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, 2002 | Commission file number 0-13292 |
McGRATH RENTCORP
(Exact name of registrant as specified in its Charter)
| California (State or other jurisdiction of incorporation or organization) |
94-2579843 (I.R.S. Employer Identification No.) |
5700 Las Positas Road, Livermore, CA 94551
(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 October 23, 2002, 12,489,180 shares of Registrant’s Common Stock were outstanding.
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) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
REVENUES |
||||||||||||||||||||
Rental |
$ | 20,202 | $ | 25,100 | $ | 62,152 | $ | 76,975 | ||||||||||||
Rental Related Services |
4,483 | 5,051 | 12,773 | 13,546 | ||||||||||||||||
Rental Operations |
24,685 | 30,151 | 74,925 | 90,521 | ||||||||||||||||
Sales |
15,752 | 11,895 | 33,061 | 28,963 | ||||||||||||||||
Other |
1,513 | 360 | 2,204 | 941 | ||||||||||||||||
Total Revenues |
41,950 | 42,406 | 110,190 | 120,425 | ||||||||||||||||
COSTS AND EXPENSES |
||||||||||||||||||||
Direct Costs of Rental Operations |
||||||||||||||||||||
Depreciation |
3,222 | 7,133 | 12,327 | 20,295 | ||||||||||||||||
Rental Related Services |
2,362 | 2,871 | 6,913 | 8,241 | ||||||||||||||||
Impairment Related to Rental Equipment |
— | — | 24,083 | — | ||||||||||||||||
Other |
4,135 | 4,742 | 14,076 | 13,204 | ||||||||||||||||
Total Direct Costs of Rental Operations |
9,719 | 14,746 | 57,399 | 41,740 | ||||||||||||||||
Costs of Sales |
11,825 | 8,207 | 24,035 | 19,726 | ||||||||||||||||
Total Costs |
21,544 | 22,953 | 81,434 | 61,466 | ||||||||||||||||
Gross Margin |
20,406 | 19,453 | 28,756 | 58,959 | ||||||||||||||||
Selling and Administrative |
5,084 | 5,599 | 17,103 | 17,075 | ||||||||||||||||
Income from Operations |
15,322 | 13,854 | 11,653 | 41,884 | ||||||||||||||||
Interest |
951 | 1,748 | 3,175 | 5,745 | ||||||||||||||||
Income Before Provision for Income Taxes |
14,371 | 12,106 | 8,478 | 36,139 | ||||||||||||||||
Provision for Income Taxes |
5,719 | 4,818 | 3,374 | 14,383 | ||||||||||||||||
Income Before Minority Interest |
8,652 | 7,288 | 5,104 | 21,756 | ||||||||||||||||
Minority Interest in Income of Subsidiary |
159 | 124 | 182 | 342 | ||||||||||||||||
Net Income |
$ | 8,493 | $ | 7,164 | $ | 4,922 | $ | 21,414 | ||||||||||||
Earnings Per Share: |
||||||||||||||||||||
Basic |
$ | 0.68 | $ | 0.58 | $ | 0.39 | $ | 1.76 | ||||||||||||
Diluted |
$ | 0.68 | $ | 0.58 | $ | 0.39 | $ | 1.73 | ||||||||||||
Shares Used in Per Share Calculation: |
||||||||||||||||||||
Basic |
12,483 | 12,280 | 12,462 | 12,202 | ||||||||||||||||
Diluted |
12,556 | 12,456 | 12,628 | 12,376 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | ||||||||||
| (in thousands) | 2002 | 2001 | |||||||||
| (unaudited) | |||||||||||
ASSETS |
|||||||||||
Cash |
$ | 2,093 | $ | 4 | |||||||
Accounts Receivable, less allowance for doubtful
accounts of $900 in 2002 and $1,250 in 2001 |
40,364 | 36,896 | |||||||||
Rental Equipment, at cost: |
|||||||||||
Relocatable Modular Offices |
286,887 | 281,203 | |||||||||
Electronic Test Instruments |
42,208 | 95,419 | |||||||||
| 329,095 | 376,622 | ||||||||||
Less Accumulated Depreciation |
(103,773 | ) | (121,100 | ) | |||||||
Rental Equipment, net |
225,322 | 255,522 | |||||||||
Land, at cost |
19,102 | 19,303 | |||||||||
Buildings, Land Improvements, Equipment and Furniture,
at cost, less accumulated depreciation of $9,917
in 2002 and $8,465 in 2001 |
31,242 | 32,479 | |||||||||
Prepaid Expenses and Other Assets |
9,833 | 10,680 | |||||||||
Total Assets |
$ | 327,956 | $ | 354,884 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
Liabilities: |
|||||||||||
Notes Payable |
$ | 72,698 | $ | 104,140 | |||||||
Accounts Payable and Accrued Liabilities |
29,220 | 30,745 | |||||||||
Deferred Income |
22,268 | 18,473 | |||||||||
Minority Interest in Subsidiary |
3,128 | 2,946 | |||||||||
Deferred Income Taxes |
68,173 | 66,985 | |||||||||
Total Liabilities |
195,487 | 223,289 | |||||||||
Shareholders’ Equity: |
|||||||||||
Common Stock, no par value - |
|||||||||||
Authorized — 40,000 shares |
|||||||||||
Outstanding — 12,484 shares in 2002 and
12,335 shares in 2001 |
15,235 | 12,794 | |||||||||
Retained Earnings |
117,234 | 118,801 | |||||||||
Total Shareholders’ Equity |
132,469 | 131,595 | |||||||||
Total Liabilities and Shareholders’ Equity |
$ | 327,956 | $ | 354,884 | |||||||
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) | 2002 | 2001 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net Income |
$ | 4,922 | $ | 21,414 | ||||||||
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities: |
||||||||||||
Depreciation and Amortization |
13,890 | 21,962 | ||||||||||
Impairment Related to Rental Equipment |
24,083 | — | ||||||||||
Gain on Sale of Rental Equipment |
(4,783 | ) | (4,977 | ) | ||||||||
Loss on Sale of Land |
26 | — | ||||||||||
Provision for Losses on Accounts Receivable |
1,055 | 826 | ||||||||||
Change In: |
||||||||||||
Accounts Receivable |
(4,523 | ) | (1,009 | ) | ||||||||
Prepaid Expenses and Other Assets |
847 | (769 | ) | |||||||||
Accounts Payable and Accrued Liabilities |
(1,612 | ) | (3,899 | ) | ||||||||
Deferred Income |
3,795 | 4,032 | ||||||||||
Deferred Income Taxes |
1,188 | 7,211 | ||||||||||
Net Cash Provided by Operating Activities |
38,888 | 44,791 | ||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of Rental Equipment |
(16,150 | ) | (41,496 | ) | ||||||||
Purchase of Land, Buildings, Land Improvements, Equipment and Furniture |
(125 | ) | (1,511 | ) | ||||||||
Proceeds from Sale of Land |
175 | — | ||||||||||
Proceeds from Sale of Rental Equipment |
14,524 | 13,624 | ||||||||||
Net Cash Used in Investing Activities |
(1,576 | ) | (29,383 | ) | ||||||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||||||
Net Payments Under Notes Payable |
(31,442 | ) | (10,776 | ) | ||||||||
Net Proceeds from the Exercise of Stock Options |
2,441 | 801 | ||||||||||
Payment of Dividends |
(6,222 | ) | (5,612 | ) | ||||||||
Net Cash Used in Financing Activities |
(35,223 | ) | (15,587 | ) | ||||||||
Net Increase (Decrease) in Cash |
2,089 | (179 | ) | |||||||||
Cash Balance, Beginning of Period |
4 | 643 | ||||||||||
Cash Balance, End of Period |
$ | 2,093 | $ | 464 | ||||||||
Interest Paid During the Period |
$ | 3,827 | $ | 6,721 | ||||||||
Income Taxes Paid During the Period |
$ | 2,187 | $ | 7,208 | ||||||||
Dividends Declared but not yet Paid |
$ | 2,248 | $ | 1,970 | ||||||||
Stock Issued for Equity in Subsidiary |
$ | — | $ | 2,061 | ||||||||
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, 2002
Note 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the nine months ended September 30, 2002 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 nine months ended September 30, 2002 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. COMMON STOCK AND OPTIONS (clarification of latest Form 10-K disclosure)
On July 2, 2001, the Company entered into a Stock Exchange Agreement with the minority shareholders of Enviroplex to increase its ownership in Enviroplex from 73% to 81%. The Company exchanged 85,366 shares of its common stock for 8% of Enviroplex. The transaction was recorded using purchase accounting and was valued at $2,061,000 based on the Company’s closing price of $24.14 per share on June 29, 2001, the last trading day immediately preceding the effective date of the transaction.
Note 3. DEPRECIATION
Effective January 1, 2002, the Company prospectively revised the estimated residual value of its relocatable modular offices from 18% to 50% of original cost. The change in estimate is based on actual used equipment sales experience and management believes that this change better reflects the future expected residual values of the modular equipment. Historical results demonstrate that upon sale, the Company recovers a high percentage of its modular equipment cost. The Company’s proactive repair and maintenance program is a key factor contributing to the high recovery of its equipment’s cost upon sale. For the three months ended September 30, 2002, the effect of the change is a decrease in depreciation expense of $1.8 million and an increase in net income of $1.1 million or $0.09 per diluted share. For the nine months ended September 30, 2002, the effect of the change is a decrease in depreciation expense of $5.4 million and an increase in net income of $3.3 million or $0.26 per diluted share.
Note 4. IMPAIRMENT
The Company continually evaluates the recoverability of its rental equipment’s carrying value in accordance with Statement of Financial Accounting Standards No. 144. A key element in the recoverability assessment of the equipment’s carrying value is the Company’s outlook as to the future market conditions for its electronics rental equipment. If the carrying amount of the equipment is not fully recoverable, an impairment charge is recognized to the extent that the carrying value of the equipment exceeds its estimated fair value. The Company estimates fair value based upon the condition of the equipment and market conditions. As a result of these evaluations, equipment was identified with carrying values in excess of its estimated future net cash flows. During the first six months of 2002, the Company’s RenTelco segment recorded noncash impairment charges of $24.1 million resulting from the depressed and low projected demand for RenTelco’s rental products coupled with high inventory levels, especially communications equipment. During the three months ended September 30, 2002, no impairment charge was recorded. RenTelco’s business activity levels are directly attributable to the severe and prolonged broad-based weakness in the telecommunications industry. The Company has limited visibility as to when the recovery in this sector will occur. Impairment charges are separately captioned on the Statements of Income within Direct Costs of Rental Operations.
As of September 30, 2002, the carrying value of communications equipment was $9.0 million, of which $1.3 million is classified as held for sale and included in “Rental Equipment, at cost: Electronics Test Instruments”
4
on the Balance Sheet. The Company will continue to use its best efforts to sell the rental equipment determined to be in excess of the required levels to meet projected customer demand. There can be no assurance that the Company will be successful in these efforts.
Note 5. PROPOSED MERGER TERMINATED
The proposed merger transaction is discussed in the Company’s Annual Report on Form 10-K filed with the SEC on March 19, 2002, and a copy of the Merger Agreement was attached as an exhibit to the Company’s Report on Form 8-K filed with the SEC on December 26, 2001. On July 1, 2002, McGrath RentCorp exercised its right to terminate the Merger Agreement, dated as of December 20, 2001, between McGrath RentCorp and Tyco Acquisition Corp. 33, a subsidiary of Tyco International Ltd. In August 2002, Tyco Acquisition Corp. 33 paid $1.25 million to McGrath RentCorp as reimbursement of certain costs and expenses incurred in connection with the proposed merger. In connection with the payment, McGrath RentCorp and Tyco Acquisition Corp. 33 have agreed that neither of them will have any claims against the other or their affiliates in connection with the Merger Agreement. The $1.25 million payment was included in “Other Revenues” on the Statements of Income for the period ending September 30, 2002. Additionally, included in Selling and Administrative expenses for first nine months of 2002 are $0.6 million of nonrecurring merger-related costs and expenses.
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 nine months ended September 30, 2002 and 2001 for the Company’s reportable segments is shown in the following table:
5
| (in thousands) | Modulars(1) | Electronics(2) | Enviroplex | Consolidated | ||||||||||||
Nine
Months Ended September 30, |
||||||||||||||||
2002 |
||||||||||||||||
Rental Revenues |
$ | 49,664 | $ | 12,488 | $ | — | $ | 62,152 | ||||||||
Rental Related Services Revenues |
12,342 | 431 | — | 12,773 | ||||||||||||
Sales and Other Revenues(3) |
14,997 | 7,703 | 11,315 | 34,015 | ||||||||||||
Total Revenues(3) |
77,003 | 20,622 | 11,315 | 108,940 | ||||||||||||
Depreciation on Rental Equipment |
5,165 | 7,162 | — | 12,327 | ||||||||||||
Interest Expense |
2,705 | 634 | (164 | ) | 3,175 | |||||||||||
Income before Impairment and Merger Related
Items and Provision for Income Taxes(4) |
29,239 | 1,191 | 1,474 | 31,904 | ||||||||||||
Income (Loss) before Merger Related Items
and Provision for Income Taxes(4) |
29,239 | (22,892 | ) | 1,474 | 7,821 | |||||||||||
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 E | ||||||||||||||||