1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 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 May 11, 1998, 14,144,730 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 MARCH 31, -------------------------------- 1998 1997 - --------------------------------------------------------------------------------------- <S> <C> <C> REVENUES Rental $16,980,893 $14,327,001 Rental Related Services 2,222,709 2,640,842 ----------- ----------- Rental Operations 19,203,602 16,967,843 Sales 7,952,147 9,601,497 Other 194,392 272,170 ----------- ----------- Total Revenues 27,350,141 26,841,510 ----------- ----------- COSTS AND EXPENSES Direct Costs of Rental Operations Depreciation 3,846,691 3,423,441 Rental Related Services 1,664,022 1,923,973 Other 3,025,471 2,641,926 ----------- ----------- Total Direct Costs of Rental Operations 8,536,184 7,989,340 Costs of Sales 5,249,373 6,261,196 ----------- ----------- Total Costs 13,785,557 14,250,536 ----------- ----------- Gross Margin 13,564,584 12,590,974 Selling and Administrative 3,704,663 3,357,564 ----------- ----------- Income from Operations 9,859,921 9,233,410 Interest 1,450,846 872,885 ----------- ----------- Income Before Provision for Income Taxes 8,409,075 8,360,525 Provision for Income Taxes 3,313,176 3,307,367 ----------- ----------- Income Before Minority Interest 5,095,899 5,053,158 Minority Interest in Income of Subsidiary 128,200 133,670 ----------- ----------- Net Income $ 4,967,699 $ 4,919,488 =========== =========== Earnings Per Share: Basic $ 0.34 0.33 =========== =========== Diluted $ 0.34 0.33 =========== =========== Shares Used in Per Share Calculation: Basic 14,435,790 14,976,518 Diluted 14,634,560 15,123,004 - --------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 1
3 McGRATH RENTCORP CONSOLIDATED BALANCE SHEETS (unaudited) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, --------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 1,442,839 $ 537,875 Accounts Receivable, less allowance for doubtful accounts of $650,000 in 1998 and 1997 20,323,911 21,794,028 Rental Equipment, at cost: Relocatable Modular Offices 200,067,260 196,132,895 Electronic Test Instruments 52,341,460 50,350,777 ------------- ------------- 252,408,720 246,483,672 Less Accumulated Depreciation (74,405,307) (72,398,374) ------------- ------------- Rental Equipment, net 178,003,413 174,085,298 ------------- ------------- Land, at cost 20,495,975 20,495,975 Buildings, Land Improvements, Equipment and Furniture, at cost, less accumulated depreciation of $3,500,913 in 1998 and $3,177,213 in 1997 29,350,043 28,921,513 Prepaid Expenses and Other Assets 7,351,873 6,557,534 ------------- ------------- Total Assets $ 256,968,054 $ 252,392,223 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes Payable $ 97,746,987 $ 82,000,000 Accounts Payable and Accrued Liabilities 16,535,976 27,047,173 Deferred Income 7,900,279 6,928,532 Minority Interest in Subsidiary 1,651,258 1,523,058 Deferred Income Taxes 39,546,912 36,247,956 ------------- ------------- Total Liabilities 163,381,412 153,746,719 ------------- ------------- Shareholders' Equity: Common Stock, no par value - Authorized -- 40,000,000 shares Outstanding -- 14,107,890 shares in 1998 and 14,521,790 shares in 1997 7,697,531 7,756,054 Retained Earnings 85,889,112 90,889,450 ------------- ------------- Total Shareholders' Equity 93,586,643 98,645,504 ------------- ------------- Total Liabilities and Shareholders' Equity $ 256,968,055 $ 252,392,223 ============= ============= - --------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 2
4 McGRATH RENTCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------------- 1998 1997 ------------ ------------ - ------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,967,699 $ 4,919,488 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 4,201,698 3,657,614 Gain on Sale of Rental Equipment (1,390,658) (1,513,842) Proceeds from Sale of Rental Equipment 3,496,525 3,542,735 Change In: Accounts Receivable 1,470,117 2,224,004 Prepaid Expenses and Other Assets (794,339) (1,642,300) Accounts Payable and Accrued Liabilities (10,635,727) 1,364,540 Deferred Income 971,747 (213,330) Deferred Income Taxes 3,298,956 2,524,553 ------------ ------------ Net Cash Provided by Operating Activities 5,586,018 14,863,462 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Rental Equipment (9,870,673) (9,980,850) Purchase of Buildings, Land Improvements, Equipment and Furniture (783,537) (1,782,391) ------------ ------------ Net Cash Used in Investing Activities (10,654,210) (11,763,241) ------------ ------------ Cash Flow from Financing Activities: Net Borrowings Under Lines of Credit 15,746,987 (1,850,000) Net Proceeds from the Exercise of Stock Options 183,175 478,057 Repurchase of Common Stock (8,795,263) -- Payment of Dividends (1,161,743) (1,037,814) ------------ ------------ Net Cash Provided (Used) by Financing Activities 5,973,156 (2,409,757) ------------ ------------ Net Increase in Cash 904,964 690,464 Cash Balance, Beginning of Period 537,875 686,333 ------------ ------------ Cash Balance, End of Period $ 1,442,839 $ 1,376,797 ============ ============ Interest Paid During the Period $ 3,302,380 $ 892,867 ============ ============ Income Taxes Paid During the Period $ 14,220 $ 731,200 ============ ============ Dividends Declared but not yet Paid $ 1,414,473 $ 1,200,681 ============ ============ - ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. </TABLE> 3
5 McGRATH RENTCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 NOTE 1. CONSOLIDATED FINANCIAL INFORMATION The consolidated financial information for the three months ended March 31, 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 three months ended March 31, 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 In April 1998, the Company entered into a loan agreement (the "Agreement") with one of its banks to borrow $15,000,000 on a short-term basis. The loan is required to be repaid on the earlier of July 31, 1998 or the funding date of a contemplated private offering of debt securities. The Agreement requires the Company to pay interest at prime minus one-half percent or, at the Company's election, other rate options available under the Agreement. 4
6 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Rental revenues for the three months ended March 31, 1998 increased $2,653,892 (19%) over the comparative period in 1997, with Mobile Modular Management Corporation ("MMMC") contributing $1,922,046 and electronics contributing $731,846. 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 quarter increased from 53.9% in 1997 to 56.4% in 1998 and declined for modulars from 79.3% in 1997 to 76.6% in 1998. Modular utilization declined as a result of a substantial increase in the level of inventory through the addition of new equipment. Rental related services revenues for the first quarter of 1998 declined $418,133 (16%) as compared to the same period in 1997 as a result of less shipments and site requirements in 1998. Gross margins declined from 27% in 1997 to 25% in 1998. Sales for the three months ended March 31, 1998 declined $1,649,350 (17%) as compared to the same period in 1997 due to fewer new equipment sales by MMMC to school districts. Electronics and Enviroplex sales volumes were consistent with the 1997 comparative period. However, Enviroplex's deferred income increased $1,614,262 as it experienced delays in shipment to school districts as a result of the inclement weather in California. Gross margin on sales declined slightly for the quarter from 35% 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 months ended March 31, 1998 increased $423,250 (12%) over the comparative period in 1997 due to the additional rental equipment purchased during 1997. Rental equipment, at cost, increased 21% between March 31, 1997 and March 31, 1998. Other direct costs of rental operations increased $383,545 (15%) over the first quarter in 1997. This increase primarily resulted from more customers requesting that certain lease costs be charged to them in the rental rate rather than as a one-time charge resulting in higher amortization expense of lease costs ($256,748) for items recovered in the customer's rental rate. Selling and administrative expenses increased $347,099 (10%) for the three months ended March 31, 1998 compared to the same period in 1997 due to higher personnel costs. Personnel costs increased $318,095 over the comparative quarter in 1997 resulting from additional staff for sales and support, including the addition of electronics sales people on the East Coast. Interest expense increased $577,961 (66%) in 1998 over 1997 as a result of a corresponding 66% higher average borrowing level in 1998. The debt increase funded part of the significant rental equipment purchases made during 1997. Income before provision for taxes, net income and basic earnings per share increased slightly in 1998 as compared to 1997 and amounted to $8,409,075, $4,967,699 and $0.34 per share, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company had a total liabilities to equity ratio of 1.75 to 1 and 1.56 to 1 as of March 31, 1998 and December 31, 1997, respectively. The debt (notes payable) to equity ratio was 1.04 to 1 and 0.83 to 1 as of March 31, 1998 and December 31, 1997, respectively. 5
7 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 the three months ended March 31, 1998, the Company has repurchased 439,450 shares of its outstanding common stock for an aggregate purchase price of $8,795,263 (or an average price of $20.01 per share). On March 26, 1998, the Board of Directors authorized the repurchase of up to an additional 1,000,000 shares of its common stock; no repurchases have been made to date under this new authorization. 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 March 26, 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> <CAPTION> NUMBER DESCRIPTION METHOD OF FILING ------ ----------- ---------------- <S> <C> <C> 4.1 Third Amendment to the Restated Credit Agreement Filed herewith. 4.2 $15,000,000 Short-Term Business Loan Agreement Filed herewith. 27.1 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. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: May 11, 1998 MCGRATH RENTCORP by: /s/ Delight Saxton ------------------- Delight Saxton Senior Vice President, Chief Financial Officer (Chief Accounting Officer) and Secretary 6
8 INDEX TO EXHIBITS <TABLE> <CAPTION> NUMBER DESCRIPTION - ------ ----------- <S> <C> 4.1 Third Amendment to the Restated Credit Agreement 4.2 $15,000,000 Short-Term Business Loan Agreement 27.1 Financial Data Schedule </TABLE>