-----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, Va313WqX5dq+js2pedNMuR8lYhLp3iOph+qBaM6STKK0ehPJTjIssCLJz9KkSOXE LN2GlJSrnOaHtCKUa/FMFQ== 0000032166-00-000006.txt : 20000417 0000032166-00-000006.hdr.sgml : 20000417 ACCESSION NUMBER: 0000032166-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000413 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: 600765 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 29, 2000 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 4, 2000 registrant had 24,632,585 shares of common stock outstanding. ELECTRO RENT CORPORATION FORM 10-Q FEBRUARY 29, 2000 TABLE OF CONTENTS Page Part I: FINANCIAL INFORMATION Condensed Consolidated Statements of Income for the Three and Nine Months Ended February 29, 2000 and February 28, 1999 3 Condensed Consolidated Balance Sheets at February 29, 2000 and May 31, 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 29, 2000 and February 28, 1999 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II: OTHER INFORMATION 13 SIGNATURES 14 Page 2 Part I. FINANCIAL INFORMATION - ----------------------------------- Item 1. Financial Statements ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (000 omitted except per share data)
Three Months Ended Nine Months Ended February 29 February 28 February 29 February 28 2000 1999 2000 1999 -------- -------- --------- --------- Revenues: Rentals and leases $ 47,601 $ 56,382 $ 152,166 $ 179,086 Sales of equipment and other revenues 11,488 8,430 31,141 27,320 -------- -------- --------- --------- Total revenues 59,089 64,812 183,307 206,406 -------- -------- --------- --------- Costs and expenses: Depreciation of equipment 23,254 27,092 73,530 81,111 Costs of revenues other than depreciation 10,352 6,287 26,844 25,589 Selling, general and administrative expenses 15,521 17,164 49,458 60,770 Interest 1,270 2,708 4,512 9,908 -------- -------- --------- --------- Total costs and expenses 50,397 53,251 154,344 177,378 -------- -------- --------- --------- Income before income taxes 8,692 11,561 28,963 29,028 Income taxes 3,303 4,740 11,005 11,901 -------- -------- --------- --------- Net income $ 5,389 $ 6,821 $ 17,958 $ 17,127 ======== ======== ========= ========= Earnings per share: Basic $ 0.22 $ 0.28 $ 0.73 $ 0.70 Diluted $ 0.22 $ 0.27 $ 0.72 $ 0.68 Average shares used in per share calculation: Basic 24,621 24,453 24,547 24,434 Diluted 24,982 24,941 24,972 25,032 See accompanying notes to condensed consolidated financial statements. Page 3
ELECTRO RENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (000 omitted) ASSETS
February 29, May 31, 2000 1999 --------- --------- Cash $ 861 $ 4,039 Accounts receivable, net of allowance for doubtful accounts 36,051 45,874 Rental and lease equipment, net of accumulated depreciation 202,613 229,317 Other property, net of accumulated depreciation and amortization 21,159 22,651 Goodwill and intangibles, net of amortization 60,156 61,469 Other 5,624 5,358 --------- --------- $ 326,464 $ 368,708 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank borrowings $ 49,100 $ 107,500 Accounts payable 23,508 21,555 Accrued expenses 22,484 26,725 Deferred income taxes 16,863 16,754 --------- --------- Total liabilities 111,955 172,534 --------- --------- Shareholders' equity: Common stock 10,887 10,510 Retained earnings 203,622 185,664 --------- --------- Total shareholders' equity 214,509 196,174 --------- --------- $ 326,464 $ 368,708 ========= ========= 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 29 February 28 2000 1999 --------- --------- Cash flows from operating activities: Net income $ 17,958 $ 17,127 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 77,185 84,822 Provision for losses on accounts receivable 923 2,362 Gain on sale of equipment (3,907) (2,698) Change in operating assets and liabilities: Decrease in accounts receivable 8,900 10,235 Decrease (increase) in other assets (851) 485 Increase (decrease) in accounts payable (6,124) 541 Increase (decrease) in accrued expenses (4,241) 1,055 Increase (decrease) in deferred income taxes 109 (356) --------- --------- Net cash provided by operating activities 89,952 113,573 --------- --------- Cash flows from investing activities: Proceeds from sale of equipment 27,025 23,480 Payments for purchase of rental and lease equipment (61,885) (57,963) Payments for purchase of other property (247) (327) --------- --------- Net cash used in investing activities (35,107) (34,810) --------- --------- Cash flows from financing activities: Decrease in short-term bank borrowings (58,400) (80,200) Proceeds from issuance of common stock 377 47 --------- --------- Net cash used in financing activities (58,023) (80,153) --------- --------- Net decrease in cash (3,178) (1,390) Cash at beginning of period 4,039 2,281 --------- --------- Cash at end of period $ 861 $ 891 ========= ========= 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 -- Interest and Income Taxes Paid - ------------------------------------------- Total interest paid during the nine month periods ended February 29, 2000 and February 28, 1999 was $3,949,000 and $11,507,000, respectively. Total income taxes paid during the nine month period ended February 29, 2000 were $15,040,000 compared to $8,399,000 during the same period in the prior year. Interest and income taxes paid will vary from amounts recorded in the financial statements. Note 3 -- Noncash Investing and Financing Activities - ------------------------------------------------------- The Company acquired equipment totaling $23,054,000 and $14,977,000 as of February 29, 2000 and May 31, 1999, respectively, and $14,642,000 and $19,231,000 as of February 28, 1999 and May 31, 1998, respectively, payable during subsequent quarters. Note 4 -- Capital Leases - ---------------------------- The Company has certain customer leases providing bargain purchase options with a portion of lease revenue deferred until option exercise. At February 29, 2000 investment in sales-type leases of $1,339,000 net of deferred interest of $75,000 is included in other assets. Interest income is recognized over the life of the lease using the interest method. Note 5 -- Derivative Positions - ---------------------------- The Company has entered into an interest rate protection agreement. The Company's exposure under this agreement is limited to the impact of variable interest rate fluctuations and the periodic settlement of amounts due under this agreement if the other party fails to perform. The Company does not anticipate nonperformance by the counterparty, which is a major financial institution. As of February 29, 2000, the Company held one interest rate swap agreement with a notional amount of $25,000,000, interest rate of 5.939% and expiration date of December 2000. 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 29, 2000 and the results of operations for the three and nine month periods ended February 29, 2000 and February 28, 1999. This discussion should be read in conjunction with the Management's Discussion and Analysis section included in the Company's 1999 Annual Report on Form 10-K (pages 15-18) to which the reader is directed for additional information. Results of Operations Comparison of Three Months Ended February 29, 2000 and February 28, 1999 Total revenues for the three months ended February 29, 2000 decreased 8.8% to $59.1 million from $64.8 million, primarily as a result of continuing attrition of the TMS business acquired in November 1997 and a generally weak PC market during the last twelve months, but partially offset by continuing improvement of test and measurement equipment rentals in the telecommunications segment. Rental and lease revenues decreased 15.6% to $47.6 million, largely for the reasons noted above, and sales of equipment and other revenues increased 36.3% to $11.5 million, primarily reflecting a higher volume of PC sales. Depreciation of equipment increased from 48.1% of rental and lease revenues in the third quarter of fiscal 1999 to 48.9% of rental and lease revenues in the third quarter of fiscal 2000. This increase is primarily due to lower personal computer utilization 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 69.3% of equipment sales in the third quarter of fiscal 1999 to 90.8% of equipment sales in the third quarter of fiscal 2000. This increase primarily reflects a higher volume of PC sales which have lower sales margins than test and measurement equipment. Selling, general and administrative expenses totaled $15.5 million for the third quarter of fiscal 2000, or 26.3% of revenues, as compared to $17.2 million, or 26.5% of revenues, for the third quarter of fiscal 1999. This increase of the expense ratio reflects revenue declines experienced during the last twelve months, which were almost offset by cost savings resulting from organizational changes, including the reduction of excess capacity. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and taxes were $10.0 million or 16.9% of total revenues in the third quarter of fiscal 2000 compared to $14.3 million or 22.0% of total revenues in the third quarter of fiscal 1999. Interest expense decreased to $1.3 million in the third quarter of fiscal 2000 from $2.7 million in the third quarter of fiscal 1999. This decrease is primarily due to a reduction of the Company's loans with various banks from $146.7 million at February 28, 1999 to $49.1 million at February 29, 2000, partially offset by higher interest rates. Comparison of Nine Months Ended February 29, 2000 and February 28, 1999 Total revenues for the nine months ended February 29, 2000 decreased 11.2% to $183.3 million from $206.4 million, primarily as a result of continuing attrition of the TMS business acquired in November 1997 and a generally weak PC market during the last twelve months. Rental and lease revenues decreased 15.0% to $152.2 million, largely for the reasons noted above, and sales of equipment and other revenues increased 14.0% to $31.1 million, primarily reflecting a higher volume of PC sales. Depreciation of equipment increased from 45.3% of rental and lease revenues in the first nine months of fiscal 1999 to 48.3% of rental and lease revenues in the first nine months of fiscal 2000. This increase is primarily due to lower personal computer utilization 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 88.5% of equipment sales in the first nine months of fiscal 1999 to 85.5% of equipment sales in the first nine months of fiscal 2000. This decrease is primarily attributable to a more normal sale activity for the current year. Selling, general and administrative expenses totaled $49.5 million for the first nine months of fiscal 2000, or 27.0% of revenues, as compared to $60.8 million, or 29.4% of revenues, for the first nine months of fiscal 1999. This decrease of the expense ratio reflects revenue declines experienced during the last twelve months, which were offset in greater proportion by cost savings resulting from organizational changes, including the reduction of excess capacity. As a result of the changes in revenues, operating costs and expenses discussed above, earnings before interest and taxes were $33.5 million or 18.3% of total revenues in the first nine months of fiscal 2000 compared to $38.9 million or 18.9% of total revenues in the first nine months of fiscal 1999. Interest expense decreased to $4.5 million in the first nine months of fiscal 2000 from $9.9 million in the first nine months of fiscal 1999. This decrease is primarily due to a reduction of the Company's loans with various banks from $146.7 million at February 28, 1999 to $49.1 million at February 29, 2000, partially offset by higher interest rates. 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 has declined during the last twelve months. However, during the first three quarters of fiscal 2000, increased purchases of equipment were made to support some areas of growth for both personal computers and test and measurement equipment. In spite of these increased purchases, bank borrowings are expected to continue declining during fiscal 2000 and 2001. During the nine months ended February 29, 2000 and February 28, 1999 net cash provided by operating activities was $90.0 million and $113.6 million, respectively. The decrease in fiscal 2000 results primarily from lower earnings before depreciation and gain on sale of equipment and decreases in accounts payable and accrued expenses. During the nine months ended February 29, 2000 and February 28, 1999 net cash used in investing activities was $35.1 million and $34.8 million, respectively. This increase is primarily attributable to a higher level of payments for equipment purchases, primarily in the test and measurement area, which more than offset increased proceeds from the sale of equipment. During the first nine months of fiscal 2000 net cash used in financing activities was $58.0 million, compared to $80.2 million in the first nine months of fiscal 1999, reflecting a decline in repayments of bank borrowings. The Company has available a revolving line of credit of $63.0 million, subject to certain borrowing base restrictions, to meet equipment acquisition needs as well as working capital and general corporate requirements. The Company had borrowings of $49.1 million under the Credit Facility at February 29, 2000. 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. Prior to 2000, the Company completed implementation of its plan to address all known aspects of the issue, with immaterial associated costs. During the first three months of 2000, the Company assessed how it was impacted. 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 Year 2000 compliant. 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 Year 2000 compliant. 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 and field office communications systems were found to be Year 2000 compliant. 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. The Company can provide no assurance that Year 2000 compliance was successfully implemented by all of its suppliers. Rental and Lease Equipment Pool. The Company has reviewed its rental and lease equipment pool to determine whether its use and market value may be materially adversely affected by the Year 2000 conversion. The Company may encounter Year 2000 risk as a result of the Year 2000 failure of equipment rented, leased or sold by the Company. The Company may face claims from customers and their end users arising in connection with bodily injury, property damage and business interruption as a result of a Year 2000 failure in equipment provided by the Company. Based on the Company's standard rental and lease agreements, the Company believes that it would not be liable for such claims. However, there can be no assurance that such claims will not be brought against the Company. Additionally, Year 2000 may have an impact on the fair market value of the Company's rental and lease equipment pool for which the manufacturer does not make available a Year 2000 compliance upgrade path or in the event an available Year 2000 upgrade is cost prohibitive relative to the market value of the equipment. Although the Company is still in the process of evaluating any potential Year 2000 market value risks, nothing has come to the Company's attention that would lead it to believe that the amounts the Company will ultimately realize would result in gross margins materially different from current levels. Contingency Planning. The Company determined that a comprehensive contingency plan was not required 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. The Company believes that failure will not alone adversely affect the continuity of the core business. The Company believes it is substantially Year 2000 compliant 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. Qualitative And Quantitative Market Risk Disclosures The Company's primary market risk exposure is interest rate risk, primarily related to its borrowings under its unsecured revolving credit facility. However, a changing interest rate environment does not necessarily impact the Company's margins since the effects of higher or lower borrowing costs may be reflected in the rates on newly rented and leased assets. The Company attempts to reduce this risk by utilizing derivative financial instruments, namely interest rate caps and swaps, pursuant to Company policies. All derivative financial instruments are for purposes other than trading. The table below presents the principal (or notional) amounts of the Company's bank borrowings and derivative financial instruments by expected maturity dates. The table reflects expected maturities as of February 29, 2000 and does not reflect changes which could arise after that time. There are no expected maturities after May 31, 2001. The Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on exposures that arise during the respective period, the Company's hedging strategies at the time, and actual interest rates.
Year ended May 31, Fair (in thousands except percentages) 2000 2001 Total Value Bank Borrowings Principal amount(a) $ 19,300 $ 29,800 $ 49,100 $ 49,100 Average interest rate(b) VR% VR% VR% Interest Rate SWAP Notional amount(c) $ 25,000 $ 25,000 $ 98 Rate to be paid by the Company 5.939% 5.939% Rate to be received by the Company 3-month 3-month Libor Libor
(a) Bank borrowings consist of the Company's unsecured revolving line of credit, which provided for total available credit of $63.0 million at February 29, 2000. Interest on the line of credit is payable in accordance with the applicable London Interbank Offering Rate (LIBOR) agreement or quarterly, and accrues, at the Company's option, either at the LIBOR plus margin (as defined) or the Base Rate (as defined). (b) Variable Rate (VR) based on LIBOR plus margin or Base Rate as defined in the Credit Agreement. (c) In December 1997, the Company entered into one 3-year floating rate to fixed rate interest rate swap agreement in the notional amount of $25.0 million. The Company is also subject to foreign currency rate risk relating to rentals and leases denominated in Canadian dollars. The Company has determined that hedging of these assets is not cost effective and instead attempts to minimize currency exposure risk through working capital management. The Company does not believe that any foreseeable change in currency rates would have a material effect on its financial position or results of operations. 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, 2000 /s/ Craig R. Jones Craig R. Jones Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 MAY-31-2000 JUN-1-1999 FEB-29-2000 9-MOS 861 0 42,443 6,392 0 0 487,105 263,333 326,464 0 0 0 0 10,887 0 326,464 31,141 183,307 26,844 149,832 0 0 4,512 28,963 11,005 17,958 0 0 0 17,958 0.73 0.72
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