on rental related services for the six-month period decreased from 44.4% in 2000 to 36.8% in 2001. Sales for the three and six months ended June 30, 2001 increased $1.0 million (10%) and $60,000 (less than 1%) as compared to the same periods in 2000. Consolidated gross margin on sales for the six months ended June 30, 2001 was 32.5% compared to 31.0% 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 7 9 funding. Looking forward, in a slowing economy, the Company would anticipate fewer sales opportunities for the remainder of 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 June 30, 2001 and 2000 was $11.8 million and $12.3 million, respectively. Backlog is not significant in MMMC's modular business or in RenTelco's electronics business. Selling and administrative expenses for the three and six months ended June 30, 2001 increased $892,000 (19%) and $2.0 million (21%) over the comparative periods in 2000. The six-month increase is primarily due to higher personnel and benefit costs of $777,000, increased web development and maintenance costs of $413,000, higher bad debt expense of $196,000 and increased consultant fees related to legal, accounting, and investor relations of $198,000. Interest expense for the three and six months ended June 30, 2001 decreased $307,000 (14%) and $107,000 (3%) over the 2000 comparative periods as a result of lower average interest rates despite 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 June 30, 2001 increased $2.3 million (21%) while net income increased $1.2 million (19%) to $7.6 million with earnings per diluted share increasing 19% from $0.52 per share in 2000 to $0.62 per share in 2001. Income before provision for taxes for the six months ended June 30, 2001 increased $4.0 million (20%) while net income increased $2.2 million (18%) to $14.3 million with earnings per diluted share increasing 20% from $0.97 per share in 2000 to $1.16 per share in 2001. 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 six months ended June 30, 2001 of $31.4 million as compared to $21.9 million for the year earlier period primarily due to the reduction in the accounts receivable. During 2001, the primary uses of cash have been to purchase of $31.4 million of additional rental equipment to satisfy customer requirements, other capital expenditures of $891,000, payment of dividends of $3.6 million to the Company's shareholders, and debt reduction of $4.4 million. The Company had total liabilities to equity ratios of 2.04 to 1 and 2.28 to 1 as of June 30, 2001 and December 31, 2000, respectively. The debt (notes payable) to equity ratios were 1.02 to 1 and 1.16 to 1 as of June 30, 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 August 8, 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 8 10 changes in interest rates with respect to its notes payable. As of June 30, 2001, the Company believes that the carrying amounts of its financial instruments (cash and notes payable) approximate fair value. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 5, 2001 McGrath RentCorp announced the settlement of 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. were two of nineteen named defendants, all of whom are involved in the portable classroom industry in the State of California. The parties reached an accord whereby the settling defendants agreed to begin using alternative buildings materials, including certain engineered wood products, adhesives, caulks, tapes, mastics and glues, and to provide ventilation in the sub-roof areas on all products ordered for manufacture after July 1, 2001. In addition, the settling defendants agreed to issue certain advisories regarding the availability of alternative materials and the advisability of airing out certain types of carpeting upon installation. In refurbishing units, to the extent such materials are needed, settling defendants will use those alternative building materials and install sub-roof ventilation as appropriate. Defendants agreed to pay $150,000 to As You Sow to be used for grant-making purposes in reducing exposures to chemicals, and to increase consumer, worker and community awareness of the health hazards posed by chemicals. Defendants also agreed to pay As You Sow's fees and costs in bringing the action. ITEM 3. OTHER INFORMATION On May 30, 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.
NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 4.1 Amended and Restated Credit Agreement Filed herewith. 4.2 $5,000,000 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. 9 11 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 8, 2001 MCGRATH RENTCORP By: /s/ Thomas J. Sauer -------------------------------------- Thomas J. Sauer Vice President and Chief Financial Officer (Chief Accounting Officer) 10 12 EXHIBIT INDEX
NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- 4.1 Amended and Restated Credit Agreement Filed herewith. 4.2 $5,000,000 Committed Credit Facility Filed herewith.