McGrath RentCorp (MGRC) 2002 Q1 法說會逐字稿

Good afternoon. My name is . And I will be your conference facilitator today. At this time I would like everyone to the McGrath RentCorp first quarter 2002 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time. Simply press start then the number one on your telephone key pad. If you would like to withdraw your question press the pound key. Thank you. Mr. , you may begin the conference.

busher|Jeffery|Busher|Investor Relations Advisor|McGrath RentCorp|cm?: Good afternoon. I'm the investor relation advisor to McGrath RentCorp. And will be acting as moderator of the conference call today. Representatives on the call today from McGrath RentCorp are: Robert McGrath, Chairman and CEO; Dennis Kakures, President and COO; and Tom Sauer, Vice President and CFO.

Please note that this call is being recorded and will be available for telephone replay for up to 48 hours, following the call by dialing: 1-800-642-1687 for domestic callers and 1-706-645-9291 for international callers. The pass code for the call replay is 394-7155. This call is also being broadcast live via the Internet and will be available for replay.

We encourage you to visit the investor relation section of the company's Website at MGRC.com. Our press release was sent out today at 4:05 p.m. eastern daylight time, 1:05 p.m. pacific daylight time today. If you did not receive a copy but would like one. It is available online in the investor relations section of our Website. Or you may call 1-206-652-9704 and one will be sent to you.

Before getting started let me remind everyone that the matters we will be discussing today that are not truly historical. They are forward looking statements within the meaning of section 21E of the Securities and Exchange Act of 1934, including statement regarding McGrath RentCorp. expectations, beliefs, intentions, core strategies regarding the future. All forward looking statement are based on information currently available to McGrath RentCorp and McGrath RentCorp. assumes no obligation to update any such forward looking statement.

Forward looking statement involve risk and uncertainties which could cause actual results that different materially from the projected. These and other risks relating to McGrath RentCorp. business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission including the companies most recent form 10K and form 10Q. I would now like to turn the call over Robert McGrath, Chairman and CEO.

mcGrath|Robert|McGrath|Chairman and CEO|McGrath RentCorp.|cm: Good afternoon. During our previous conference calls we talked about nuggets. And we define a nugget as a little kernel of information that you onto and carry away with you. Nugget number one: for the first time since going public in 1984 we have recorded a quarterly loss.

While I am proud of our previous record. I am humbled by our current loss. This results directly from an $11.9 million dollar impairment charge related to our telecommunications equipment held in our rental inventory. While there is no absolutely nothing wrong with this equipment. It is simply a case of owning too much of it and our competitors owning too much of it, resulting in too much equipment chasing too few rental dollars.

I've been in the rental business for over 30 years and have gone through many ups and downs but never have I seen such a overhang of equipment.

Nugget number two: The good news is that the write down is behind us and I'm please with our strong results in the modular business. To be honest I feel quite positive about the future. Nugget number three: Guidance, this quarter we will not be giving guidance as far as numbers are concerned. Having said that, let me say that as a company we are committed to a strong investor relations program. And it our desire to get every bit of color and guidance that we can. It is however, just not appropriate this quarter.

Nugget number four: As most of you are aware we announced an agreement with Tyco on December 20th, 2001. Where in McGrath RentCorp. agreed to be acquired for a cash and stock consideration. Just as with our Q4 2001 conference call held earlier this year. We can not speak to the transaction during this conference call. We are also sorry that we will not be able to address any of your questions on this matter.

In the meantime it is business as usual and the remainder of this call should be treated as such. There are some expenses relating to the transaction that appear in the first quarter. And more are expected in the second quarter of 2002. In giving you the numbers Dennis and Tom will try to be clear whether those numbers include or exclude those expenses. Now I'm going to turn the meeting over to our Chief Financial Officer, Tom Sauer.

sauer|Thomas|Sauer|Vice President and Chief Financial Officer|McGrath RentCorp.|cm: Thank you Bob, as Bob mentioned the company did record an impairment loss in the quarter that I will discuss in a moment. First let me review the results excluding this impairment charge.

The companies results continued to be affected by broad based weakness in the telecommunications industry and this is significantly impacted the company's overall results for the quarter. RenTelco's quarterly rental revenues have declined over the last year with growth margin percentage unrest trending down as depreciation has become a larger and larger cost element of the business. This trend has resulted RenTelco's pretax contribution falling from $5.7 million in first quarter 2001 to break even in the first quarter 2002.

Comparing the first quarter 2002 to the first quarter 2001. Rental revenues decreased 18 percent to $21.3 million with mobile modular increasing eight percent to $16.3 million and RenTelco's decreasing 55 percent to five million. For RenTelco 43 percent lower utilization combined with 12 percent lower rental rates resulted in a 50 percent reduction in the overall monthly yield on the rental equipment pooled during the quarter. Declining from 3.8 percent in the first quarter of 2001 to 1.9 percent in first quarter 2002.

Sales revenues increased seven percent to $6.1 million as a result of higher sales volume by RenTelco. RenTelco's growth margin percentage on sales has declined 21 percent from 33.7 percent in 2001 to 26.6 percent in 2002 as the company continues to proactively sell it's underutilized inventory during the quarter. RenTelco's gross margin erosion contributed to the consolidated growth margin percentage on sale declining 32.7 percent in 2001 to 30.5 percent in 2002.

Sales , especially from modular, had a tendency to fluctuate period to period depending on customer requirements and funding. Total revenues decreased 12 percent to $31.8 million as a result of the decline in RenTelco's rental business. Depreciation on rental equipment declined 16 percent to $5.4 million resulting from increasing the modular residual values from 18 percent to 50 percent of original cost effective January 1, 2002. This change better reflects the future expected residual values of our modular equipment and decreased depreciation expense in the first quarter 2002 by $1.8 million.

As a result of the residual value change, depreciation as a percentage of rents for mobile modular declined from 21 percent in 2001 to 11 percent in 2002. Other direct costs of rental operations for mobile modular increased slightly over the first quarter of 2001 and gross margin percentage on rent increased to 63 percent.

Excluding the impact of the residual value change, mobile modular's gross margin percentage on rent was consistent with first quarter 2001. For Rentelco, depreciation is a percentage of rents increased from 30 percent in 2001 to 73 percent in 2002, reflecting the lower utilization levels of the equipment. Other direct declined slightly from first quarter 2001 and gross margin percentage on rents declined from 65 percent in 2001 to 16 percent in 2002 as a result of higher depreciation costs relative to rents.

Selling and administrative expenses increased slightly compared to first quarter 2001 and includes 419,000 of non-recurring expenses related to the previously announced merger agreement with Tyco. Excluding these non-recurring expenses, selling and administrative expenses would have declined $237,000 from 2001 as a result of lower benefit costs. Interest expense decreased 47 percent to $1.1 million as a result of average interest rates dropping 34 percent to 4.7 percent combined with an average debt reduction of 20 percent to $97.6 million in the first quarter 2002 from first quarter 2001 levels.

RenTelco's first quarter results ongoing and projected low demand primarily for its communications rental products and the uncertainty of recovery of the telecommunications industry has contributed significantly to the reporting of a non-cash impairment loss of $11.9 million. Approximately 40 percent of RenTelco's rental equipment was affected by the rate down and was predominantly related to the communications equipment.

Rental equipment was identified where the value would not be recoverable by its estimated, undiscounted future cash flows from rentals plus the estimated future sale proceeds upon its disposition. When the amount of the rental equipment was determined not to be fully recoverable, an impairment loss was recognized to the extent the value of the equipment exceeded its selling price considering current market conditions.

The impairment loss affected equipment with a cost of $36 million and a net book value of $23.5 million. This equipment was written down to $11.6 million, $7.7 million of which is classified as non-depreciable rental equipment pending its sale. Future depreciation expense of this equipment will decrease by approximately $1.5 million per quarter or $6 million annually. Sales of equipment classified as depreciable rental equipment or purchases of new equipment will also impact future depreciation expense.

For the first quarter of 2002, the company reported a net loss of $2.4 million or 19 cents per share compared to net income of $6.6 million or 54 cents per share in first quarter 2001.

To summarize, first quarter 2002 results include a non-cash impairment loss of $11.9 million resulting in net income being reduced by $7.2 million or 56 cents per share. Non-recurring expenses related to the proposed merger resulting a net income being reduced by $.3 million or 2 cents per share and an increase in modular residual values decreased depreciation expense $1.8 million resulting in net income being increased by $1.1 million or 9 cents per share.

For comparability, excluding impairment and merger related expenses and assuming the increase in residual values had not occurred, first quarter net income and earnings per share would have declined from $6.6 million or 54 cents per share in 2001 to $4 million or 31 cents per share in 2002.

The company continues to generate significant cash using its excess cash to reduce bank borrowing revolving lines of credit. The decline in RenTelco's business has caused operational cash flows for 2002 to decrease 28 percent to $13.6 million. The operational cash flows plus proceeds from sales of rental equipment and proceeds from the exercise of stock options total $21 million for the quarter. These funds were used to purchase rental assets of $7 million, primarily modular equipment, pay shareholder dividends totaling $2 million and to reduce bank debt by $11.9 million.

EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization and adjusted for non-cash items declined 26 percent from $20.1 million in first quarter 2001 to $14.9 million in first quarter 2002 due to the decline in RenTelco's rental business. Even Rentelco, which recorded a pretax loss of $11.9 million, including the impairment charge, generated EBITDA of more than $3.9 million with an EBITDA margin of better than 50 percent.

Consolidated EBITDA margin declined from 55.4 percent in 2001 to 46.8 percent in 2002. At March 31, 2002, the company's total liabilities to equity ratio declined from 1.6 to 1 from 1.7 to 1 as of December 31, 2001 as a result of debt reduction. At March 31, 2002, the company had additional borrowing capacity under its existing lines of credit for $64.7 million.

Under the terms of the proposed merger agreement with Tyco, our dividends rate remained unchanged for the first quarter 2002 at 16 tenths per share. On an annualized basis, this dividend represents a 2.4 percent yield based on the May 13, 2002 close price of $27 per share. With respect to earnings guidance for 2002, in general, we believe from a macro perspective that mobile modular will have another strong year, that Enviroplex will have a consistent year relative to 2001 and RenTelco will continue to be challenged for the remainder of 2002.

Additionally, we anticipate the businesses will continue to generate significant amounts of cash for the remainder of 2002. Looking forward, as RenTelco's operating trends continued to decline over the past year combined with a lack of visibility as to the recovery of the telecommunications industry, we are unable to provide any guidance at this time regarding earnings or EPS for 2002. I'd now like to turn the call over to Dennis Kakures.

kakures|Dennis|Kakures|President and Chief Operating Officer|McGrath Rentcorp|mc: Thank you Tom. Welcome everyone. The news shared by both Bob and Tom regarding the impairment write down of various telecommunications equipment, is a direct result of the continuing challenges facing the telecommunications industry. Although the write down was a tough pill to swallow, without any visibility of a near term sustainable for the communications segment of our equipment rental business, it was an appropriate action to take.

That being said, from a fundamental standpoint, the electronic test equipment rental business is sound. End users rent rather than purchase electronic test equipment due to its high dollar cost and the short term nature of a great many projects. Those dynamics that created the test equipment rental industry are still in place today and will be there in the future.

Although RenTelco also rents general purpose and industrial test equipment, it has made its name on being the leading provider of test equipment rentals for the communications industry in the U.S. Just as with the communications industry, our communications rental business experienced rapid growth from 1995 through 2000. I know a few industries that over time have maintained rapid growth rates without experiencing some period of adjustment.

The communications test equipment rental business is going through a lengthy downturn and more than likely will never again see the explosive growth rates that we saw in the 1990's. However, what we should see in the future is the industry enter the next stage in its evolution. One with greater stability, albeit with slower growth. The only question is when. I fully expect for RenTelco to maintain its leadership role throughout and can be positioned to take advantage of an improved marketplace in the future.

Now let's examine the results for each of our businesses more closely. Let's start with Mobil Modular. Rental revenues for the first quarter 2002 increased 8 percent to $16.3 million from $15.2 million in the first quarter of 2001. This was the highest ever first quarter rental revenue level for Mobil Modular. The educational market continues to be the strongest segment of our modular rental business. We could fill classroom and specialty spacing serving the education industry from preschool to post secondary study. Fueled by increasing student populations, insufficient funding for new schools and aging facility infrastructure, demand for portable classroom space continues to be very strong in California.

Over the past 10 years, we have established ourselves as a preeminent provider of educational buildings for rental in California. Educational rentals now make up greater than 56 percent of our rental revenue mix for modulars. It is worth mentioning again from our last conference call that there is not a better insulated industry segment from a recession than education.

The need to education children exists where the economy is contracting or expanding and facilities are required to educate. The recurrent rental annuity from this segment of our business continues to provide earnings stability for the company, even during periods of economic downturns. Gross margin percentage of rents from for the quarter increased to 63 percent, up from 52 percent in the first quarter of 2001, due to our change in residual value of equipment as discussed during our Q4 2001 conference call. Excluding the impact of this change, the comparable gross margin of rents would have been flat at 52 percent.

Let me share with you a couple of ways in which we are working to squeeze even higher gross margins on rents. First, due to our increased emphasis on pre prepping our inventory, that is getting buildings prepared ahead of time, we are able to respond more quickly to marketplace demand and thus are able to book more business.

Second, towards the end of the first quarter, we actively began a campaign to lessen our dependency on higher priced, outside contractor labor in our inventory center operations by hiring employees directly. As this transition takes hold, we anticipate that our average hourly cost in our inventory center operations will decrease in 2002. We expect the impact from these two programs to generate and additional two percent points to our current margin levels.

Average utilization in the first quarter of 2001, increased to 85.9 percent from 85.1 percent in the first quarter of 2001. This is mainly attributable to our focus on utilizing existing equipment first to fill customer requirements and our increasing mix of DSA educational rental products that carry utilization rates of better than 90 percent.

Mobil Modular sales revenue for the first quarter increased 17 percent to $3.2 million from $2.8 million in Q1 2001. For the quarter, gross margin percentage on sales increased to 39 percent from 34 percent in Q1 2001. To demonstrate the enduring value of our modular buildings, equipment sold in the first quarter of 2001 had an average age of 8 years yet was sold for 130 percent of its original cost. Now that's residual value.

And now, let's look at the quarter for Enviroplex, our classroom manufacturing subsidiary. Net sales for the first quarter 2002, decreased 62 percent to $.4 million for the quarter compared to $1 million in Q1 2001. The backlog of orders as of 3/31/02 was relatively flat at $9.4 million compared to $9.3 million in Q1 2001. Typically, in the California classroom market, booking activity for the first six months of the new year, provides the most meaningful information towards determining revenue levels for the full year.

Finally, let's take a closer look at Rentelco. I emphasized during our last call that due to the lower business activity levels, we had a strong focus on selling larger amounts of underutilized equipment in order to reduce both depreciation expense and to a lesser degree, interest expense going forward.

We made good progress during the first quarter 2002 with sales increasing 28 percent to $2.5 million from $2 million in Q1 2001. Gross margin percentage on sales for the first quarter 2002 decreased to 26.6 percent from 33.7 percent in Q1 2001 due to market conditions putting downward pressure on sales pricing. As we execute on our plan for selling more underutilized equipment, you can look for significantly higher sales revenue levels in 2002 versus 2001. However, we expect sales margins to be lower until market conditions change.

Rather than for me to address in greater detail the results of our communications rental business as I typically would at this point of our presentation, Bob probably said it best in his comments earlier that our communications rental business is currently mired in a marketplace where there is too much equipment chasing too few rental dollars. It won't be that way forever but for now that is the reality facing this segment of our test equipment business. I'd rather focus us on where we go from here.

When speaking to you on our conference calls over the previous three quarters, during which time RenTelco's business levels had experienced steep decline. We talked repeatedly about the continuing downturn in the telecommunications industry and its impact on our test equipment business. We also spoke to the fact that when business activity levels turn upward for Rentelco, the great majority of rental revenue generated will drop to the bottom line. This is due to depreciation in interest on test equipment owned but unutilized already being in the expense numbers. All of these statements are accurate and when things do finally turn around, it will benefit RenTelco nicely.

However, what is needed at this time in order to begin to make up for RenTelco's earnings decline is a focus on what we can control versus what we cannot control as a company. And what does this mean? Well, for RenTelco it means the following: One, putting greater emphasis on expanding our general purpose and industrial test equipment rental segments. We have a solid foundation in these product groups already and feel that we can increase our business levels with aerospace, defense, semi-conductor computer, broadcast and power demand companies.

Additionally, there are opportunities to be explored in other test equipment product areas where the company can leverage its strong financial position and seasoned management team to create new sources of income. Two, continue to enhance our Internet offering to bring more unique, valued online features that make it easier and easier for customers to do business with RenTelco and create long term customer loyalty. And three, reexamining our test equipment operations IT systems and personnel infrastructure to create greater efficiencies in order to reduce expenses.

And for Mobil Modular, it means the following: One, expanding our educational rental business, possibly through acquisition, and by targeting more opportunities for organic growth with child care providers, private schools, community colleges and universities. Two, increasing our market share of the commercial market, especially in Southern California, through increased marketing efforts and expanding our sales force. And three, further enhancement of our Internet offerings in order to create more unique, valued online features that are difficult for our competitors to duplicate.

And finally, for Enviroplex, it means the following: Managing our production staffing levels to more closely align with business activity, especially during the historically slower first and fourth quarter period. The flip side of this objective is the create increased building opportunities during the slower periods by creating monitor incentives to school districts to build earlier or by bringing in more public - more non-public school K-12 building opportunities.

And finally, we continue to be focused on trimming expenses and operating with great awareness and foresight on making expenditures. Our years of operating experience with a lean expense mentality has benefited us greatly through this economic downturn and will continue to do so in the future.

And now Bob McGrath, Tom Sauer and I are please to take any of your questions except for any related to the Tyco merger as Bob had mentioned earlier.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Nick of March Partners.

Hello.

Good afternoon.

Hi. How are you?

Fine. How are you?

Well, good. Actually gentlemen, we have a- we're, we appreciate what you have done in terms of taking the impairment charge and facing the reality of what's going on. And we also appreciate the tough period you find our company in. The - what we're perplexed by is the following and if you could help me, that'd be great. And that's the following question. There's an agreement with Tyco in terms of the merger of this company, which is a seminal event in the life of this company, as much as going public and as much as Mr. McGrath starting the company, and you've eliminated it from any kind of consideration for us shareholders to talk about.

You've also sort of not given us any guidance going and, believe me, I appreciate how difficult it is in the electronics section, in telecom, etcetera to give guidance. So, what - generally, as shareholders, what do want us to do? Do you want us just to say fine, just do your best and we'll see you next year? The articulated process for us shareholders, I don't know how to respond to no guidance which I understand, no commentary about the Tyco situation, which again, is a very important part of this company and I'm perplexed. And I just generally want some guidance what to look for. What benchmark should we look for over the next few months in terms of developments, results. You guys - is there even discussions with Tyco? Some semblance of an idea that matters are under control?

Right. This is Bob.

I understand you've eliminated the Tyco inquiry but I'm sort of nodding our heads. I don't know what else we can do here and that's a very frustrating position to be as investors and shareholders.

Alright. This is Bob McGrath. I certainly share your frustration and can understand that. Unfortunately or fortunately, however you want to look at it, we are being guided in these matters by our very high priced attorneys who have considerably more experience in these areas than we do and they inform us that the proper procedure is that to allow the public statements speak for themselves and that is what we are have been asked to do and that's what we're doing.

How about . . .

That's frustrating for everybody.

How about you even hire paid investment bankers?

Well, having this on record that we have investment bankers. Its Alex Brown.

Right.

And that's a conundrum that we are all in. As this thing moves through the SEC, there, I'm sure there will be filings, etc. But that's unfortunately just the way it is. It's largely out of our control. I think you need to look to Tyco a lot to create some - why some of this frustration is there. But I commiserate and I can understand but I can't do anything about it.

OK. But, well at least can you give us comfort? Is there some buttons you guys can push to sort of get clearance from Tyco one way or another? Watching for Tyco is already - its perplexing enough. Is there sort of the process we started X months ago, is that just moving inexorably to its conclusion or are their parameters that you guys feel - that you gentlemen feel that you have in your hands that that can - that we at least have some leverage in the process and not just like water flowing itself. At some point it'll either stop or pour over the water shed and then we're done. Its not . . .

Right.

Usually we don't like get involved in this because we usually understand the company's performance better and as far as your rental business, you've done a bang up job. Its just that we have this weak wheel that we can't - well I don't think anybody can get their . We have a - on the other side you have a buyer who is - which is itself having problems and we just sit around, scratch our heads and look to you for guidance and I appreciate the attorneys having - the attorney's favorite statement is don't. So, I'm assuming that there are other variables that you guys - that you gentlemen have in motion that you can't comment about but at least there's some semblance of moves of a chess game going even if we are not aware of it.

That's speculation of course, and I can't - don't think I can go beyond what I said and, again, it's not the way we like to run our businesses but that's the that we find ourselves in.

So, it's basically the lawyer's are preventing you from really saying anything and making any commentary in terms of this process?

mcgrath. That would be an accurate statement.

OK.

And I'm sorry about that.

yeah, no. Listen, we understand the dynamics it is. It's just that we're also trying to make, as shareholders, decisions about the company and we also, believe me, appreciate how difficult it is in this environment to make any decent predictions and correspondingly though, we want to make sure that the Tyco situation is not frustration or tiring our management to, into distraction which is not a trivial force here on you.

So, and we sort of want a resolution one way or the other and we keep waiting for SEC documents as some guidepost of what's going to happen but nothing is coming either. All we've seen, frankly, is Tyco has flip flopped three times in this process and we can't figure out - we can't even figure out how to read the results much less if you have a legal constraint in terms of talking about this.

Right. All I can say is yes sir.

Well, will your lawyers talk about a time certain of when we can have a one way or the other of this process. Is there any kind of time schedule that we can look to as guidepost? We're literally operating on fumes in terms of what's going on. Not only in terms of what Tyco, which is a second order for us, but as a business itself. Are we, we do our own handles on the market in terms of the electronic business and that kind of business and we can't see visibility either, even away from you. So . . .

Right. I play on the rule and you all are much more experienced in this than we are. And that's just where we are. And I don't have a good answer for you.

OK. I appreciate it. Thank you.

OK. Yes sir.

Your next question comes from of Fidelity Capital.

Hello gentlemen. How are you doing?

Hi Dwayne. How are you?

Hi Dwayne.

Just talk a little bit about the classroom business. Do you really seeing demand on that side of the business still increasing ahead of the November ballot in California or do you think that most of the demand there is already searched in anticipation of that?

Well, Dwayne this is Dennis Kakures. I would say that our classroom orders thus far this year, I think we're pleased with. I think that with the bond issue that is scheduled for November as well as the one that is scheduled in 2004, I think, everybody's looking forward to those being approved as 11 of 12 bond issues for facilities have in the state. So we think that's a positive item. That demand I would not, I don't think its built in at this point because people typically are not consummating orders until those funds are known to be available. So, I think that is in the future and its a very positive element for our business.

OK. So that's still upside that remains for the future.

Absolutely.

Are you seeing at least a greater appetite for higher end modular units. For example two story units and, if so, are you making any adjustments to the inventory that you have?

Well, for Enviroplex, that would be an impact item on two story and they continue to look for more opportunities in that arena. As a rental product, that hasn't been a product that we stock for rental.

Got you. But are you seeing an increased demand for that?

For two story in particular?

Two . . .

Or just more custom classroom products?

Two story, in particular, as well as just more custom, more custom features.

Yeah. I think we have seen more opportunities for two story although we haven't closed more orders for Enviroplex and I know that from a customization standpoint, both businesses, both our rental business and business, are seeing more custom needs going forward.

OK. You know 7 weeks into the second quarter, what are you seeing in terms of - obviously visibility remains very, very limited but what do you seeing thus far in terms of RenTelco and demand and whatnot?

With respect to RenTelco?

Yeah.

That's a difficult question to answer because the visibility down the road, there really is none. One week you have an upkick in business and you think you're getting traction and the next week business, it goes the other direction. So, at this point, its very difficult, beyond a week's picture, to have any feel for that market place.

So, thus far, into the second quarter, you really haven't seen much change on that side of the business.

Have not.

OK. And I've notice that the utilization rate still fairly stable hugging that 35 percent number. Do you think that that kind of marks the bottom there?

We ended the quarter and 37 2 - this is Tom Sauer, Dwayne.

Oh hey Tom.

And know that we have $7.7 million of our inventory that's classified as non-depreciable and its pending sale. Once that is sold and rotated out of the inventory, our utilization will climb about 40 percent.

OK.

Just as a benchmark for go forward operating purposes.

And are you pretty much through with the inventory adjustments there?

We believe we are for this quarter. As you know, every quarter we go through an impairment review to determine whether we have inventory problems. We believe at this time that the write down is sufficient for our projected demand.

And last quarter I guess you gave guidance for the year, two dollar - for EPS in the range of 243 to $2.47. I guess you're kind of backing away from that guidance now. What's really changed in the business overall? Obviously, things are weak on the RenTelco side but they've been weak. What's really changed now that you really don't think that the visibility has really decreased.

Well, to answer your first question, yes. The guidance given on the Q4 call looking forward for 2002 is off the table and it all relates to the RenTelco picture entirely. For Mobile Modular, we expect to have another strong year. That business has continued to be just a real workhorse through good times and bad.

For Enviroplex, we expect a year consistent with last year but the RenTelco business is such that the ups and downs of the flow of order activity is just too unpredictable for us to do any sort of stable modeling of that business through the end of the year. As Bob mentioned earlier, our commitment is to give as much color and guidance as prudent on our part to do so going forward but at this time, there is just too much murkiness and cloudiness to that picture. The industry will recover at some point, as I said earlier but at this time, we're looking for consistent traction and we just haven't seen that yet.

Did you - I guess I missed that. Tom did you say before that after the pending sale the $7.7 million in non-depreciable inventory. Is that - you said your utilization rate was going to be 40, above 40 percent?

That's correct.

And that's just for Rentelco?

That's correct.

OK. Thank you.

Thank you.

Thank you Dwayne.

Your next question comes from of and Company.

Gentlemen, good afternoon. Several questions if I may. Regarding the RenTelco equipment, if you could give us some information regarding what the average price of each piece of equipment is and what its end use is for, I would appreciate it. And I'd presume that the methodology you're using of inventorying equipment is one that is consistent with the historical way you've operated but in connection with that, I'd be curious to know what the time factor is between the time you order the piece of equipment and you get delivery? I ask that question from the perspective of could you - to what extent would you be able to order the equipment from the manufacturer as against a specific order?

And in connection with this, I'm just curious, in this industry is there any such thing as takes place in the department store field that when they have certain merchandise that doesn't move they're able to send it back to the manufacturer. Does that ever take place with this rental equipment? Why don't I hold my follow-up questions after you've answered this one if I may.

This is Dennis Kakures speaking. Let me try to respond to all them. With respect to, I'll kind of work from the back forward. You mentioned a department store approach where you could actually return equipment. We have the ability when we order equipment and it has certain times or we stage out deliveries for us to be able to cancel orders.

Typically, once we take receipt though, its not something we're sending back. But we do have ability in many cases, once we cut a PO to be able to - we stage them four pieces a month etcetera, its with typically some cancellation provisions should demand soften. With respect to how, and I think your second question was, again going backwards, was with respect to can - how quickly can we order and get the product from manufacturers. I'm assuming that's a question . . .

Yes.

of how much do we ramp back up if we needed to. Actually, in this environment, it would be a very quick turnaround. And, typically, what we're doing is if we were to see a demand change, we're going to do some things on the come there to make certain that we're not short equipment to grow the business. However, we will be prudent in our approach there knowing what we've just come off of. But - so yes, we have an ability to react very quickly with manufacturers to be able to replenish equipment supplies.

The first question you asked is the most difficult and I don't think we're prepared to answer that this afternoon in terms of an average price of equipment and a of that. A lot of the equipment that we dealt with was optical equipment which is very high ticket equipment but we really went through all of our inventory and looked - and did modeling on cash flows and out possible impairments. So, we did a very thorough review. I'm sure if that information - well, we can provide that information at a later date, if people are interested. We can give an overview of how that process occurred and what those dollar amounts are on average for certain products. I don't think we'd want to share specifically . . .

You wouldn't want to share what a specific piece of equipment is or what a rental is. In other words if someone renting some for $500,000, a million . . . is it one machine, two machines and, query who makes those machines. Is that something you can share with us?

Well, I mean there's a variety of - we buy equipment anywhere from $5,000 little hand held meter to $150,000 top test equipment. So, it's a variety of equipment, a variety of different needs, purchased from and a number of different manufacturers. So, its just a very varied amount of equipment.

Right. Alan this is Bob McGrath. I would - the simplest way to refer you to RenTelco.com and there's a complete list of the inventory, their sales prices, etcetera and you'll see the wide range of - and variety of the equipment and, as Dennis said, it varies all over the place. The telecommunications equipment in general, there's been some high ticket items in there but even so, rentals are generally just for a few months. And so its that kind of turn around. But it's - and that's why, you know, a good utilization to us is 50 percent. And the reason it's 50 percent is because, if you get much higher than that, you're telling people no, because there's such a wide variety that they can possibly rent.

So, that's sort of how that math works on that.

And do I gather when someone gives you an order, they want it yesterday? Is that the way it works?

That's the nature of the rental business.

And they ...

But, yes, it's .

... they generally assume that we already have it. So, ...

I mean, it ships the same day that the order's placed.

And in the past, what's been an average lead time that you need from your order to the manufacturer till you get it?

It'll vary by manufacturer and their lead time. But what we do is, we set up delivery schedules typically with manufacturers based upon anticipated demand going forward.

But that's a constant assessment game, and not trying to carry too much inventory too soon, but to stage it, and really grow the business prudently.

And as you guys, you know, manage portfolios of stock and various stocks, we manage portfolios of electronic instruments. And it's sort of knowing when to buy, when to sell, how much to buy, you know, et cetera, et cetera.

And when to go long and when to go short and all that kind of stuff. So, there's similarities there.

Sure. And as you say, this is the first time you've ever had to address a mark-down in your ...

Right. Well, what generally happens is it - there's sort of a recession. And then - but demand, people still need things, and so they start wanting it, and they start renting it and they start ordering some new from the manufacturer, but the manufacturer doesn't really believe that that demand is really there yet, so he delays.

And that sometimes stretches out deliveries, and then there's more requirements to because they can't get delivery on it, and it sort of goes through this cycle.

And I've probably been through six or seven of these, you know, over 30 years. It's just that this time we've gotten very heavy on equipment. And I've never seen anything quite like it.

I see. All right, well thank you.

Now, the follow-up question I wanted to ask, and I apologize for asking this, but since I spent this weekend finally reading your approximate 190-page document that was filed by Tyco, I hope what I can ask is appropriate - really two questions.

Number one, do you have a date for when you're going to call the meeting relative to the merger?

And the second question is, the document describes the process relating to how this whole transaction came about, essentially between Tyco Capital and RenTelco, I believe.

And then, in the Tyco - one of their telephone sessions in response to a question I believe that I asked, they said they were not going to - this was at the time that they were going to spin out or try to sell Tyco Capital - they said they were trying to - they were planning to put McGrath into the main part of Tyco, or maybe it was the electronics part.

And I just wonder if you know what caused them to change that ultimate destination from McGrath. And if that was the scenario when they were going to spin out Tyco Capital, has that now been changed?

OK. I think we can answer parts of that.

Thank you.

The first answer is no. We do not have a date. And the second - and I probably missed some stuff here - the, ours was designed as a tax-free transaction. And it would not - it appeared it might not be if it ended up at Tyco Capital or CIT.

And I think that was the rationale - their rationale, not our rationale - of leaving it in some other part of Tyco International.

So now that they're not going forward, there's no reason why it wouldn't be back in Tyco Capital.

Quite frankly, I think that would be a question better asked of Tyco directly.

Sure.

As to what their intentions are.

Do you happen to know specifically from a tax point of view why it would work in one entity and not in the other? That kind of mystifies me.

Well, you can't - well, the question - if CIT - if Tyco Capital stayed with it, it wouldn't make any difference.

Right.

If our stock got dividended out to CIT, that would make a difference. But now ...

But CIT - if CIT were standalone and bought you, then I guess they could give you CIT shares.

That is accurate, but we do not have a deal with CIT. Our deal is with Tyco International.

Right. Correct.

So, but what you say is accurate. If it were a different deal, and if CIT had publicly traded shares, which is also an if, that would be accurate.

Well, ...

Messy, ?

... good luck, gentlemen. It's an interesting chess game.

Thank you. I always appreciate your calls and appreciate listening to you on your calls to the Tyco conference call.

Well, I don't think they've got me scheduled in the near future that I know of. Are you aware of any that they've got coming up?

No.

I see. I guess they were all talked out, then. Thank you.

Thank you.

Your next question comes from of Capital Partners.

Hey, guys.

Hi.

Good day.

On the mobile modular side of the business, can you talk a little bit about trends in utilization, specifically for construction trailers?

I'll break it down into two parts - construction units that are - as you know, we're in the California and Texas markets, ...

Yes.

... California much larger than Texas.

In the California market, if I break down construction into a commercial sector and a home-building sector, the commercial side of the business has slowed some. The home-building side of the business has remained fairly strong through this period.

And in terms of utilization of that product, that product is, you know, is utilized for a variety of needs other than construction. So even if we were to have a buildup of that, which we may have some on the smaller sizes now that's easily rentable to other types of general business needs.

So there's not some anticipation of a lot of product coming off lease in the next six months and having a hard time getting it back out into the market?

Not at all.

OK. OK. Of the $6.5 million in purchases you made this quarter on the mobile side of the business, how much of that went to school, and how much went to the, or I guess to the DSA product versus the commercial product?

We don't have that detail before us ...

OK.

... at this conference call. I can certainly chat with you offline on that.

OK. As a generality sort of going forward, would you anticipate the majority of your purchases to be on the school side? Or, I mean, clearly that's a function of what comes off lease, but are you sensing that you're going to have some excess capacity on the trailer side of the business?

Well, if you've been following our utilization rates for inventory, we're now up right around 86 percent, and that's, you know, at the end of - our average inventory in 2002 is around 82 percent. Last year is around 85, and we just this quarter are at 86 percent.

So we use what we have.

Yes.

And we'll continue to do that.

Now, the one product group that we continued to buy most of our inventory for is DSA classrooms for the California market.

So I think, you know, the trends that we've seen over the last year or two will continue. A, will continue to keep those supplies plentiful for school rentals, and we'll continue to pull from our inventory centers for other buildings, and build commercial product as we need it for perhaps more custom items or maybe very large type projects where customers want new product, so ...

OK. But the strict - I guess I'm thinking strictly of this sort of commodity construction trailers. Is that an area where you don't anticipate needing to sort of buy or build more product?

I would say right now, when I look at the landscape there, we probably have ample supplies for the near term. But, you know, things can change pretty quickly.

Yes.

And again, that product, you know, everything's on eight-by-20 to a 12-by-60, is used for the construction market.

Yeah.

And its also used for general business. So you could have a customer come along for a general business need that takes 40 single wides in one fell swoop and all of a sudden you're short for your construction needs.

Yeah.

So, it really depends on what type of order you get and the, where it's coming from.

OK. A little earlier on the call you had mentioned that one of the drivers for your school product is insufficient funding and aging infrastructure. Looks like we've got about $5 billion in local financing and probably $25 billion in state financing for new schools coming up in the next few years. I'm assuming there'll be some sort of dislocation associated with this construction but I would also think that, to some extent, if we have $30 billion in new product, that might reduce the need or the reliance on the mobile product. Is that true?

Well, all I can do is tell you, historically that since 1982 there have been 12 bond issues and I can talk about local bond issues for a moment. But there's been 12 statewide bond issues and 11 of the 12 have passed. And if you have followed the growth of our educational business and the rentals, it has grown enormously since 1982 even though there have always been in the bonds that have passed were permanent construction.

OK.

No different than the ones that or in 2004. What assists us are the monies that are there for modernization and reconstruction. You may be aware that, I think over 70 percent of the school facilities in California are greater than 25 years old. There is an immense amount of modernization work that will continue to be done for years and years. And you mentioned earlier about dislocating students. Well, when they have to the large majority of those projects, students are displaced for anywhere from 18 to 24 months and we rent products into that market to serve that.

OK.

So, its a channel - I should say its a funding item that we view upon very favorably where there are statewide bond issues just as when the local bond issues that have began, begun to pass in the last year, there's modernization and reconstruction monies in those bond issues also.

Last question and then I'll defer to others. On the RenTelco side of the business, you bought about $500,000 worth of product in this quarter. To what extent do your customers require that you continue to purchase the latest and greatest to remain a relevant vendor? Is this - clearly that's a function of weak demand in the market but there's - I'm sure there's also some new products coming out that customers expect you to have. Is this a level - is $500,000 a quarter, will that keep your relevant vendor having the best sort of new product as well as sort of the slightly older product?

Well, first of all, I fully expect for RenTelco to maintain its leadership position in communications rentals. We are committed to that. That being said, we also are being very prudent about our purchases but I can we haven't passed up any new technology opportunity where there was a viable rental demand in the first quarter. A lot of the, the $500,000 I see there is probes and other types of equipment. Sometimes we run short in certain amounts now, even on certain products that haven't been impacted by impairment. So, its kind of a mix there. But you're asking the question about going forward, are we going to be able to sustain at $500,000? I wouldn't look at the $500,000 as being indicative of any future purchase amounts quarter to quarter. We'll buy the support our customers to the level that we want to be committed and we want to retain our position as the leader in communication rentals.

OK. Appreciate your time. Thank you.

Thanks.

Your next question comes from Tom of Spiro Capital.

Good afternoon.

Hi Tom. How are you?

Hi Tom.

I'm fine. I'm fine. I had two questions, over on the RenTelco side, I wonder if Tom Sauer could review with us any credit issues that you may be wrestling with there?

Our - let me give you a little perspective on our DSO's. On a consolidated basis, our DSO's have slightly improved actually. However, primarily due to Mobile Modular's improvement on the electronic side, it has extended a bit, however, we believe our reserves are adequate at the end of the quarter for any potential receivable exposure. We did not bump the reserve and feel that its adequate going forward.

Can you give me a rough idea of how much equipment over on the RenTelco side has leased to companies that are bankrupt?

I don't have the - there is a, there is a very minor amount that is currently outstanding. I don't have the exact figures in front of me now.

OK. But you're saying its

Yes.

OK. And then separately over on the mobile . . .

on that one issue we had one customer last year that we had the problem and we have not had a significant problem beyond that.

Did you ever get the equipment back?

No, we did not. We're getting some funds out of the bankruptcy court.

Separately, over on the Mobile Modular side, I was intrigued to hear you mention that you're going to switch from using contract employees, I guess this is to what? To prep and transport equipment? You're going to hire guys, have your own workforce to do that. And it sounds like you're changing a variable cost into a fixed cost and I was intrigued that you would make a change like that. And having been in the business for many years and, I presume, having thought these issues through in the past. If you could expand on that decision a little bit, I'd appreciate it.

Certainly Tom. This is Dennis Kakures. First of all, let me clarify that we have always had our own staff of inventory center employees and what we have done in more recent years within increasing demand for the modular products and especially with our effort to turn around all the equipment that we have and refurbish what we have, is we went to outside contractors to supplement our own work forces. And over a period of time, although we thought we'd flow the subcontractors in and then flow them out, we never tend to flow them out.

There was so much work to be done and with the product being well received in the marketplace that that demand to refurbish and pre prep equipment has stayed there. So, when we started taking a closer look, and Tom in particular did a very good analysis on this, to where our costs for outside labor was considerably higher than our costs to higher additional regular staff, we began very quickly to start a transitional program in place so we can capture those savings. So, its - it by no means is changing a variable to a fixed because that - what we might have thought was a variable cost really was a fixed cost although it was outside contract labor.

Tom, this is tom Sauer. Just as an added item, we still are continuing to use subcontractor services for the delivery of the product and the setup of the product.

But its a strictly inventory center operation.

And it that we outsource the other.

Thanks much and good luck in Q2.

Thank you.

Again I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. At this time, there are no further questions. Sir, you may proceed.

I'd like to thank everybody for joining us on our Q1 conference call this afternoon. We look forward to chatting with everyone on our Q2 conference call. Thank you so much.

Thank you for participating in today's teleconference. You may now all disconnect.

END