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 September 30, 2003 Commission file number 0-13292

McGRATH RENTCORP

(Exact name of registrant as specified in its Charter)

California	94-2579843
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5700 Las Positas Road, Livermore, CA 94551-7800

(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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined under Rule 12b-2 of the Exchange Act).     

Yes  x    No  ¨

At October 30, 2003, 12,120,763 shares of Registrant’s Common Stock were outstanding.

McGRATH RENTCORP

FORM 10-Q

September 30, 2003

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Income – Three months and nine months ended September 30, 2003 and September 30, 2002	1
	Consolidated Balance Sheets – September 30, 2003 and December 31, 2002	2
	Consolidated Statements of Cash Flows – Nine months ended September 30, 2003 and September 30, 2002	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Market Risk	10
Item 4.	Controls and Procedures	10
PART II. OTHER INFORMATION
Item 5.	Other Information	10
Item 6.	Exhibits and Reports on Form 8-K	10
Signatures		11

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MCGRATH RENTCORP

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2003		2002		2003		2002
REVENUES
Rental	$	19,592	$	20,202	$	56,252	$	62,152
Rental Related Services		4,350		4,483		11,554		12,773
Rental Operations		23,942		24,685		67,806		74,925
Sales		10,719		15,752		25,496		33,061
Other		194		1,513		598		2,204
Total Revenues		34,855		41,950		93,900		110,190
COSTS AND EXPENSES
Direct Costs of Rental Operations
Depreciation of Rental Equipment		3,226		3,222		9,468		12,327
Rental Related Services		2,501		2,362		6,874		6,913
Impairment of Rental Equipment		—		—		—		24,083
Other		5,323		4,135		14,544		14,076
Total Direct Costs of Rental Operations		11,050		9,719		30,886		57,399
Costs of Sales		7,284		11,825		17,830		24,035
Total Costs		18,334		21,544		48,716		81,434
Gross Margin		16,521		20,406		45,184		28,756
Selling and Administrative		5,623		5,084		16,873		17,103
Income from Operations		10,898		15,322		28,311		11,653
Interest		647		951		2,085		3,175
Income Before Provision for Income Taxes		10,251		14,371		26,226		8,478
Provision for Income Taxes		4,090		5,719		10,464		3,374
Income Before Minority Interest		6,161		8,652		15,762		5,104
Minority Interest in Income of Subsidiary		95		159		89		182
Net Income	$	6,066	$	8,493	$	15,673	$	4,922
Earnings Per Share:
Basic	$	0.50	$	0.68	$	1.29	$	0.39
Diluted	$	0.50	$	0.68	$	1.28	$	0.39
Shares Used in Per Share Calculation:
Basic		12,080		12,483		12,127		12,462
Diluted		12,242		12,556		12,254		12,628

The accompanying notes are an integral part of these consolidated financial statements.

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MCGRATH RENTCORP

CONSOLIDATED BALANCE SHEETS

(in thousands)	September 30, 2003			December 31, 2002
	(unaudited)
ASSETS
Cash	$	4		$	4
Accounts Receivable, net of allowance for doubtful Accounts of $650 in 2003 and $1,000 in 2002		42,390			33,249
Rental Equipment, at cost:
Relocatable Modular Buildings		303,021			285,901
Electronic Test Instruments		36,509			39,786
		339,530			325,687
Less Accumulated Depreciation		(107,087	)		(103,788	)
Rental Equipment, net		232,443			221,899
Property, Plant and Equipment, net		47,698			48,379
Prepaid Expenses and Other Assets		14,552			9,603
Total Assets	$	337,087		$	313,134
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Notes Payable	$	55,961		$	55,523
Accounts Payable and Accrued Liabilities		32,456			29,889
Deferred Income		31,639			17,337
Minority Interest in Subsidiary		2,809			3,107
Deferred Income Taxes, net		75,538			68,259
Total Liabilities		198,403			174,115
Shareholders’ Equity:
Common Stock, no par value - Authorized — 40,000 shares Outstanding — 12,108 shares in 2003 and 12,490 shares in 2002		17,155			16,320
Retained Earnings		121,529			122,699
Total Shareholders’ Equity		138,684			139,019
Total Liabilities and Shareholders’ Equity	$	337,087		$	313,134

The accompanying notes are an integral part of these consolidated financial statements.

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MCGRATH RENTCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended September 30,
(in thousands)	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	15,673		$	4,922
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization		10,940			13,890
Impairment of Rental Equipment		—			24,083
Provision for Doubtful Accounts		255			1,055
Gain on Sale of Rental Equipment		(4,051	)		(4,783	)
Loss on Sale of Land		—			26
Change In:
Accounts Receivable		(9,396	)		(4,523	)
Prepaid Expenses and Other Assets		(4,949	)		847
Accounts Payable and Accrued Liabilities		2,183			(1,055	)
Deferred Income		14,302			3,795
Deferred Income Taxes		7,279			1,188
Net Cash Provided by Operating Activities		32,236			39,445
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Rental Equipment		(27,160	)		(16,707	)
Purchase of Property, Plant and Equipment		(790	)		(125	)
Proceeds from Sale of Land		—			175
Proceeds from Sale of Rental Equipment		11,107			14,524
Net Cash Used in Investing Activities		(16,843	)		(2,133	)
CASH FLOW FROM FINANCING ACTIVITIES:
Net Borrowings (Repayments) Under Bank Lines of Credit		438			(31,442	)
Proceeds from the Exercise of Stock Options		1,442			2,441
Repurchase of Common Stock		(10,207	)		—
Payment of Dividends		(7,066	)		(6,222	)
Net Cash Used in Financing Activities		(15,393	)		(35,223	)
Net Increase (Decrease) in Cash		—			2,089
Cash Balance, Beginning of Period		4			4
Cash Balance, End of Period	$	4		$	2,093
Interest Paid During the Period	$	2,568		$	3,827
Income Taxes Paid During the Period	$	3,185		$	2,187
Dividends Declared, Not Yet Paid	$	2,424		$	2,248
Rental Equipment Acquisitions, Not Yet Paid	$	5,194		$	3,495

The accompanying notes are an integral part of these consolidated financial statements.

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MCGRATH RENTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

NOTE 1. CONSOLIDATED FINANCIAL INFORMATION

The consolidated financial information for the nine months ended September 30, 2003 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. Certain prior period amounts have been reclassified to conform to current year presentation. The consolidated results of the nine months ended September 30, 2003 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. STOCK OPTIONS

The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which compensation cost is recorded as the difference between the deemed fair value and the exercise price at the date of grant, and is recorded on a straight-line basis over the vesting period of the underlying options. The Company has adopted the disclosure only provisions of Statement of Financial Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation”. No compensation expense has been recognized in the accompanying financial statements as the option terms are fixed and the exercise price equals the market price of the underlying stock on the date of grant for all options granted by the Company.

Had compensation cost for the stock-based compensation plans been determined based upon the fair value at grant dates for awards under those plans consistent with the method prescribed by SFAS 123, net income would have been reduced to the pro forma amounts indicated below:

(in thousands, except per share amounts)	Nine Months Ended September 30,
	2003		2002
Net Income, as reported	$	15,673	$	4,922
Pro Forma Compensation Expense, net of tax		382		382
Pro Forma Net Income	$	15,291	$	4,540
Earnings Per Share:
Basic – as reported	$	1.29	$	0.39
Basic – pro forma		1.26		0.36
Diluted – as reported	$	1.28	$	0.39
Diluted – pro forma		1.25		0.36

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The fair value of options granted were estimated on the date of the grant using the Black-Scholes option-pricing model using the following assumptions:

	Nine Months Ended September 30,
	2003		2002
Risk-free interest rates	3.6	%	3.8	%
Expected dividend yields	3.1	%	3.1	%
Expected volatility	35.0	%	36.7	%
Expected option life (in years)	7.5		7.5

NOTE 3. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed as net income divided by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed as net income divided by the weighted average number of shares outstanding of common stock and common stock equivalents for the period, including the dilutive effects of stock options and other potentially dilutive securities. Common stock equivalents result from dilutive stock options computed using the treasury stock method and the average share price for the reported period. The weighted average number of dilutive options outstanding for the nine months ended September 30, 2003 and 2002 was 127,633 and 153,609, respectively.

NOTE 4. IMPAIRMENT

During the six months ended June 30, 2002, the Company’s RenTelco segment recorded $24.1 million of non-cash impairment charges, which primarily reduced the net carrying value of its communications equipment. The impairment charge resulted from the depressed and low projected demand for RenTelco’s rental products coupled with high inventory levels, particularly communications equipment. RenTelco’s business activity levels are directly attributable to the continued broad-based weakness in the telecommunications industry. Since June 30, 2002, there have been no additional impairment charges recorded. As of September 30, 2003, the net carrying value of RenTelco’s rental equipment was $18.1 million, of which $7.5 million is communications equipment. There can be no assurance that future impairment charges on rental equipment will not occur.

NOTE 5. 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 and accounting policies of these three segments are described in Notes 1 and 2 of the consolidated financial statements included in the Company’s latest Form 10-K. The Corporate column in the table below is for the items related to the terminated merger with Tyco International, which were not specifically allocated to a reportable segment. 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, deferred income and customer security deposits. The Company does not report total assets by business segment. Summarized financial information for the nine months ended September 30, 2003 and 2002 for the Company’s reportable segments is shown in the following table:

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(in thousands)	Modulars			Electronics			Enviroplex			Corporate1		Consolidated
Nine Months Ended September 30,
2003
Rental Revenues	$	47,073		$	9,179		$	—		$	—	$	56,252
Rental Related Services Revenues		11,152			402			—			—		11,554
Sales and Other Revenues		13,253			5,729			7,112			—		26,094
Total Revenues		71,478			15,310			7,112			—		93,900
Depreciation of Rental Equipment		5,405			4,063			—			—		9,468
Impairment of Rental Equipment		—			—			—			—		—
Interest Expense (Income) Allocation		1,948			272			(135	)		—		2,085
Income before Provision for Income Taxes		23,397			2,233			596			—		26,226
Rental Equipment Acquisitions		23,017			4,053			—			—		27,070
Accounts Receivable, net (period end)		32,656			3,943			5,791			—		42,390
Rental Equipment, at cost (period end)		303,021			36,509			—			—		339,530
Rental Equipment, net book value (period end)		214,374			18,069			—			—		232,443
Utilization (period end) 2		85.8	%		48.6	%
Average Utilization 2		84.0	%		45.2	%
2002
Rental Revenues	$	49,664		$	12,488		$	—		$	—	$	62,152
Rental Related Services Revenues		12,342			431			—			—		12,773
Sales and Other Revenues		14,997			7,703			11,315			1,250		35,265
Total Revenues		77,003			20,622			11,315			1,250		110,190
Depreciation of Rental Equipment		5,165			7,162			—			—		12,327
Impairment of Rental Equipment		—			24,083			—			—		24,083
Interest Expense (Income) Allocation		2,705			634			(164	)		—		3,175
Income (Loss) before Provision for Income Taxes		29,239			(22,892	)		1,474			657		8,478
Rental Equipment Acquisitions		14,051			2,099			—			—		16,150
Accounts Receivable, net (period end)		30,889			3,647			5,828			—		40,364
Rental Equipment, at cost (period end)		286,887			42,208			—			—		329,095
Rental Equipment, net book value (period end)		201,656			23,666			—			—		225,322
Utilization (period end) 2		86.4	%		44.7	%
Average Utilization 2		86.0	%		37.2	%

1 Corporate includes nonrecurring items related to the terminated merger with Tyco International in 2002, which were not allocated to a specific segment.

2 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.

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ITEM 2. MANAGEMENT’S 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 and are subject to a number of risks and uncertainties. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q regarding the Company’s business strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans, objectives, the recovery of RenTelco’s business activities and financial results, the Company’s ability to sell rental equipment in excess of required levels, and the sufficiency of the Company’s working capital expenditures through 2003 are forward-looking statements. These statements appear in a number of places and 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. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Readers should not place undue reliance on these forward-looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. 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 and in particular the continuing weakness in the telecommunications industry; new or modified statutory or regulatory requirements relating to the Company’s modular operations; changing prices and market conditions; additional impairment charges on the Company’s equipment; and fluctuations in the Company’s rentals and sales of modular or telecommunications equipment. 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 Nine Months Ended September 30, 2003 and 2002

The Company is comprised of three business segments: “Mobile Modular Management Corporation” (“MMMC”), its modular building rental division, “RenTelco,” its electronic test equipment rental division, and “Enviroplex,” its majority-owned subsidiary classroom manufacturing business. Although the Company’s primary emphasis is on equipment rentals, sales of equipment occur in the normal course of business. For the nine months ended September 30, 2003, MMMC, RenTelco and Enviroplex contributed 89%, 9% and 2% of the Company’s pre-tax income, respectively.

The Company’s rental revenues for the three and nine months ended September 30, 2003 decreased $0.6 million (3%) and $5.9 million (9%), respectively, from the comparative periods in 2002.

• For the nine months ended September 30, 2003, MMMC’s rental revenues decreased $2.6 million (5%) from $49.7 million in 2002 to $47.1 million in 2003. MMMC’s rental revenue decrease is due to unexpected project delays by customers, lower average rental rates and an increased number of equipment returns resulting in a decline of the nine-month average monthly yield from 2.02% in 2002 to 1.86% in 2003. Average monthly yield for the period is calculated as average rental revenues divided by the average cost of rental equipment for the period. Changes in equipment utilization and rental rates of equipment on rent can impact the average monthly yield for a period. For the nine months ended September 30, 2003, the mix of leases remaining on rent during the first nine months of 2003 had lower rental rates on average than the prior year’s comparable period and the nine-month average utilization for modulars, decreased from 86.0% in 2002 to 84.0% in 2003. Average utilization for the period is calculated by dividing the average cost of rental equipment on rent by the average total cost of rental equipment for the period.

• The Company’s RenTelco division continues to be affected by the severe and prolonged broad-based weakness in the telecommunications industry, which has significantly impacted the Company’s overall results in the first nine months of 2003. RenTelco’s rental revenue levels have declined 26% from $12.5 million for the first nine months of 2002 to $9.2 million during the first nine months of 2003. For the nine months ended September 30, 2003, average utilization for electronics increased from 37.2% in 2002 to 45.2% in 2003 due to the 2002 equipment with the average monthly yield increasing from 2.2% in 2002 to 2.7% in 2003, both increasing primarily as a result of the Company’s 2002 equipment write-downs and the selling of underutilized equipment.

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During the first six months of 2002, the Company’s RenTelco segment recorded $24.1 million of impairment charges, and since June 30, 2002, the Company has recorded no additional impairment charges. The impairment charges resulted from the depressed and low projected demand for RenTelco’s rental products coupled with high inventory levels, particularly communications equipment. During the first quarter 2002, $11.9 million of the 2002 impairment charges were recorded and worsening market demand in the second quarter of 2002 for communications equipment caused the additional $12.2 million of impairment charges to be recorded. At September 30, 2003, RenTelco’s communications equipment had a net carrying value of $7.5 million, representing 42% of the electronics inventory. There can be no assurance that future impairment charges on rental equipment will not occur.

Looking forward to the foreseeable future, the Company expects RenTelco’s business activity levels to be low until such time as the telecommunications industry recovers. While management has limited visibility as to when the recovery in this sector will occur, management believes that adjusted equipment and overhead expense levels are sufficient to meet demand in the near term, and positions RenTelco to increase its earnings contribution upon the recovery of the telecommunications industry. However, there can be no assurance as to the success of RenTelco’s operations and financial results in connection with any such recovery. If business levels were to decline further, the Company is subject to the risk that additional equipment may become impaired which would adversely impact the Company’s future reported results. The Company will continue to sell rental equipment determined to be in excess of the required levels to meet projected customer rental demand. There can be no assurance that the Company will be successful in these efforts.

Depreciation of rental equipment for the nine months ended September 30, 2003 decreased $2.9 million (23%) compared to the prior year’s period due to the RenTelco equipment write-downs discussed above, which resulted in the classification of some equipment as non-depreciable equipment held for sale and lowered the monthly depreciation expense on written down rental equipment. The decrease in depreciation expense was offset in part by depreciation related to rental equipment additions. For MMMC, for the nine months ended September 30, 2003, depreciation expense as a percentage of rental revenues increased to 11% from 10% in the prior year’s comparable period. For RenTelco, the effect of 43% lower depreciation expense and 26% lower rental revenues for the first nine months of 2003 as compared to the first nine months of 2002, resulted in a decrease in depreciation expense as a percentage of revenues from 57% in 2002 to 44% in 2003.

Other direct costs of rental operations for the three and nine months ended September 30, 2003 increased $1.2 million (29%) and $0.5 million (3%), respectively, over last year’s comparable periods primarily due to higher MMMC expenses related to the preparation of equipment for shipment during the third quarter. For the nine-month period, consolidated gross margin percentage on rents increased from 18.8% in 2002, which included RenTelco’s $24.1 million impairment charge, to 57.3% in 2003.

Rental related services revenues for the three and nine months ended September 30, 2003 decreased $0.1 million (3%) and $1.2 million (10%), respectively, from the comparative periods in 2002. These revenues are primarily associated with modulars and consist of services negotiated as an integral part of the lease, which are recognized on a straight-line basis over the term of the lease. For the nine-month period, the revenue decrease resulted from the change in mix of leases within their original term. Gross margin percentage on these services for the nine months ended September 30 decreased from 45.9% in 2002 to 40.5% in 2003.

Sales revenues for the three and nine months ended September 30, 2003 decreased $5.0 million (32%) and $7.6 million (23%), respectively, from the comparable periods in 2002 as a result of lower sales volumes by Enviroplex, MMMC and RenTelco. 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 requirements, equipment availability and funding. Consolidated gross margin percentage on sales for the nine-month period increased from 27.3% in 2002 to 30.1% in 2003.

Enviroplex’s backlog of orders as of September 30, 2003 and 2002 was $7.1 million and $2.8 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 nine months ended September 30, 2003 increased $0.5 million (11%) and decreased $0.2 million (1%), respectively, from the comparable 2002 periods. For the three month-period, the $0.5 million increase primarily resulted from higher personnel and benefit costs of $0.6 million and professional fees of $0.1 coupled with lower bad debt expense of $0.2 million. For the nine-month period, the

8

$0.2 million decrease primarily resulted from lower bad debt expense of $0.8 million and expenses incurred in 2002 related to the terminated merger with Tyco International of $0.6 million, offset by increases in health and workers compensation insurance of $0.6 million and professional fees of $0.5 million.

Interest expense for the three and nine months ended September 30, 2003 decreased $0.3 million (32%) and $1.1 million (34%), respectively, primarily as a result of lower debt levels from the comparative prior year periods.

Income before provision for taxes for the three months ended September 30, 2003 decreased $4.1 million primarily due to lower sales volume and the $1.25 million reimbursement of merger expenses received from Tyco in 2002. For the nine months ended September 30, 2003, pre-tax income increased $17.7 million over 2002 due primarily to impairment charges recorded in 2002 related to RenTelco’s rental equipment. RenTelco’s pre-tax contribution for the nine months ended September 30, 2003 was $2.2 million compared to a pre-tax loss of $22.9 million in 2002, which included the impairment charges noted above. During the first nine months of 2003, RenTelco’s pre-tax income was positively impacted from selling underutilized equipment for sales gains of $1.9 million. There can be no assurance that the positive contribution from the sale of underutilized equipment will continue to occur.

Net income for the three months ended September 30, 2003 decreased $2.4 million to $6.1 million, or $0.50 per share, in 2003 from $8.5 million, or $0.68 per share, in 2002. For comparability of the three-month period results, excluding the $1.25 million reimbursement of merger expenses related to the terminated merger agreement, net income and earnings per share would have decreased from $7.7 million and $0.62 per diluted share in 2002 to $6.1 million and $0.50 per diluted share in 2003. Net income for the nine-months ended September 30, 2003 increased $10.8 million to $15.7 million, or $1.28 per share, in 2003 from $4.9 million, or $0.39 per share, in 2002. For comparability of the nine-month period results, excluding the 2002 impairment charges and net merger income related to the terminated merger agreement, net income and earnings per share would have decreased from $19.0 million and $1.51 per diluted share in 2002 to $15.7 million and $1.28 per diluted share in 2003.

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 statements at the beginning of Item 2 for cautionary information with respect to such forward-looking statements.

For the nine months ended September 30, 2003, the Company’s cash flow from operations plus the proceeds from the sale of rental equipment decreased $10.8 million (20%) from $54.1 million in 2002 to $43.3 million in 2003 due to lower earnings and sales proceeds. During 2003, the primary uses of cash have been to purchase $27.2 million of rental equipment, primarily modulars, to satisfy customer requirements, repurchase $10.2 million of the Company’s common stock and pay dividends of $7.1 million to the Company’s shareholders. As a result of the cash activity during the first nine months of 2003, borrowings under the Company’s lines of credit increased $0.5 million from $55.5 million to $56.0 million.

The Company had total liabilities to equity ratios of 1.43 to 1 and 1.25 to 1 as of September 30, 2003 and December 31, 2002, respectively. The debt (notes payable) to equity ratios were 0.40 to 1 as of September 30, 2003 and December 31, 2002. The Company’s credit facility related to its cash management services facilitates automatic borrowings and repayments with the bank on a daily basis depending on the Company’s cash position and allows the Company to maintain minimal cash balances. At September 30, 2003, the Company had unsecured lines of credit which expire June 30, 2004 that permit it to borrow up to $125.0 million of which $40.0 million was outstanding.

The Company has made purchases of shares of its common stock from time to time in market transactions (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 nine months ended September 30, 2003, the Company repurchased 462,900 shares of its outstanding common stock for an aggregate purchase price of $10.2 million (or an average price of $22.05 per share). As of October 30, 2003, 1,000,000 shares remain authorized for repurchase.

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The Company believes that its needs for working capital and capital expenditures through 2003 will be adequately met by cash flow and bank borrowings.

ITEM 3. 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. The Company believes that the carrying amounts for cash, accounts receivable, accounts payable, and notes payable approximate their fair value, except for the fixed rate debt included in notes payable which has an estimated fair value of $16.8 million compared to the recorded value of $16.0 million as of September 30, 2003. The estimate of fair value of the Company’s fixed rate debt is based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2003. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

Dividends

On August 28, 2003, the Company declared a quarterly dividend on its Common Stock; the dividend was $0.20 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.

10.1	McGrath RentCorp Employee Stock Ownership Plan, as amended and restated on September 12, 2003.
10.2	McGrath RentCorp Employee Stock Ownership Trust Agreement, as amended and restated on September 12, 2003.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K on July 31, 2003 regarding the 2^nd Quarter 2003 earnings press release.

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: October 30, 2003		MCGRATH RENTCORP
	By:	/s/ Thomas J. Sauer
	Thomas J. Sauer
	Vice President and Chief Financial Officer (Chief Accounting Officer)

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