FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1997 Commission File No. 0-13292 McGRATH RENTCORP (Exact name of registrant as specified in its Charter) CALIFORNIA 94-2579843 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 5700 LAS POSITAS ROAD LIVERMORE, CALIFORNIA 94550 (Address of principal executive offices) Registrant's telephone number: (510) 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 November 11, 1997, 15,021,918 shares of Registrant's Common Stock were outstanding. _________________________
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 1 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Nine months ended September 30, September 30, --------------------------- ---------------------------- 1997 1996 1997 1996 ----------- ----------- ------------ ----------- <S> <C> <C> <C> <C> REVENUES: Rental operations- Rental $16,067,741 $12,321,796 $ 45,138,552 $35,573,650 Rental related services 3,608,892 3,920,071 8,892,168 7,672,245 ----------- ----------- ------------ ----------- 19,676,633 16,241,867 54,030,720 43,245,895 Sales and related services 25,675,496 9,255,338 51,621,927 19,598,040 ----------- ----------- ------------ ----------- Total revenues 45,352,129 25,497,205 105,652,647 62,843,935 ----------- ----------- ------------ ----------- COSTS & EXPENSES: Direct costs of rental operations- Depreciation 3,649,571 3,108,151 10,537,344 9,188,972 Rental related services 1,991,688 2,048,185 5,606,739 4,227,682 Other direct rental costs 2,296,141 2,671,884 6,763,243 6,231,218 ----------- ----------- ------------ ----------- 7,937,400 7,828,220 22,907,326 19,647,872 Cost of sales and related services 17,878,601 6,064,184 35,533,649 13,257,615 ----------- ----------- ------------ ----------- 25,816,001 13,892,404 58,440,975 32,905,487 ----------- ----------- ------------ ----------- Gross margin 19,536,128 11,604,801 47,211,672 29,938,448 Selling and administrative expenses 5,429,859 3,729,591 12,970,953 9,576,391 ----------- ----------- ------------ ----------- Income from operations 14,106,269 7,875,210 34,240,719 20,362,057 Interest expense 1,042,716 744,275 2,905,047 2,061,701 ----------- ----------- ------------ ----------- Income before provision for income taxes 13,063,553 7,130,935 31,335,672 18,300,356 ----------- ----------- ------------ ----------- Provision for income taxes 5,361,199 2,667,070 12,632,183 7,110,824 ----------- ----------- ------------ ----------- Net income $ 7,702,354 $ 4,463,865 $ 18,703,489 $11,189,532 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Net income per share $ 0.51 $ 0.29 $ 1.23 $ 0.73 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- </TABLE> The accompanying notes are an integral part of these financial statements.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 2 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 1997 1996 ------------ ------------ <S> <C> <C> ASSETS Cash $ 1,341,998 $ 686,333 Accounts receivable, less allowance for doubtful accounts of $650,000 in 1997 and $605,000 in 1996 25,849,843 19,919,954 Rental equipment, at cost: Relocatable modular offices 179,968,456 158,376,950 Electronic test instruments 48,867,451 43,335,413 ------------ ------------ 228,835,907 201,712,363 Less - Accumulated depreciation (70,142,706) (64,419,888) ------------ ------------ 158,693,201 137,292,475 Land 20,167,647 20,167,647 Land improvements, furniture and equipment, at cost, less accumulated depreciation of $2,934,896 in 1997 and $3,376,803 in 1996 25,416,597 19,572,015 Prepaid expenses and other assets 6,494,117 2,396,935 ------------ ------------ $237,963,403 $200,035,359 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 65,800,000 $ 53,850,000 Accounts payable and accrued liabilities 22,757,765 15,280,543 Deferred income 7,313,239 5,226,803 Deferred income taxes 37,627,123 36,869,734 ------------ ------------ Total liabilities 133,498,127 111,227,080 ------------ ------------ Shareholders' equity: Common stock, no par value - Authorized - 4O,OOO,OOO shares Outstanding - 15,015,918 shares in 1997 and 14,797,918 in 1996 7,718,062 7,161,168 Retained earnings 96,747,214 81,647,111 ------------ ------------ Total shareholders' equity 104,465,276 88,808,279 ------------ ------------ $237,963,403 $200,035,359 ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these financial statements.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 3 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash (Unaudited) Nine months ended September 30, 1997 1996 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 18,703,489 $ 11,189,532 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,191,451 9,787,419 Gain on sale of rental equipment (5,453,700) (3,606,691) Change in: Accounts receivable (5,929,889) (5,380,276) Prepaids and other assets (4,097,182) (428,495) Accounts payable and accrued liabilities 7,313,283 3,931,629 Deferred income 2,086,436 (341,885) Deferred income taxes 757,389 1,826,972 ------------ ------------ Net cash provided by operating activities 24,571,277 16,978,205 ------------ ------------ Cash flows from investing activities: Purchase of rental equipment (41,240,592) (17,598,298) Purchase of land --- (678,347) Purchase of land improvements, furniture and equipment (6,498,689) (4,277,225) Proceeds from sale of rental equipment 14,756,222 9,511,633 ------------ ------------ Net cash used in investing activities (32,983,059) (13,042,237) ------------ ------------ Cash flows from financing activities: Net borrowings 11,950,000 8,645,000 Payment of dividends (3,439,447) (3,048,133) Repurchase of common stock --- (8,778,775) Net proceeds from the exercise of stock options 556,894 92,101 ------------ ------------ Net cash provided (used) by financing activities 9,067,447 (3,089,807) ------------ ------------ Net increase (decrease) in cash 655,665 846,161 Cash balance, beginning of period 686,333 221,075 ------------ ------------ Cash balance, end of period $ 1,341,998 $ 1,067,236 ------------ ------------ ------------ ------------ Interest paid during period $ 2,859,790 $ 2,028,226 ------------ ------------ ------------ ------------ Income taxes paid during period $ 8,274,674 $ 5,256,506 ------------ ------------ Dividends declared but not yet paid $ 1,201,753 $ 1,035,854 ------------ ------------ ------------ ------------ </TABLE> The accompanying notes are an integral part of these financial statements.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 __________________________________________ 1. The consolidated financial information for the nine months ended September 30, 1997 has not been audited, but in the opinion of management, all adjustments (consisting only of normal recurring accruals, consolidation and eliminating entries) necessary for the fair presentation of the consolidated results of operations, financial position, and cash flows of McGrath RentCorp (the "Company") have been made. The consolidated results of the nine months ended September 30, 1997 should not be considered as necessarily indicative of the results for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest Form 10-K. 2. The number of outstanding shares and equivalent shares used in the earnings per common share calculations were as follows: <TABLE> <CAPTION> Primary Fully Diluted ---------- ------------- <S> <C> <C> Three months ended: September 30, 1997 15,242,764 15,250,148 September 30, 1996 15,172,408 15,194,300 Nine months ended: September 30, 1997 15,192,887 15,235,692 September 30, 1996 15,403,986 15,468,252 </TABLE> 3. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which modifies the way in which earnings per share (EPS) is calculated and disclosed effective for periods ending after December 15, 1997. Primary EPS will be replaced by basic EPS which is computed by dividing reported net income by the weighted average number of shares of common stock outstanding during the period. Fully diluted EPS will be replaced with diluted EPS which is computed by dividing reported net income by the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the period. Common stock equivalents result from dilutive stock options computed using the treasury stock method with the average share price for the reported period. When implemented, the effect of this accounting change on previously reported EPS data is not significant. 4. In July 1997, the Company entered into a new credit agreement amending and restating it's unsecured line of credit (the "Agreement") with its banks which expires June 30, 1999 and permits it to borrow up to $70,000,000. The Agreement requires the Company to pay interest at prime or, at the Company's election, other rate options available under the Agreement. In addition, the Company pays a commitment fee on the daily average unused portion of the available line. Among other terms, the
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 __________________________________________ Agreement requires (i) the Company to maintain shareholders' equity of not less than $77,800,000 plus 50% of all net income generated subsequent to June 30, 1997, (ii) a debt-to-equity ratio (excluding deferred income taxes) of not more than 3 to 1, (iii) interest coverage (income from operations compared to interest expense) of not less than 2 to 1, and (iv) debt service coverage of not less than 1.15 to 1. If the Company does not amend or renegotiate this Agreement for an additional time period prior to its expiration date, the principal amount outstanding at that time will be converted to a two-year term loan with the principal due and payable in eight (8) quarterly installments. In addition to the $70,000,000 unsecured line of credit, the Company has a $3,000,000 committed line of credit related to its cash management services and has $10,000,000 of uncommitted optional advance facilities all of which expire June 30, 1998.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 6 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Three and Nine Months Ended September 30, 1997 and 1996 McGrath RentCorp (the "Company") is engaged in the business of renting and selling relocatable modular offices and classrooms under its trade name "Mobile Modular," and electronic test and measurement instruments under the names "McGrath RentCorp" and "Rentelco". Although the Company's primary emphasis is on rentals, both modulars and electronics are sold to direct-use customers. The Company also manufactures portable classrooms through its majority owned (73.2%) subsidiary, Enviroplex, Inc., for direct sale to school districts. Rental revenues for the three and nine months ended September 30, 1997 increased $3,745,945 (30%) and $9,564,902 (27%), respectively, over the same periods in 1997. Modulars contributed 71.2% and 75.8% of the rental revenue increase in 1997 for the three and nine months ended September 30, 1997. Average utilization during the first nine months increased for Modulars, from 70.5% to 80.0%, and slightly declined for Electronics, from 55.2% to 55.0% as compared to the same period in 1996. The increase in utilization for Modulars is primarily the result of rentals to implement the class size reduction program in California schools. Rental related service revenues for the three months ended September 30, 1997 decreased $311,179 (8%) and for the nine months ended September 30, 1997 increased $1,219,923 (16%), respectively, compared to the same periods in 1996. The three month comparative revenue decline resulted from many schools opting in 1997 to include the normal upfront charges in the rental rate. The nine month comparative increase was primarily due to one commercial project with significant site work requirements which occurred in the first quarter of 1997. The gross margins for rental related services declined for the nine month comparative period from 45% in 1996 to 37% in 1997 partially as a result of the project noted above being performed at a lower gross margin. Sales and related services for the three and nine months ended September 30, 1997 increased $16,420,158 (177%) and $32,023,887 (163%), respectively, over the same periods in 1996. The table below indicates the sales and related services contribution for Modulars, Enviroplex and Electronics for nine months ended September 30, 1997 compared with the nine months ended September 30, 1996. Nine months ended September 30, ------------------------------- Increase Over 1997 1996 Prior Period ----------- ----------- ------------- Modulars $29,156,007 $ 9,216,794 $19,939,213 Enviroplex 16,755,733 6,150,920 10,604,813 Electronics 5,710,187 4,230,326 1,479,861 ----------- ----------- ------------ $51,621,927 $19,598,040 $32,023,887 ----------- ----------- ------------ ----------- ----------- ------------
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 7 The significant increase in sales and related services for Modulars and Enviroplex is directly related to the higher demand by school districts in conjunction with the class size reduction program in California. Sales and related service revenues from school districts comprised 77% and 33% of the Modulars sales and related services revenues for the nine months ended September 30, 1997 and 1996, respectively, while Enviroplex sells substantially all of its product to school districts. Future sales under the class size reduction program for the Company are subject to the state's funding of the program, the requirements of the various school districts and available supplies. Management believes the present sales and related services revenue levels for Modulars, and to a lesser degree Enviroplex, may not be sustainable in the future. Management continues to believe that sales and related services from quarter to quarter and year to year fluctuate based on customer requirements. Gross margins on sales and related services declined slightly for the nine month period from 32.4% in 1996 to 31.2% in 1997. Depreciation on rental equipment for the three and nine months ended September 30, 1997 increased $541,420 (17%) and $1,348,372 (15%), respectively, over the same periods in 1996 due to the additions of both modular and electronic rental equipment. Selling and administrative expenses for the three and nine months ended September 30, 1997 increased $1,700,268 (46%) and $3,394,562 (35%), respectively, over the same periods in 1996. The increased business activity in the modular business for class size reduction has also translated into higher personnel costs for the nine months ended September 30, 1997 over the same nine month period in 1996. Personnel costs increased $1,580,152 over the same period in 1996 and include additional staff for sales and support, increased temporary contract labor, and increased sales and performance bonuses. Additionally, selling and administrative expenses for Enviroplex increased $908,894 during the nine month comparative period due to increased sales activity and includes the reduction of net income by the portion of earnings of Enviroplex related to the minority shareholder's interest. Interest expense for the three and nine months ended September 30, 1997 increased $298,441 (40%) and $843,346 (41%), respectively, over the same periods in 1996 as a result of 47% higher average borrowing levels during the comparative period. Income before provision for income taxes for the three and nine months ended September 30, 1997 increased $5,932,618 (83%) and $13,878,662 (68%), respectively, over the same periods in 1996. Net income increased $3,238,489 (73%) for the three month period and $7,513,957 (67%) for the nine month period over the same periods in 1996. Earnings per share for the three and nine months ended September 30, 1997 increased 76%, from $0.29 to $0.51, and 68%, from $0.73 to $1.23.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 8 Liquidity and Capital Resources. The debt (notes payable) to equity ratio was 0.63 to 1 at September 30, 1997 compared to 0.61 to 1 at December 31, 1996. The debt (total liabilities) to equity ratio at the end of the current period was 1.28 to 1 as compared to 1.25 to 1 as of December 31, 1996. The Company has made purchases of shares of its common stock from time to time in the over-the-counter market (NASDQ) and/or through privately negotiated, large block transactions under an authorization of the Board of Directors. Shares repurchased by the Company will be cancelled and returned to the status of authorized but unissued stock. The Company has not repurchased any of its common stock during 1997 and currently is authorized to purchase up to 1,000,000 shares. The Company's primary use of funds is to purchase rental equipment and sales inventory, and funds will continue to be used for this purpose in the future. The Company also pays quarterly dividends, which will constitute an additional use of cash in 1997.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 9 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION In September 1997, the Company declared a quarterly dividend on its Common Stock; the dividend was $0.08 per share. Subject to its continued profitability and favorable cash flow, the Company intends to continue the payment of quarterly dividends. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. Index to exhibits filed herewith as part of this report: Exhibit Number Title 4.1 $3,000,000 Committed Credit Facility dated July 29, 1997 between the Company and Union Bank of California, N.A. 4.2 $5,000,000 Optional Advance Facility Extension dated July 29, 1997 between the Company and Union Bank of California, N.A. 4.3 $5,000,000 Optional Advance Facility Extension dated August 13, 1997 between the Company and Fleet Bank, N.A. (b) REPORTS ON FORM 8-K. No reports on form 8-K have been filed during the quarter for which this report is filed.
McGrath RentCorp Third Quarter 1997 Form 10-Q Page 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 11, 1997 McGRATH RENTCORP By:/s/ Delight Saxton ---------------------------------- Delight Saxton, Chief Financial Officer and Senior Vice President