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, 1998 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 7, 1998, 14,068,362 shares of Registrant's Common Stock were outstanding. ===============================================================================
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------------- ------------------------------------ 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES Rental $ 17,339,975 $ 14,743,810 $ 34,320,868 $ 29,070,811 Rental Related Services 2,727,176 2,133,040 4,949,885 4,773,882 ---------------- ----------------- ---------------- ---------------- Rental Operations 20,067,151 16,876,850 39,270,753 33,844,693 Sales 13,233,648 16,344,934 21,185,795 25,946,431 Other 173,698 237,224 368,090 509,394 ---------------- ----------------- ---------------- ---------------- Total Revenues 33,474,497 33,459,008 60,824,638 60,300,518 ---------------- ----------------- ---------------- ---------------- COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 3,810,232 3,464,332 7,656,923 6,887,773 Rental Related Services 1,544,464 1,313,029 3,208,486 3,237,002 Other 3,534,613 2,203,225 6,560,084 4,845,151 ---------------- ----------------- ---------------- ---------------- Total Direct Costs of Rental Operations 8,889,309 6,980,586 17,425,493 14,969,926 Costs of Sales 8,722,806 11,393,852 13,972,179 17,655,048 ---------------- ----------------- ---------------- ---------------- Total Costs 17,612,115 18,374,438 31,397,672 32,624,974 ---------------- ----------------- ---------------- ---------------- Gross Margin 15,862,382 15,084,570 29,426,966 27,675,544 Selling and Administrative 3,838,880 3,688,801 7,543,543 7,046,365 ---------------- ----------------- ---------------- ---------------- Income from Operations 12,023,502 11,395,769 21,883,423 20,629,179 Interest 1,582,884 989,446 3,033,730 1,862,331 ---------------- ----------------- ---------------- ---------------- Income Before Provision for Income Taxes 10,440,618 10,406,323 18,849,693 18,766,848 Provision for Income Taxes 4,113,603 4,044,277 7,426,779 7,351,644 ---------------- ----------------- ---------------- ---------------- Income Before Minority Interest 6,327,015 6,362,046 11,422,914 11,415,204 Minority Interest in Income of Subsidiary 352,679 280,399 480,879 414,069 ================ ================= ================ ================ Net Income $ 5,974,336 $ 6,081,647 $ 10,942,035 $ 11,001,135 ================ ================= ================ ================ Earnings Per Share: Basic $ 0.42 $ 0.41 $ 0.77 $ 0.73 ================== =================== ================ ================ Diluted $ 0.42 $ 0.40 $ 0.75 $ 0.73 ================== =================== ================ ================ Shares Used in Per Share Calculation: Basic 14,122,495 15,011,918 14,295,909 14,994,218 ================== =================== ================ ================ Diluted 14,213,201 15,201,573 14,496,762 15,163,548 ================== =================== ================ ================ </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 1
3 MCGRATH RENTCORP CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- June 30, December 31, ------------------ ------------------ 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 1,076,195 $ 537,875 Accounts Receivable, less allowance for doubtful accounts of $650,000 in 1998 and 1997 23,191,495 21,794,028 Rental Equipment, at cost: Relocatable Modular Offices 207,502,584 196,132,895 Electronic Test Instruments 56,147,727 50,350,777 ------------------ ------------------ 263,650,311 246,483,672 Less Accumulated Depreciation (76,767,755) (72,398,374) ------------------ ------------------ Rental Equipment, net 186,882,556 174,085,298 ------------------ ------------------ Land, at cost 20,495,975 20,495,975 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $3,617,709 in 1998 and $3,177,213 in 1997 30,195,229 28,921,513 Prepaid Expenses and Other Assets 4,733,265 6,557,534 ------------------ ------------------ Total Assets $ 266,574,715 $ 252,392,223 ================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 103,500,000 $ 82,000,000 Accounts Payable and Accrued Liabilities 16,750,244 27,047,173 Deferred Income 6,661,013 6,928,532 Minority Interest in Subsidiary 2,003,937 1,523,058 Deferred Income Taxes 40,491,447 36,247,956 ------------------ ------------------ Total Liabilities 169,406,641 153,746,719 ------------------ ------------------ Shareholders' Equity: Common Stock, no par value - Authorized -- 40,000,000 shares Outstanding -- 14,098,362 shares in 1998 and 14,521,790 shares in 1997 7,701,829 7,756,054 Retained Earnings 89,466,245 90,889,450 ------------------ ------------------ Total Shareholders' Equity 97,168,074 98,645,504 ------------------ ------------------ Total Liabilities and Shareholders' Equity $ 266,574,715 $ 252,392,223 ================== ================== </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 2
4 MCGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, ----------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 10,942,035 $ 11,001,135 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 8,378,752 7,332,307 Gain on Sale of Rental Equipment (2,955,192) (2,885,946) Proceeds from Sale of Rental Equipment 7,545,304 7,577,768 Change In: Accounts Receivable (1,397,467) (3,922,041) Prepaid Expenses and Other Assets 1,824,267 (3,558,671) Accounts Payable and Accrued Liabilities (10,064,142) 571,639 Deferred Income (267,518) 1,720,598 Deferred Income Taxes 4,243,492 185,813 ------------------ ------------------ Net Cash Provided by Operating Activities 18,249,531 18,022,602 ------------------ ------------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Rental Equipment (25,044,294) (20,630,573) Purchase of Buildings, Land Improvements, Equipment and Furniture (1,995,545) (4,411,326) ------------------ ------------------ Net Cash Used in Investing Activities (27,039,839) (25,041,899) ------------------ ------------------ Cash Flow from Financing Activities: Net Borrowings Under Lines of Credit 21,500,000 11,150,000 Net Proceeds from the Exercise of Stock Options 214,632 513,894 Repurchase of Common Stock (9,809,788) -- Payment of Dividends (2,576,216) (2,238,495) ------------------ ------------------ Net Cash Provided (Used) by Financing Activities 9,328,628 9,425,399 ------------------ ------------------ Net Increase in Cash 538,320 2,406,102 Cash Balance, Beginning of Period 537,875 686,333 ================== ================== Cash Balance, End of Period $ 1,076,195 $ 3,092,435 ================== ================== Interest Paid During the Period $ 3,045,749 $ 1,850,899 ================== ================== Income Taxes Paid During the Period $ 3,103,287 $ 7,085,171 ================== ================== Dividends Declared but not yet Paid $ 1,409,836 $ 1,200,953 ================== ================== </TABLE> - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 3
5 MCGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 NOTE 1. CONSOLIDATED FINANCIAL INFORMATION The consolidated financial information for the six months ended June 30, 1998 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, 1998 should not be considered as necessarily indicative of the consolidated results for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest Form 10-K. NOTE 2. NOTES PAYABLE On July 31, 1998, the Company restructured a portion of its debt to a fixed rate by completing a private placement of $40,000,000 of 6.44% senior notes due in 2005 through BancAmerica Robertson Stephens. Interest on the notes is due semi-annually in arrears and the principal is due in 5 equal installments commencing on July 31, 2001. Upon completion of the private placement, the Company repaid a $15,000,000 interim loan with one of its banks. The remainder of the proceeds was applied to reduce the existing revolver. 4
6 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Rental revenues for the three and six months ended June 30, 1998 increased $2,596,165 (18%) and $5,250,057 (18%), respectively, over the comparative periods in 1997. Mobile Modular Management Corporation ("MMMC") contributed $3,552,623 (68%) and electronics contributed $1,697,434 (32%) of the six-month increase. The significant rental revenue increase by MMMC resulted from the large quantities of equipment shipped to schools in the latter part of 1997. Average utilization for electronics during the first six months increased from 53.9% in 1997 to 55.8% in 1998 and declined for modulars from 79.0% in 1997 to 75.8% in 1998. Modular utilization declined primarily due to a substantial increase in inventory from the addition of new classrooms for the 1998 school year. Modular utilization excluding new equipment inventory was 82.2% compared to 81.0% as of June 30, 1998 and 1997, respectively, with an additional $17,643,000 of modular equipment on rent as of June 30, 1998 compared to a year earlier. Rental related services revenues for the three and six months ended June 30, 1998 increased $594,136 (28%) and $176,003 (4%), respectively, as compared to the same periods in 1997. Gross margins increased from 34% to 35% in 1998 for the comparative six-month period. Sales for the three and six months ended June 30, 1998 declined $3,111,286 (19%) and $4,760,636 (18%), respectively, as compared to the same periods in 1997 due to fewer new classroom sales to school districts by MMMC. Enviroplex and Electronics sales volumes increased 15% and 11%, respectively, over the 1997 comparative six-month period which partially offset MMMC's expected decline in new classroom sales. (See 1997 Form 10K Management Discussion and Analysis for Fiscal Years 1997 and 1996.) Gross margin on sales improved for the six-month period from 32% in 1997 to 34% in 1998. Sales continue to occur routinely as a normal part of the Company's rental business; however, these sales can fluctuate from quarter to quarter and year to year depending on customer demands and requirements. Depreciation on rental equipment for the three and six months ended June 30, 1998 increased $345,900 (10%) and $769,150 (11%) over the comparative periods in 1997 as a result of additions to the rental equipment of both modulars and electronics. Rental equipment, at cost, increased 23% between June 30, 1997 and June 30, 1998. Other direct costs of rental operations for the three and six months ended June 30, 1998 increased $1,331,388 (60%) and $1,714,933 (35%) over the comparative periods in 1997 due to increased maintenance costs of the modular fleet and higher amortization of lease expenses included in the rental rate. Selling and administrative expenses for the three and six months ended June 30, 1998 increased $150,079 (4%) and $497,178 (7%), respectively, compared to the same periods in 1997 primarily due to higher personnel and benefit costs. Personnel and benefit costs increased $433,225 over the comparative six-month period in 1997 resulting from additional staff for sales and support, including the addition of electronics sales people on the East Coast, and higher health insurance costs. Interest expense for the three and six months ended June 30, 1998 increased $593,438 (60%) and $1,171,399 (63%) over the comparative periods in 1997 as a result of higher average borrowing levels in 1998. The debt increase was primarily due to rental equipment purchases made during 1997. Net income for the three and six months ended June 30, 1998 decreased slightly as compared to the comparative periods in 1997 and amounted to $5,974,336 and $10,942,035, respectively. Earnings per share increased slightly for the three and six-month periods in 1998 to $0.42 per share and $0.77 per share, respectively, on fewer shares outstanding. 5
7 LIQUIDITY AND CAPITAL RESOURCES The Company had total liabilities to equity ratio of 1.74 to 1 and 1.56 to 1 as of June 30, 1998 and December 31, 1997, respectively. The debt (notes payable) to equity ratio was 1.07 to 1 and 0.83 to 1 as of June 30, 1998 and December 31, 1997, respectively. The Company has made purchases of shares of its common stock from time to time in the over-the-counter market (NASDAQ) and/or through privately negotiated, large block transactions under an authorization of the Board of Directors. Shares repurchased by the Company are cancelled and returned to the status of authorized but unissued stock. As of August 7, 1998, the Company has repurchased 519,550 shares of its outstanding common stock for an aggregate purchase price of $10,424,093 (or an average price of $20.06 per share). As of August 7, 1998, 919,900 shares remain authorized for repurchase. The Company believes that its needs for working capital and capital expenditures through 1998 and beyond will adequately be met by cash flow and bank borrowings. PART II OTHER INFORMATION ITEM 3. OTHER INFORMATION On June 11, 1998, the Company declared a quarterly dividend on its Common Stock; the dividend was $0.10 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. <TABLE> <S> <C> <C> NUMBER DESCRIPTION METHOD OF FILING 4.1 First Extension $3,000,000 Committed Credit Facility Filed herewith. 4.2 Fourth Extension to the $5,000,000 Optional Credit Facility with Union Bank of California N.A. Filed herewith. 4.3 Schedule of Notes With Sample Note Filed herewith. 27 Financial Data Schedule Filed herewith. </TABLE> (b) Reports on Form 8-K. No reports on form 8-K have been filed during the quarter for which this report is filed. 6
8 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 7, 1998 MCGRATH RENTCORP by: /s/ Delight Saxton ------------------- Delight Saxton Senior Vice President, Chief Financial Officer (Chief Accounting Officer) and Secretary 7
9 INDEX TO EXHIBITS Exhibits. <TABLE> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- <S> <C> <C> 4.1 First Extension $3,000,000 Committed Credit Facility Filed herewith. 4.2 Fourth Extension to the $5,000,000 Optional Credit Facility with Uion Bank of California H.A. Filed herewith. 4.3 Schedule of Notes With Sample Note Filed herewith. 27 Financial Data Schedule Filed herewith. </TABLE>