McGrath RentCorp (MGRC) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the McGrath RentCorp's first quarter 2009 conference call. (Operator instructions.) This conference is being recorded today, Thursday, May 7, 2009.

And now I'd like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

Thank you, operator.

Good afternoon. I'm the investor relations advisor to McGrath RentCorp and will be acting as moderator of the conference call today.

On the call today from McGrath RentCorp are Dennis Kakures, President and CEO, and Keith Pratt, Senior 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 1-800-405-2236 for domestic callers and 1-303-590-3000 for international callers. The pass code for the call replay is 11129304.

This call is also being broadcast live via the Internet and will be available for replay. We encourage you to visit the Investor Relations section of the company's Web site at mgrc.com.

The press release was sent out today at approximately 4:05 Eastern time, or 1:05 Pacific time. If you did not receive a copy but would like one, it is available online in the Investor Relations section of our Web site, 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 are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp's expectations, beliefs, intentions, or strategies regarding the future. All forward-looking statements are based upon information currently available to McGrath RentCorp, and McGrath RentCorp assumes no obligation to update any such forward-looking statements.

Forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those projected. These and other risks related to McGrath RentCorp's business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission, including the company's most recent Form 10-K and Form 10-Q.

I would now like to turn the call over to Keith Pratt.

Thank you, Geoffrey.

In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its first quarter 2009 Form 10-Q.

For the first quarter 2009, total revenues increased 3% to $67.2 million from $65.4 million for the same period in 2008.

Net income decreased 23% to $7.9 million, or $0.33 per diluted share, from $10.3 million, or $0.43 per diluted share, for the same period in 2008.

Reviewing the first quarter results for the company's Mobile Modular division, Mobile Modular total revenues decreased $0.2 million to $35.7 million from the same period in 2008 due to lower rental revenues partly offset by higher sales and rental-related services revenues during the quarter.

Gross profit on rents decreased $0.8 million, or 4%, to $16.4 million from $17.2 million in 2008, primarily due to 4% lower rental revenues with rental margins remaining flat at 66%.

Selling and administrative expenses increased $0.3 million, or 4%, to $7.2 million from $6.9 million in the same period in 2008.

The combined effect of lower gross profit on rents and increased selling and administrative expenses was a decrease in operating income of $1.3 million, or 10%, to $12.1 million for the first quarter 2009 from $13.4 million for the same period in 2008.

Finally, average modular rental equipment for the quarter was $477 million, an increase of $26 million from the first quarter of 2008.

Average utilization for the first quarter decreased from 82.5% in 2008 to 78.3% in 2009.

Turning to first quarter results for the company's TRS-RenTelco division, first quarter total revenues decreased $2.3 million, or 8%, to $25.4 million compared to the same period in 2008 due to lower rental revenues partly offset by higher sales revenues.

Gross profit on rents decreased $3.7 million, or 39%, to $5.9 million in 2009.

Rental revenues decreased $2.8 million, or 13%, as compared to 2008, and rental margins decreased from 43% to 30% as deprecation as a percentage of rent increased to 55% from 46% in 2008.

Selling and administrative expenses decreased $0.1 million, or 2%, to $5.8 million from the same period in 2008.

As a result, operating income decreased $4 million, or 67%, for the first quarter 2009 to $2 million from $6.1 million for the same period in 2008.

Finally, average electronics rental equipment at original cost for the quarter was $253 million, an increase of $18 million from the first quarter of 2008.

Average utilization for the first quarter decreased from 68.8% in 2008 to 61.4% in 2009.

Turning next to first quarter results for the company's Adler Tank's division, which was acquired on December 11, 2008, total revenues were $5.5 million, and rental revenues were $4 million.

Gross profit on rents was $2.8 million with rental margins of 71%.

Selling and administrative expenses were $1.9 million.

Operating income was $1.4 million for the quarter.

Finally, average rental equipment was $47 million, and average utilization was at 64.5% for the quarter.

On a consolidated basis, interest expense for the first quarter 2009 decreased $0.6 million to $1.9 million from the same period in 2008 as a result of the company's lower average interest rates partly offset by higher average debt levels.

The first quarter provision for income taxes was based on an effective tax rate of 39.1%, compared to 39.2% in the first quarter 2008.

Next, I'd like to review our 2009 cash flows.

We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the three months ended December 31, 2009 (sic - see Press Release), highlights in our cash flows included:

Net cash provided by operating activities was $31.9 million, an increase of $6.3 million compared to 2008. The increase was primarily attributable to reduced accounts receivable and other balance sheet changes partly offset by lower operating results.

We invested $20.4 million for rental equipment purchases, compared to $21.6 million for the same period in 2008 partly offset by $4.9 million in proceeds from used equipment sales.

Dividend payments to shareholders were $4.7 million.

Net borrowings decreased $11.8 million from $305.5 million at the end of 2008 to $293.7 million at the end of the first quarter 2009.

With total debt at quarter end of $293.7 million, the company hit capacity to borrow an additional $97.3 million under its lines of credit, and the ratio of funded debt to the last 12 months adjusted actual EBITDA was 2.1. We continue to have a solid, low-leverage balance sheet.

For 2009, first quarter adjusted EBITDA decreased $2.3 million, or 7%, to $32 million, compared to $34.3 million in 2008, with consolidated adjusted EBITDA margin at 48%. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release and Form 10-Q for the quarter.

Turning next to 2009 earnings guidance, at this time, based on first quarter 2009 results and our outlook for the remainder of the year, we are reconfirming our full-year earnings-per-share guidance to be in a range of $1.30 to $1.45 per diluted share.

At this point I would like to turn the call over to Dennis.

Thank you, Keith.

Let's go right to our results for our modular rental business, Mobile Modulars.

Rental revenues to the quarter decreased by 4% from a year ago to $24.9 million.

In California, during the first quarter we continued to experience lower business activity levels and very competitive educational and commercial markets as a result of the macroeconomic environment, underutilized equipment inventories, and the state's financial challenges.

The good news is that in February California passed a budget, and as a result, the state sold over $6 billion in tax-exempt bonds in March and another approximately $7 billion in taxable bonds in April. These monies will allow previously apportioned but unfunded school and other public works-type projects to move forward.

However, the flow of these monies, as well as federal stimulus funds, have been slow in reaching the school district level. As a result, in 2009 we expect commencement delays for a number of school modernization projects beyond the traditional summer-delivery window. Keep in mind there continue to be challenges to California having a balanced budget in that five of the six initiatives on the May 19th special election directly related to the budget passed in February are behind in the opinion polls.

It's important to mention that there was a noticeable change in rental-quoting activity towards the end of the first quarter and into April for both our California commercial and educational markets. Although it remains a very competitive marketplace in California, we're hopeful that we have seen the bottom of business activity levels during the first quarter.

In Florida we've had lower new educational rental activity than in past years due to the state's financial challenges and its impact on implementing the next stage of class-size reduction and flat to slightly down student enrollment levels. However, we continue to be well positioned versus our competitors for when business activity levels increase with our campus make-a-classroom product and the phasing out of older model code portable classrooms.

We're also experiencing a very challenging commercial rental environment in Florida with lower demand in a very competitive pricing environment, especially on single- and double-wide building activity.

In Texas we are seeing lower commercial business activity related to the decrease in oil and petrochemical-related activity. We are also anticipating lower rental classroom booking levels in 2009 as school districts look to more fully utilize their existing facilities.

In the new Mid-Atlantic expansion, we are continuing to make progress in capturing new educational business in North Carolina, Maryland, and Virginia with our innovative classroom products designed for these markets. We're also continuing to see very competitive commercial markets in the Mid-Atlantic and Southeast, especially for single-wide building rental opportunities.

Due to slower new rental business activity levels for the modular division overall for the quarter, we experienced a quarter-over-quarter reduction in average equipment utilization to 78.3% from 82.5% a year ago and 81% at the end of 2008.

Now let me turn our attention to TRS-RenTelco and their results.

Rental revenues decreased 13% from a year ago. During the quarter we experienced higher equipment return and lower new-booking levels compared to the first quarter of 2008.

Our pipeline activity remained healthy, but opportunities continue to age longer, and our order-conversion rate slowed considerably from a year ago, reflecting project delays and broad uncertainty in the current economic environment. There also continues to be downward pressure on rental rates as conversion of pipeline activity has slowed.

We continued making good progress during the quarter in selling underutilized equipment and reducing depreciation expense. Monthly depreciation expense stood at $3.4 million in March 2009, and it's down from a high of $3.9 million in October of 2008.

Although sales revenues rose to $4.9 million for the quarter, compared to $4.5 million a year ago, gross profit on sales dropped to $1.4 million from $1.8 million a year ago due to our need to reduce inventory levels sooner rather than later in order to take cost out of the business.

Ending-first-quarter utilization was 59.9%, compared to year-end 2008 utilization of 64%. Our average monthly rental rate declined to 4.2%, from 4.5% at year-end 2008. Both of these metrics are indicators of the difficult market conditions we faced during the first quarter of 2009.

Although our first quarter results reflect a very challenging rental environment, we are hopeful that the start of the second quarter is a sign of stabilizing market conditions in electronics. In April our rental billing rate finished fairly flat as compared to the start of the month. Hopefully, we are close to or at the bottom of the market. If so, business may remain at current lower levels for some time before we experience growth again. In the meantime, we continue to manage our expenses tightly and look to take more cost out of the business as activity levels warrant.

Now let's turn our attention to Adler Tank Rentals first full-quarter results.

Adler Tank Rentals generated $4 million in rental revenues and $2.8 million in gross profits on rents with a 71% gross margin on rents during the first quarter, which met our expectations.

During the first quarter we continued our work on a number of integration elements, including transitioning various back-office accounting and administrative functions to our team in Livermore, upgrading the Adler Web site, developing marketing materials, building customer and prospect databases, and creating information system and other connectivity between Adler's locations and our corporate offices. We also continued to assess facility needs and added sales positions in various regions.

We also expanded Adler's growing national footprint into both the California and Western Pennsylvania markets during the quarter. The expansion into California can be done very cost effectively by leveraging our existing modular facilities and certain personnel and incrementally building a sales organization. We also placed orders during the quarter with a variety of manufacturers and began receiving additional rental equipment into the different Adler operating regions.

Finally, it's very important to note that the operating cultures and the value systems of Adler Tank Rentals and McGrath RentCorp are very similar, and this has made for a smoother integration process. I'm very confident that, with Steve Adler's capable leadership and with ample capital now available for additional rental assets, Adler Tank Rentals is well positioned to grow its business even in today's challenging market environment.

Now let me take a minute and update everyone on our two newest organic initiatives, environmental test equipment and portable storage.

First, our environmental test equipment initiative made very good strides during the first quarter in growing its number of customers, opportunities, and orders booked. We're feeling more confident each month that our centralized sales and inventory operating structure in Dallas is optimal for lowering per-order transactional costs, as well as then creating a better customer experience. We believe we can become a significant rental provider in this industry over the next few years.

For our portable storage initiative, we have now expanded this business into our Southern California, Texas, and Florida regional modular locations. We were able to leverage our existing modular sales and inventory centers in these regions to reduce our cost structure in ramping our portable storage business.

We discovered from our initial launch in Northern California that there can be a material level of synergies between our legacy modular building customers and portable storage usage. We've been pleased with our business levels to date and the fact that we've increased rental revenues each quarter since we launched the initiative in 2008.

It's important to emphasize that the rental revenue levels with both of these organic initiatives are small relative to our modular and electronics businesses, as well as to our new tank rental business. However, we expect both rental legs to become increasingly important to our earnings in the years ahead.

And now for a few closing remarks.

Today, in effect, we have five rental businesses, compared to a year ago when we had only two, modular buildings and electronic test equipment. We also now operate our modular building rental business in seven states, as compared to only three states two years ago.

Our electronics business also has a broader international footprint with our 24-by-5 Dallas-based operation center coverage window, online ordering, and sales representation in Southeast Asia.

2009 and the next few years are all about getting these additional investments in both new rental products and geographies increasingly successful. Our greatest strength as a company has always been our rental operations prowess. We understand the value proposition of getting the operating details of each rental business just right. This includes the customer experience, smart marketing, asset management, equipment processing, and regional-specific issues. We understand inherently how each turn of the flywheel is cumulative in its effect and can ultimately trade meaningful competitive advantages.

We believe we are well positioned today to become a larger and more profitable company as economic conditions improve. While we expect the next 12 to 15 months to be a very challenging operating environment, we would expect McGrath RentCorp to fair better than many companies due to the countercyclical nature of portions of our rental businesses, our strong cash flows, and low-leverage balance sheet.

Longer term, we believe that our strategy of investing in new earnings engines in more diverse business-to-business rental market segments will generate growth in income and share value while maintaining our financial strength, protecting our balance sheet, providing attractive dividends, and making the company more resilient to future economic cycles.

And now Keith and I welcome your questions.

Thank you. (Operator instructions.) Our first question comes from the line of David Gold with Sidoti & Company. Please go ahead.

Hey, good afternoon.

Good afternoon.

Hi, David.

Just a couple of follow-up questions. First, can you walk us through a little bit the guidance? What's embedded in there by way of the California budget? Is that predicated on the five proposals that you're looking for to pass?

Actually, if you look at the California budget situation currently, we feel for the remainder of 2009 its impact -- whether that passes or not -- will probably be minimal. The key item for us thus far has been the fact that bonds were able to be sold in March and April, and what that did was fund about $2 billion worth of about $2.5 billion of construction -- school construction-related projects that had been put on hold. They were either shovel-ready projects or projects that were just starting off that they had frozen. So when we look at the rest of this year, although we'd love to see the initiatives pass on May 19th, it's less critical to this year than it is to the 2010 school year, in our mind.

Uh-huh. Uh-huh. Okay. And so, presumably, the bonds that have been sold basically provide all of the funding that you would need to -- sort of to get to that range?

It's for the -- let's put it this way. The fact that the December 18th stalled projects are now up and running -- or at least the great majority of them -- that was a very important item.

Okay. And sort of on that note, I guess, if we go back a quarter ago, on that call you pointed to looking for the budget to pass and, basically, without it, I think you said something along the lines -- there were some stalled projects, like you say, presumably, the December 18th projects. So now that the dollars are out there, we're holding guidance. Is that to say that the money hasn't come through maybe as quickly as we might hope? In other words, if the situation's better, why wouldn't guidance be going up?

Well, the situation, I'd say, is better. It turned out that, having a -- having those initiatives passed in May became less important once the bonds were sold.

Uh-huh.

The bonds were the key to be able to fund the 50% that the state needs to provide for these modernization projects. So that was what was most critical.

Uh-huh.

And I would still say that the fact of the initiatives passing on May 19th, that's also important, but it's a longer term -- that has a longer-term dynamic entailed to it, and if they don't pass, we'd expect they've got -- they will sit down and figure out another approach. So I would just say that what occurred with the bonds being sold --

Uh-huh.

-- was we always -- we believe that the state would find a way to make things work. Now, it turned out that it was the fact that they sold bonds before they had a formal balanced budget with the initiatives passing.

Uh-huh.

So one happened before the other, and that really satisfied what we were looking for in our plan for this year.

And, David, one comment I'd like to make is, when we talk guidance, as I'm sure you'll appreciate, many companies have not even offered guidance this year.

Sure.

We've done that to the best of our ability. We felt that was important, particularly in light of the addition of Adler and some of our new organic rental initiatives. So there's still a lot of uncertainty and a lot of challenge that we're wrestling with.

I think, if you look at the business as a whole, Dennis has outlined for you some of the factors in the modular business, but we have to look across all the businesses as we reaffirm our guidance. And I think at the margin, things are probably a little better in modulars than we might have feared they could be, although, again, we have a long ways to go. And, similarly, in the electronics side of the business, it's been a tougher start to the year than we would have liked, and we have work to do there to see that situation turn around. So I think you have to look all across the business --

Uh-huh.

-- when you really ask the question where's guidance at and do we think it's still reasonable.

Okay. All right. That's fair. And then in, sort of, another piece of that, we have G&A -- you can tell that you're managing that quite tightly, and just curious if there is more potential progress there, or would you use the first quarter as a good run rate?

Yes, I'd go back to what we said in February. I think it still holds true. What we said in February was -- to remind everyone -- we spent $58 million in SG&A for the total business in 2008. We said our goal was to really hold the line on SG&A in spite of the fact that we're funding some new organic initiatives and really see the incremental SG&A just be tied to Adler. And you'll see in the press release Adler was approximately $1.8 million of incremental SG&A in the first quarter, and what we said was that for the full-year '09 we were expecting SG&A somewhere in the $8 million to $9 million range for Adler. I think that still holds true. We're going be adding incrementally some additional personnel to Adler over the course of this year. Some of that we've already begun.

But I think, in short, will we try to beat that goal and manage costs as tightly as we can? Absolutely. So if we can do better than the $58 million of last year with another $8 million or $9 million added to account for the addition of Adler, which takes you into the $66 million to $67 million range for the year -- if we can beat that, we will, and we're very focused on careful management of cost, and we're very focused on looking at business activity levels in all areas and making adjustments if we need to.

Very good. Thank you, both.

Thank you.

Thank you. Our next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Hi, guys.

Hi, there.

Wondering can you talk a little bit about Florida? It sounds like that market was holding up a little bit better. Commercial construction was actually doing fairly well given your new entry. Can you just comment on what you've seen change in the marketplace and also in the class-size-reduction initiative? I think you had a comment that there'd been some delays or some nonrenewals of that initiative. If you could comment there?

Certainly. First, on the commercial side, I think the prepared remarks really centered around what a difficult market it's been this year, especially on single- and double-wide-type rentals. So just to be clear on that, that was a very tough market in Q1 commercially.

On the educational side, what occurred with class-size reduction for the 2009-2010 school year is the constitutional amendment on class-size reduction was having the ratios be met on a classroom level, rather than on a school level. They went from district to school to classroom by design when they initially put together the legislation. And what the state did, because of this very tight budget situation in Florida, is they deferred districts having to go to that until the 2010-2011 school year. So class-size reduction is still fully in place. They just got a one-year reprieve, so to speak, and next year -- the 2010-2011 -- they would have to go make those reductions at a classroom level.

Okay. And how much of mods today is in the Mid-Atlantic? Is it less than 5%?

Yes, it's very small. Although, I will say that we're making some good initial steps there with our new product introductions. It's small, but it's a longer-term growth item for us, but, again, good progress to date in terms of getting the seeds planted and getting a few nice orders here recently.

Okay. And then just, I guess, on cost measures. Have you -- what have you done to date? Is that part of how you're able to maintain the outlook here, based on, sort of, little bit deeper cost control than we talked about a few months ago?

Yes, we're highly focused. As Keith mentioned a moment ago, I mean, without -- based upon a volume-driven business for each division, we take cost out as we need to on the production side and processing side based on volume. I mean, I spoke to some of the cuts on our call earlier this year about salary freezes, reduction in bonus levels, reduction in equity grants, and those types of items. So we've taken a very surgical approach to things and really tried to do things smartly, and we're continuing to monitor this very tightly to take costs out of the businesses as warranted.

Okay. And I guess just on interest rates -- not the interest rate -- the interest expense. That came in a bit lower than expected. Is that a level that could be sustained for the year? Do you expect to continue to pay down debt and have that creep down, assuming interest rates stay the same?

The key to it is LIBOR. Most of our borrowings are through our revolving credit lines, and, essentially, we pay a margin over LIBOR. We're typically borrowing one- or three-month LIBOR, and over the -- really the last couple of months, they're at historic lows. That's benefiting us. So interest expense was around 2.5% in the aggregate for the first quarter. Really, if LIBOR stays low, if credit market conditions do not deteriorate, we don't see it tightening or a spike, it is possible we could stay right around the low levels that we saw in Q1.

Okay. Great. Thanks a lot.

Thank you.

Thank you. (Operator instructions.) Our next question comes from the line of Jim Giannakouros with Oppenheimer. Please go ahead.

Good afternoon, everyone. I guess I'll pick the other state, Texas, where you have some business there. I'm wondering, was the drop in activity -- you said it was tied to oil, but could you just give us a little bit more granularity as to what you are seeing in that market, I guess, on a sequential basis?

Well, in Texas a great amount of our commercial side of the business there is tied into oil industry. We provide structures and office space for a lot of the plants when they're doing projects, different turnarounds of the plants, and those types of items. And when they're business gets slower and they get more cost conscious and so forth, that impacts our business directly. And, also, with slower -- if it's slower in that area there, it can be petrochemical plants and other related industries.

And in -- the educational business that we have in Texas is much smaller than the other states we're in, but we had a good last three or four years. This year we expect that there's going to be some more economizing in those markets there just because of the tightness of the budget situations in Texas. I think 40% of the school districts in Texas are running a deficit in their school budgets. So some challenges there.

Okay. Thanks. And just to better understand the dynamic in California as far as you mentioned that money has been at least deployed -- the $13 billion or so of bonds that have been issued -- but they've been slow to reach the school districts. Exactly -- is that just -- is that imminent, or is that -- what exactly is driving the holdup there?

Yes, it's just administratively just how things work in the state. And I'm not sure about all the $13 billion. I am sure of -- I'm aware that $2 billion that's funding -- about the $2.4 billion that -- of school related. It just takes time sometimes.

And also, now, the federal stimulus monies, the first batch of those monies, my understanding, are to be out to the school districts by May 15th. So that's another -- California on the education side, I think, is looking at about $6 billion, and they're going to get a certain percentage of that here by the middle of May, at least that's what's been planned. But this is all administrative processes that just take time.

And I think one consequence, Jim, may be that the start date on projects, which typically are in the June-July-August time frame -- some of those may start later than that and beyond the typical summer season, and so we've also had to factor that into our thinking for the balance of the year.

And for California does that -- does the -- their budget issues, does that at all affect stimulus dollars coming into the state, or we should think of them completely separately?

I believe they're separate items. Now, the fact -- the dynamic is such, though, that the school district is receiving federal stimulus monies, and, for whatever reason, the May 19th initiatives don't pass, they may decide to spend those monies on different types of items. So it may alter some of their spending behavior, but they're really independent items.

Okay. Thank you.

Thank you. Our next question comes from the line of John Gibbons with Odin Capital. Please go ahead.

Hi, Dennis.

Hey, John.

Well, you see, I've got two, three questions about how these different states operate. Just walk me through the initiatives that are in trouble.

Well, there are really six initiatives on the ballot. Five are the ones that are really key.

Right.

And the best way to break it down here is -- I'm going to just pull my notes here just to make certain I don't miss any salient points here, but if you look at propositions 1A and 1B, which are really critical, they really establish this rainy-day fund for the state, and, in effect, what it does is 1A would extend -- there are three new taxes that were put in place, vehicle license fee tax, there was a state personal income tax increase, and a sales tax increase.

Yes.

So those three items are in place, but they're temporary. This would extend it for, I believe, four years and then it creates additional revenue.

And 1B then provides a shot in the arm to school districts to basically get -- I -- it's a one-time infusion of $9.3 billion that's paid over five years beginning in the 2011-2012 school year.

So, needless to say, those are very -- both of those are tied at the hip, and if 1A doesn't pass, 1B doesn't matter.

-- were in trouble, huh?

What's that?

You said they were behind in the polls.

Yes, they're behind in the polls. All five are behind in the polls. Now, let me -- if you -- do you want to hear what the other -- I'll summarize the other three very quickly.

The other three -- 1C, 1D, and 1E -- in effect, provide more of an immediate pop here in the fact that it allows -- 1C basically is a securitization of the state lottery system --

Yes.

-- and allows basically about $5 billion in one -- a one-time event for the state to be able to use right away.

And then 1D and 1E are some other mixing and matching borrowing. It's very small, irrelative.

So that's an immediate pop, and whereas 1A and 1B are a longer term. But --

Let me kind of just turn to the other states? I think -- I've always understood California but -- this is usual California weirdness. But Florida, they don't have anything quite like this; right? Aren't a lot of those school districts funded by local funding?

I'm sorry. In Florida?

Florida, yes. Considering what you have in Florida, which is very unusual --

It's both in Florida.

(Inaudible.)

You have local sales tax revenue there, and you also get operating funds from the state.

So but there's nothing based on real estate taxes; right? Florida?

State budget.

The state budget would be.

Because you understand in Florida they're reducing the valuations for both commercial and residential --

Right.

-- real estate dramatically. So it's going to reduce the tax base, which funds all kinds of services in every community there. It's stunning --

Right.

-- what's happening. Now, I'm going to ask you about Texas. Does Texas have a -- both a state and a local funding situation because you say that 40% of the school districts in Texas are running deficits. How do they make up the deficits there because Texas doesn't have quite the problems Florida has (inaudible) problem?

Well, Texas three years ago lowered property taxes down to quite a low level, and that's really starting to impact the school districts there. So they -- they're both. They get state funds, and they have local funds so --

And, presumably, both of these states will get something, not very large, but something for the stimulus program.

Yes.

That's perfect.

Yes, they'll definitely get something, but it's challenging. Texas right now -- in fact, the numbers increased -- they're adding about 80,000 new students a year.

Gees Louise.

And they're basically -- I think their funding levels are currently at about 2006 levels, if I'm not mistaken, on the most recent articles that I've read.

So they --

They (inaudible) property when they lowered property taxes.

Eventually this has to play right into your hands then essentially.

Well, we've seen an uptick in our Texas business over the last three to four years so there's some impact there. We'll have to see what happens going forward.

Just so you have this -- and this is more anecdotal than anything else -- but I gather the stimulus money is affecting other kinds of businesses and eventually affects your commercial trailer rentals business because I have already heard from a couple companies that projects which -- having to do with asphalt and concrete, etc. -- they've already started, and their prices are firmed up on those things so that, if you will, the infrastructure part of the spending, even though it hasn't all arrived yet, the suppliers are beginning to see the signs of that. Now, I realize that earlier than what you see, but there's a sign of it anyway.

Yes, we very well will benefit from some of the federal money, but perhaps, more importantly, the $30 billion in state infrastructure bonds that was passed in November of 2006, we saw some impact from that last year, and we would expect, as the state is able sell bonds, we'll see more of those types of infrastructure projects. You know, these are wastewater treatment plants, dams, bridges, those types of items. That's good for our commercial business and larger complexes.

Somebody's expecting that money, for sure, because I'm hearing it around in the infrastructure companies.

I would agree with your thinking.

Thank you.

All right. Thanks, John.

Thank you. Our next question is a follow-up question from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Hi. Couple quick questions. On the income statement, rental-related and other lines, that was up year over year. Is that related to returns and pickups and things like that?

Not specifically. When we have a rental for modulars, the rental-related services, those revenues are recognized ratably over the term of the initial contract. So it might be over one, two, or three years -- whatever the appropriate time frame is. So when you see movement in that line item, particularly for modulars, it can simply relate to the ebb and flow of particular projects being -- really running their course in terms of the initial contract and the revenues associated with them being recognized.

Okay.

We also in that line item for modulars will periodically have a customer request that we move some buildings or classrooms to a new location, and you can think of that as a project where there's no new units put on rent, but there are revenues that come to us to do that work.

Okay. So if I look at that line, it was -- you combine -- those are up 15% year over year?

Yes, keep in the mind there's some dollars in as well for Adler. So you'll see in the segment reporting we've broken that out for you.

Okay. All right. And then just how much is Texas of the modular business?

We don't break it out. What we've done -- well, we did tell you it's historically and currently probably about 55% to 75% -- 65% to 70% of our business is California based, and the balance of modulars is outside of the state, and that's been a trend that's been moving lower -- that percentage of California business has been low. It's been impacted by the California business level, as well as increases in other states.

Okay. And the increases have been coming mostly from Texas?

Well, actually, it's Texas, and the Mid-Atlantic is kicking in some, and Florida.

Okay. Thanks.

Thank you. Our next question is a follow-up question from the line of David Gold with Sidoti & Company. Please go ahead.

Hi. Can you give a little bit more detail on the CapEx in the period? Just -- it sounded like it was pretty close to last year.

David, for the first quarter, just looking at the cash flow statement, we spent $20.4 million on capital, and that's comparable to last year, a little bit lower.

The thing I would say about our outlook on capital spending, first of all, as we had suggested in the past, our capital spending will be diverted more to the new-initiative areas. So that would include Adler Tank Rentals. It would also include portable storage and environmental test equipment. And well over half of what we spent in the first quarter was directed towards those new-initiative areas.

The other thing is, because they're new initiatives, I think the capital spending will be more than (inaudible -- background noise) in the first half of the year for those and then probably tapering off a bit in the second half of the year.

Really, the capital we need to put into what I call the traditional modular and electronics businesses, that is very low, and it really reflects the fact that utilization of the equipment pools is low compared to where we'd like it to be.

Okay. Okay. Yes, that's what I would expect. I just wanted to clarify that. Thanks.

Thank you. And there are no further questions in the queue. I'd like to turn the call back over to management for closing remarks.

All right. Well, thank you, everyone for joining us today.

I want to remind everyone that this -- we have a -- our annual shareholders' meeting this coming June 4th beginning at 2:00 o'clock here in Livermore, California. As many of you that can join us, we'd love to see you, and, otherwise, we'll be webcasting it so you can listen in that way if you're not going to travel, and so we'll look forward to chatting with everyone then -- (end of audio).