UNITED STATES
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, 2004
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 in Rule 12b-2 of the Exchange Act). Yes x No ¨
At November 4, 2004, 12,211,124 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) | 2004 |
2003 |
2004 |
2003 | ||||||||
| REVENUES |
||||||||||||
| Rental |
$ | 37,113 | $ | 19,592 | $ | 82,696 | $ | 56,252 | ||||
| Rental Related Services |
6,901 | 4,350 | 17,267 | 11,554 | ||||||||
| Rental Operations |
44,014 | 23,942 | 99,963 | 67,806 | ||||||||
| Sales |
28,208 | 10,719 | 42,489 | 25,496 | ||||||||
| Other |
318 | 194 | 756 | 598 | ||||||||
| Total Revenues |
72,540 | 34,855 | 143,208 | 93,900 | ||||||||
| COSTS AND EXPENSES |
||||||||||||
| Direct Costs of Rental Operations |
||||||||||||
| Depreciation of Rental Equipment |
11,589 | 3,226 | 20,725 | 9,468 | ||||||||
| Rental Related Services |
3,981 | 2,501 | 10,246 | 6,874 | ||||||||
| Other |
7,465 | 5,323 | 17,214 | 14,544 | ||||||||
| Total Direct Costs of Rental Operations |
23,035 | 11,050 | 48,185 | 30,886 | ||||||||
| Costs of Sales |
22,496 | 7,284 | 32,729 | 17,830 | ||||||||
| Total Costs |
45,531 | 18,334 | 80,914 | 48,716 | ||||||||
| Gross Margin |
27,009 | 16,521 | 62,294 | 45,184 | ||||||||
| Selling and Administrative |
9,641 | 5,623 | 23,294 | 16,873 | ||||||||
| Income from Operations |
17,368 | 10,898 | 39,000 | 28,311 | ||||||||
| Interest |
1,576 | 647 | 3,524 | 2,085 | ||||||||
| Income Before Provision for Income Taxes and Minority Interest in Income of Subsidiary |
15,792 | 10,251 | 35,476 | 26,226 | ||||||||
| Provision for Income Taxes |
6,301 | 4,090 | 14,155 | 10,464 | ||||||||
| Income Before Minority Interest in Income of Subsidiary |
9,491 | 6,161 | 21,321 | 15,762 | ||||||||
| Minority Interest in Income of Subsidiary |
111 | 95 | 82 | 89 | ||||||||
| Net Income |
$ | 9,380 | $ | 6,066 | $ | 21,239 | $ | 15,673 | ||||
| Earnings Per Share: |
||||||||||||
| Basic |
$ | 0.77 | $ | 0.50 | $ | 1.75 | $ | 1.29 | ||||
| Diluted |
$ | 0.76 | $ | 0.50 | $ | 1.72 | $ | 1.28 | ||||
| Shares Used in Per Share Calculation: |
||||||||||||
| Basic |
12,177 | 12,080 | 12,152 | 12,127 | ||||||||
| Diluted |
12,421 | 12,242 | 12,358 | 12,254 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
MCGRATH RENTCORP
CONSOLIDATED BALANCE SHEETS
| (in thousands)
|
September 30, 2004 |
December 31, 2003 |
||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| Cash |
$ | 2,046 | $ | 4 | ||||
| Accounts Receivable, net of allowance for doubtful accounts of $900 in 2004 and $650 in 2003 |
62,739 | 32,199 | ||||||
| Rental Equipment, at cost: |
||||||||
| Relocatable Modular Buildings |
330,818 | 304,905 | ||||||
| Electronic Test Instruments |
146,938 | 34,448 | ||||||
| 477,756 | 339,353 | |||||||
| Less Accumulated Depreciation |
(121,896 | ) | (107,307 | ) | ||||
| Rental Equipment, net |
355,860 | 232,046 | ||||||
| Property, Plant and Equipment, net |
47,584 | 47,250 | ||||||
| Prepaid Expenses and Other Assets |
15,506 | 12,359 | ||||||
| Total Assets |
$ | 483,735 | $ | 323,858 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Liabilities: |
||||||||
| Notes Payable |
$ | 162,999 | $ | 47,266 | ||||
| Accounts Payable and Accrued Liabilities |
42,810 | 28,695 | ||||||
| Deferred Income |
29,970 | 21,970 | ||||||
| Minority Interest in Subsidiary |
2,972 | 2,890 | ||||||
| Deferred Income Taxes, net |
86,257 | 79,059 | ||||||
| Total Liabilities |
325,008 | 179,880 | ||||||
| Shareholders’ Equity: |
||||||||
| Common Stock, no par value - Authorized — 40,000 shares Outstanding — 12,207 shares in 2004 and 12,122 shares in 2003 |
19,445 | 17,900 | ||||||
| Retained Earnings |
139,282 | 126,078 | ||||||
| Total Shareholders’ Equity |
158,727 | 143,978 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 483,735 | $ | 323,858 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
MCGRATH RENTCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended September 30, |
||||||||
| (in thousands)
|
2004 |
2003 |
||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net Income |
$ | 21,239 | $ | 15,673 | ||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
||||||||
| Depreciation and Amortization |
22,185 | 10,940 | ||||||
| Provision for Doubtful Accounts |
228 | 255 | ||||||
| Gain on Sale of Rental Equipment |
(5,251 | ) | (4,051 | ) | ||||
| Change In, Net of TRS Assets Acquired and Liabilities Assumed: |
||||||||
| Accounts Receivable |
(17,189 | ) | (9,396 | ) | ||||
| Prepaid Expenses and Other Assets |
(3,147 | ) | (4,949 | ) | ||||
| Accounts Payable and Accrued Liabilities |
9,325 | 2,183 | ||||||
| Deferred Income |
6,355 | 14,302 | ||||||
| Deferred Income Taxes |
7,198 | 7,279 | ||||||
| Net Cash Provided by Operating Activities |
40,943 | 32,236 | ||||||
| CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
| Purchase of TRS Assets, Net of Liabilities Assumed |
(120,209 | ) | — | |||||
| Purchase of Rental Equipment |
(46,162 | ) | (27,160 | ) | ||||
| Purchase of Property, Plant and Equipment |
(566 | ) | (790 | ) | ||||
| Proceeds from Sale of Rental Equipment |
18,531 | 11,107 | ||||||
| Net Cash Used in Investing Activities |
(148,406 | ) | (16,843 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
| Net Borrowings Under Bank Lines of Credit |
55,733 | 438 | ||||||
| Borrowings Under Private Placement |
60,000 | — | ||||||
| Proceeds from the Exercise of Stock Options |
1,545 | 1,442 | ||||||
| Repurchase of Common Stock |
— | (10,207 | ) | |||||
| Payment of Dividends |
(7,773 | ) | (7,066 | ) | ||||
| Net Cash Provided by (Used) in Financing Activities |
109,505 | (15,393 | ) | |||||
| Net Increase in Cash |
2,042 | — | ||||||
| Cash, beginning of period |
4 | 4 | ||||||
| Cash, end of period |
$ | 2,046 | $ | 4 | ||||
| Interest Paid, during the period |
$ | 3,155 | $ | 2,568 | ||||
| Income Taxes Paid, during the period |
$ | 6,956 | $ | 3,185 | ||||
| Dividends Declared, not yet paid |
$ | 2,686 | $ | 2,424 | ||||
| Rental Equipment Acquisitions, not yet paid |
$ | 5,930 | $ | 5,194 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
MCGRATH RENTCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 1. CONSOLIDATED FINANCIAL INFORMATION
The consolidated financial information for the three and nine months ended September 30, 2004 and 2003, have 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 and nine months ended September 30, 2004, 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. ACQUISITION
In May 2004, the Company entered into an Asset Purchase Agreement to purchase substantially all of the assets of Technology Rentals & Services (“TRS”), a division of CIT Group Inc. (“CIT”) in order to facilitate the growth of the electronics business. Based in Dallas, Texas, TRS is similar to the Company’s existing electronics business, RenTelco, and is one of the leading providers of general purpose and communications test equipment for rent or sale in North America. The transaction was completed on June 2, 2004, for cash consideration of $120.2 million, including expenses of $0.6 million.
The acquisition was accounted for using the purchase method of accounting. Under the purchase method of accounting, the total purchase price is allocated to TRS’ net tangible assets based upon their fair value as of the date of the transaction. Based upon the allocation of the purchase price and management’s estimate of fair value based upon an independent valuation, the purchase price allocation was as follows:
| (in thousands) | ||||
| Rental Equipment |
$ | 107,642 | ||
| Accounts Receivable, net |
13,579 | |||
| Property, Plant and Equipment |
1,228 | |||
| Accounts Payable and Accrued Liabilities |
(595 | ) | ||
| Deferred Income |
(1,645 | ) | ||
| Total Purchase Price |
$ | 120,209 | ||
An independent valuation of the purchased assets was performed to assist in determining the fair value of each identifiable tangible and intangible asset and in allocating the purchase price among the acquired assets and assumed liabilities. Standard valuation procedures and techniques were utilized in determining the fair values. The results of the valuation indicated that the value of intangible assets was de minimus.
Since June 2, 2004, TRS’ results are included in the consolidated statements of income for the three and nine months ended September 30, 2004. The Company financed the acquisition from a revolving line of credit facility with its banks and $60 million in fixed-rate senior notes. At September 30, 2004, no liabilities existed related to the purchase price. Going forward, the electronics division will operate under the name TRS-RenTelco.
Supplemental pro forma information reflecting the acquisition of TRS as if it occurred on January 1, 2003, has not been provided due to the fact that the historical data necessary to compile such pro forma information was impracticable to obtain.
4
NOTE 3. FOREIGN CURRENCY TRANSACTIONS
In conjunction with the TRS acquisition, the Company formed a Canadian subsidiary, TRS-RenTelco Inc., a British Columbia Corporation. The functional currency of the Company’s Canadian subsidiary is the U.S. dollar. Foreign currency transaction gains and losses are reported in results of operations in the period in which they occur. Currently, the Company does not use derivative instruments to hedge its economic exposure with respect to assets, liabilities and firm commitments as the foreign currency transactions and risks to date have not been significant.
NOTE 4. STOCK OPTIONS
The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which compensation cost is recorded as the difference between the 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 Accounting 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 No. 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, |
|||||||
| 2004 |
2003 |
|||||||
| Net Income, as reported |
$ | 21,239 | $ | 15,673 | ||||
| Pro Forma Compensation Charge |
||||||||