-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VAmh8pVo2Vn4UjPk1l14EQI144V92U74VYhbBwDt19WzMW3O7pzXkVfHA0kcvd7I pyc4B3wD28KKuSs8Tedm+A== 0000032166-99-000008.txt : 19990415 0000032166-99-000008.hdr.sgml : 19990415 ACCESSION NUMBER: 0000032166-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRO RENT CORP CENTRAL INDEX KEY: 0000032166 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 952412961 STATE OF INCORPORATION: CA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09061 FILM NUMBER: 99593025 BUSINESS ADDRESS: STREET 1: 6060 SEPULVEDA BLVD CITY: VAN NUYS STATE: CA ZIP: 91411-2512 BUSINESS PHONE: 8187872100 MAIL ADDRESS: STREET 1: 6060 SEPULVEDA BLVD CITY: VAN NUYS STATE: CA ZIP: 91411 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED FEBRUARY 28, 1999 COMMISSION FILE NUMBER 0-9061 ELECTRO RENT CORPORATION Exact name of registrant as specified in its charter CALIFORNIA 95-2412961 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6060 SEPULVEDA BOULEVARD VAN NUYS, CALIFORNIA 91411-2501 (Address of principal executive offices) (Zip code) (818) 786-2525 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO At April 7, 1999 registrant had 24,456,749 shares of common stock outstanding. ELECTRO RENT CORPORATION FORM 10-Q FEBRUARY 28, 1999 TABLE OF CONTENTS Page Part I: FINANCIAL INFORMATION Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended February 28, 1999 and 1998 3 Condensed Consolidated Balance Sheets at February 28, 1999 and May 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II: OTHER INFORMATION 11 SIGNATURES 12 Page 2 Part I. FINANCIAL INFORMATION - ----------------------------------- ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000 omitted except per share data)
Three Months Ended Nine Months Ended February 28 February 28 1999 1998 1999 1998 -------- -------- --------- --------- Revenues: Rentals and leases $ 56,382 $ 73,313 $ 179,086 $ 150,099 Sales of equipment and other revenues 8,430 11,879 27,320 24,486 -------- -------- --------- --------- Total revenues 64,812 85,192 206,406 174,585 -------- -------- --------- --------- Costs and expenses: Depreciation of equipment 27,092 31,362 81,111 58,093 Costs of revenues other than depreciation 6,287 9,513 25,589 21,805 Selling, general and administrative expenses 17,164 22,057 60,770 47,245 Interest 2,708 4,224 9,908 5,320 -------- -------- --------- --------- Total costs and expenses 53,251 67,156 177,378 132,463 -------- -------- --------- --------- Income before income taxes 11,561 18,036 29,028 42,122 Income taxes 4,740 7,396 11,901 17,270 -------- -------- --------- --------- Net income $ 6,821 $ 10,640 $ 17,127 $ 24,852 ======== ======== ========= ========= Earnings per share: Basic $ 0.28 $ 0.44 $ 0.70 1.02 Diluted $ 0.27 $ 0.42 $ 0.68 $ 0.99 Average shares used in per share calculation: Basic 24,453 24,321 24,434 24,273 Diluted 24,941 25,168 25,032 25,077 See accompanying notes to condensed consolidated financial statements.
Page 3 ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (000 omitted) ASSETS
February 28, May 31, 1999 1998 --------- --------- Cash $ 891 $ 2,281 Accounts receivable, net of allowance for doubtful accounts 53,921 66,518 Rental and lease equipment, net of accumulated depreciation 245,652 293,048 Other property, net of accumulated depreciation and amortization 22,801 25,867 Goodwill and intangibles, net of amortization 61,906 63,346 Other 6,351 6,836 --------- --------- $ 391,522 $ 457,896 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank borrowings $ 146,700 $ 226,900 Accounts payable 16,686 20,733 Accrued expenses 22,804 21,749 Deferred income taxes 16,149 16,505 --------- --------- Total liabilities 202,339 285,887 --------- --------- Shareholders' equity: Common stock 10,457 10,410 Retained earnings 178,726 161,599 --------- --------- Total shareholders' equity 189,183 172,009 --------- --------- $ 391,522 $ 457,896 ========= ========= See accompanying notes to condensed consolidated financial statements.
Page 4 ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (000 omitted)
Nine Months Ended February 28, 1999 1998 --------- --------- Cash flows from operating activities: Net income $ 17,127 $ 24,852 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 84,822 60,814 Provision for losses on accounts receivable 2,362 3,022 Gain on sale of equipment (2,698) (4,934) Change in operating assets and liabilities: (Increase) decrease in accounts receivable 10,235 (47,049) (Increase) decrease in other assets 485 (3,977) Increase (decrease) in accounts payable 541 (4,080) Increase in accrued expenses 1,055 1,765 Decrease in deferred income taxes (356) (518) --------- --------- Net cash provided by operating activities 113,573 29,895 --------- --------- Cash flows from investing activities: Payment for acquisition of business - (239,212) Proceeds from sale of equipment 23,480 21,659 Payments for purchase of rental and lease equipment (57,963) (59,228) Payments for purchase of other property (327) (1,422) --------- --------- Net cash used in investing activities (34,810) (278,203) --------- --------- Cash flows from financing activities: Increase (decrease) in short-term bank borrowings (80,200) 246,000 Proceeds from issuance of common stock 47 149 --------- --------- Net cash provided by (used in) financing activities (80,153) 246,149 --------- --------- Net increase in cash (1,390) (2,159) Cash at beginning of period 2,281 2,207 --------- --------- Cash at end of period $ 891 $ 48 ========= ========= See accompanying notes to condensed consolidated financial statements. Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 -- Basis of Presentation - ----------------------------------- The unaudited consolidated financial statements are condensed and do not contain all information required by generally accepted accounting principles to be included in a full set of financial statements. The condensed consolidated financial statements include Electro Rent Corporation and the accounts of its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The information furnished reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the financial position and the results of operations of the Company. All such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 -- Net Income Per Share - ----------------------------------- Shares outstanding for the three and nine month periods ended February 28, 1999 have been restated to give effect to the two-for-one stock split effected in the form of a 100% stock dividend on April 30, 1998. Note 3 -- Interest and Income Taxes Paid - ------------------------------------------- Total interest paid during the nine month periods ended February 28, 1999 and 1998 was $11,057,000 and $3,443,000, respectively. Total income taxes paid during the nine month period ended February 28, 1999 were $8,399,000 compared to $18,340,000 during the same period in the prior year. Interest and income taxes paid will vary from amounts recorded in the financial statements. Note 4 -- Noncash Investing and Financing Activities - ------------------------------------------------------- The Company acquired equipment totaling $14,642,000 and $19,231,000 as of February 28, 1999 and May 31, 1998, respectively, and $7,148,000 and $19,405,000 as of February 28, 1998 and May 31, 1997, respectively, payable during subsequent quarters. Note 5 -- Capital Leases - ---------------------------- The Company has certain customer leases providing bargain purchase options with a portion of lease revenue deferred until option exercise. At February 28, 1999 investment in sales-type leases of $993,000 net of deferred interest of $62,000 is included in other assets. Interest income is recognized over the life of the lease using the interest method. Page 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion addresses the financial condition of the Company as of February 28, 1999 and the results of operations for the nine month periods ended February 28, 1999 and 1998. This discussion should be read in conjunction with the Management's Discussion and Analysis section included in the Company's Annual Report on Form 10-K (pages 13-14) to which the reader is directed for additional information. On November 14, 1997, the Company acquired the computer and test and measurement rental business of GE Capital Technology Management Services (TMS), a competitor of Electro Rent, for a purchase price of approximately $240.8 million. Results of Operations Comparison of Three Months Ended February 28, 1999 and 1998 Total revenues for the three months ended February 28, 1999 decreased 24% to $64.8 million from $85.2 million, primarily as a result of higher than expected attrition of TMS customers and a generally weak market following the acquisition of TMS. Rental and lease revenues decreased 23% to $56.4 million and sales of equipment and other revenues decreased 29% to $8.4 million, largely for the reasons noted above. It is not possible to accurately determine the effects of the TMS acquisition on revenues because of the almost immediate integration of all TMS operations. Depreciation of equipment increased from 43% of rental and lease revenues in the third quarter of fiscal 1998 to 48% of rental and lease revenues in the third quarter of fiscal 1999. This increase is primarily due to lower equipment utilization since the TMS acquisition, an increased proportion of lower yield personal computer operating leases in the acquired TMS equipment pool and an acceleration of depreciation for personal computers which was implemented at the beginning of fiscal 1999. Costs of revenues other than depreciation primarily includes the cost of equipment sales, which decreased from 77% of equipment sales in the third quarter of fiscal 1998 to 69% of equipment sales in the third quarter of fiscal 1999. This decrease is primarily attributable to a firming in the continuing volatile market for used equipment sales, a profitable large buyout in the current quarter and the revaluation of the acquired TMS equipment pool which was completed in the second quarter of fiscal 1999. Selling, general and administrative expenses totaled $17.2 million for the third quarter of fiscal 1999 as compared to $22.1 million for the third quarter of fiscal 1998, representing 26% of total revenues for both periods. The continuity of the expense ratio reflects revenue declines experienced during the last twelve months, offset by cost savings resulting from the integration of TMS, including the elimination of redundant functions and facilities. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and taxes were $14.3 million or 22% of total revenues in the third quarter of fiscal 1999 compared to $22.3 million or 26% of total revenues in the third quarter of fiscal 1998. Interest expense decreased to $2.7 million in the third quarter of fiscal 1999 from $4.2 million in the third quarter of fiscal 1998. This decrease is a result of repayments of the Company's loans with various banks, and to a lesser extent, a reduction in the effective interest rate on those loans. Comparison of Nine Months Ended February 28, 1999 and 1998 Total revenues for the nine months ended February 28, 1999 increased 18% to $206.4 million from $174.6 million in the prior year comparable period, primarily reflecting the acquisition of TMS. Rental and lease revenues increased 19% to $179.1 million and sales of equipment and other revenues increased 12% to $27.3 million. These increases primarily relate to the full year effect in fiscal 1999 of the TMS acquisition. It is not possible to accurately determine the effects of the TMS acquisition on revenues because of the almost immediate integration of all TMS operations. Partially offsetting the additional revenue base initially provided by the TMS acquisition were the effects of a higher than expected attrition of TMS customers and a generally weak market following the acquisition of TMS. Depreciation of equipment increased from 39% of rental and lease revenues in the first nine months of fiscal 1998 to 45% of rental and lease revenues in the first nine months of fiscal 1999. This increase is primarily due to lower equipment utilization since the TMS acquisition, an increased proportion of lower yield personal computer operating leases in the acquired TMS equipment pool and an acceleration of depreciation for personal computers which was implemented at the beginning of fiscal 1999. Costs of revenues other than depreciation primarily includes the cost of equipment sales, which increased from 77% of equipment sales in the first nine months of fiscal 1998 to 89% of equipment sales in the nine months of fiscal 1999. This increase is primarily attributable to a weak market for both personal computers and test and measurement equipment and an increased proportion of personal computer sales in the first half of fiscal 1999. Selling, general and administrative expenses totaled $60.8 million or 29% of total revenues for the first nine months of fiscal 1999 as compared to $47.2 million or 27% of total revenues for the first nine months of fiscal 1998. The increase in the expense ratio reflects revenue declines experienced during the last twelve months, partially offset by cost savings resulting from the integration of TMS, including the elimination of redundant functions and facilities. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and taxes were $38.9 million or 19% of total revenues in the first nine months of fiscal 1999 compared to $47.4 million or 27% of total revenues in the first nine months of fiscal 1998. Interest expense increased to $9.9 million in the first nine months of fiscal 1999 from $5.3 million in the first nine months of fiscal 1998. The increase is a result of additional bank borrowings used to finance the TMS acquisition. Liquidity and Capital Resources The Company's primary capital requirements are purchases of rental and lease equipment and debt service. The Company purchases equipment throughout each year to replace equipment which has been sold and to maintain adequate levels of rental equipment to meet existing and new customer needs. The market for personal computers and test and measurement equipment has declined during the last twelve months. In spite of the larger equipment pool after the TMS acquisition, expenditures decreased in the first nine months of fiscal 1999 as compared with the comparable prior year period and are expected to continue at a lower level for the remainder of the year. As a result, bank borrowings are expected to continue declining. During the nine months ended February 28, 1999 and 1998 net cash provided by operating activities was $113.6 million and $29.9 million, respectively. The increase in fiscal 1999 results primarily from the effects of the TMS acquisition and a decrease in accounts receivable. During the nine months ended February 28, 1999 and 1998 net cash used in investing activities was $34.8 million and $278.2 million, respectively. This decrease is attributable to the TMS acquisition in the prior year, partly offset by a lower level of equipment purchases and increased equipment sales in fiscal 1999. During the first nine months of fiscal 1999 net cash used in financing activities was $80.2 million, reflecting decreased bank borrowings primarily from the increase in net cash provided by operating activities, while in the first nine months of fiscal 1998 net cash provided by financing activities was $246.1 million, reflecting increased bank borrowings for the TMS acquisition. The Company has available a revolving line of credit of $180 million, subject to certain borrowing base restrictions, to meet acquisition needs as well as working capital and general corporate requirements. The Company had borrowings of $146.7 million under the Credit Facility at February 28, 1999. Year 2000 Compliance General. The computer systems issue relating to dates beyond 1999 is the result of many computer programs being written to use and store dates with only the last two digits of the applicable year. As a result, these programs may assume that all two digit dates are twentieth century dates. This could result in system failure, anomalous system behavior or incorrect system reporting. System failure could, in turn, temporarily affect the Company's ability to process customer transactions, interface with vendors and engage in similar normal business activities. The Company has assessed how it may be impacted. The Company has formulated and begun implementation of a plan to address all known aspects of the issue. The Company has already completed a substantial portion of this plan and is on schedule to fully complete the plan by May 1999. Software Information Systems. Software information systems consist of the Company's base financial and operations system (internally-developed PERFECT system), other smaller scale software applications and other programs developed internally. All of these systems were found to be substantially year 2000 compliant with immaterial associated costs. Vendor Provided Computer Hardware and Operating Systems. Vendor provided computer hardware and operating systems include all data center equipment (Sun Microsystems Enterprise 6000) and networks (Novell and Microsoft NT). All of these systems were found to be substantially year 2000 compliant with the exception of the Sun 6000 operating system. This was upgraded in February 1999 with immaterial associated costs. Communications Systems. Communications systems include all data center equipment and software systems used to support external communications with customers, employees, suppliers and business partners, and all corporate equipment and software systems used to support internal business management communications. Corporate communications systems have been recently replaced and/or upgraded. Each significant component of these communications systems has been tested and all were found to be substantially year 2000 compliant with immaterial associated costs. The Company is currently evaluating communications systems at each of its field offices and will make any necessary replacements and/or upgrades by May 1999. The Company does not expect any associated costs to be material. Suppliers and Other Business Partners. This area of the plan called for all significant suppliers and other business partners to be monitored for year 2000 readiness. The Company is not currently aware of any single vendor or business partner with year 2000 compliance issues that could have a material impact on the Company. Year 2000 business transaction tests of all direct interfaces with vendors and other business partners will be completed by May 1999. The Company can provide no assurance that year 2000 compliance will be successfully implemented by all of its suppliers. Contingency Planning. The Company has not yet developed a comprehensive contingency plan to address the risk of operational problems and costs likely to result from a failure by the Company or by a supplier or business partner to address year 2000 readiness. This plan will be developed by the end of May 1999. It will list specific action plans for failure in any of the identified areas of the year 2000 compliance plan. The Company believes that failure to complete any of the remaining work to be done will not alone adversely affect the continuity of the core business. The Company believes its current state of readiness is on schedule with a conservative plan to be fully year 2000 compliant by May 1999 and that business risks have been minimized. However, there can be no guarantee that year 2000 compliance issues not yet identified or fully addressed will not materially affect the Company's operations or expose it to third party liability. Part II. OTHER INFORMATION - ---------------------------- Items 1. through 3. - ---------------------------- Nothing to report. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- Nothing to report. Item 5. - ---------------------------- Nothing to report. Item 6. Exhibits and Reports on Form 8-K - ------------------------------------------- Nothing to report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. ELECTRO RENT CORPORATION DATED: April 13, 1999 /s/ Craig R. Jones Craig R. Jones Vice President and Chief Financial Officer Page 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 MAY-31-1999 JUN-1-1998 FEB-28-1999 9-MOS 891 0 60,649 6,728 0 0 510,910 242,457 391,522 0 0 0 0 10,457 0 391,522 27,320 206,406 25,589 167,470 0 0 9,908 29,028 11,901 17,127 0 0 0 17,127 0.70 0.68
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