UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended May 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-09061
ELECTRO RENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA | 95-2412961 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
6060 Sepulveda Boulevard
Van Nuys, California 91411-2512
(Address of Principal Executive Offices and Zip Code)
(818) 786-2525
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock without par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer ¨ | Accelerated Filer þ | Non-Accelerated Filer ¨ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the registrants stock held by non-affiliates of the registrant as of November 30, 2011, was $309,305,540.
Number of shares of the registrants common stock outstanding as of August 10, 2012: 23,995,626.
DOCUMENTS INCORPORATED BY REFERENCE
The information contained in the Proxy Statement for the Annual Shareholders Meeting of Shareholders to be held on October 11, 2012 that is required by Part III of this Form 10-K is incorporated herein by reference.
EXPLANATORY NOTE
Unless otherwise noted, (1) the terms we, us and our refer to Electro Rent Corporation and its subsidiaries, and (2) the terms Common Stock and shareholder(s) refer to our common stock and the holders of that stock, respectively.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as approximates, believes, expects, anticipates, estimates, intends, plans, would, may or other similar expressions in this Report. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following: common stock price fluctuations, fluctuations in operating results (including as a result of changing economic conditions), risks associated with technology changes, risks associated with customer solvency, competition, risks associated with international operations, risks associated with our manufacturers and suppliers, dependence on key personnel, control by management and others, risks associated with possible acquisitions and new business ventures and anti-takeover provisions. For further discussion of these and other factors, see Item 1A. Risk Factors; Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations; and Item 7A. Quantitative and Qualitative Disclosure About Interest Rates and Currency Rates, in this Report, and our other filings with the Securities and Exchange Commission.
This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
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PART I
Item 1. Business.
We are one of the largest global organizations devoted to the rental, lease and sale of new and used electronic test and measurement (T&M) equipment. We purchase that equipment from leading manufacturers such as Agilent Technologies, Inc. (Agilent) and Tektronix Inc. (Tektronix) primarily for use by our customers in the aerospace, defense, telecommunications, electronics, industrial and semiconductor industries. Although it represented only approximately 7% of our revenues in fiscal 2012, we believe our data products (DP) division is one of the largest rental companies in the United States for personal computers and servers from manufacturers including Dell, HP/Compaq, IBM and Toshiba. We have also recently expanded our efforts in the rental, lease and sale of industrial equipment such as electrical test equipment and inspection equipment.
The Electro Rent Approach. For the most part, customers who purchase or lease equipment from us place orders through our inside sales force, which has access to our proprietary computer system that is updated in real time for equipment availability and pricing. In the case of rentals and some leases, we generally use a pool of equipment we have previously purchased for that purpose, or we may add equipment to that pool to fill a lease or rental order if the addition makes economic sense. Our equipment fulfillment team typically can arrange delivery of equipment from our pool to our customers within one or two days of a request. Most of our equipment is technically complex and must be tested and serviced when returned to us. We do most of that testing in house, using a team of experienced technicians and our state of the art calibration laboratory.
Although our customers respond to equipment pricing and availabilities in making their decisions to choose to work with us, we believe that our success also depends on other factors:
| Customer Responsiveness. Our customer service, responsiveness and expert technical staff provide us a key competitive advantage. Our resale channel for Agilent T&M equipment, for the United States and Canada, has enabled us to substantially expand the number and technical expertise of our T&M sales force, which at approximately 99 persons is the largest among our principal competitors. We believe our management team is the most experienced and stable in the industry, averaging 28 years at Electro Rent. In 2008 and 2009, Forbes magazine named us as one of their 100 Most Trustworthy Companies out of the more than 8,000 publicly traded companies for what Forbes termed transparent and conservative accounting practices and solid corporate governance and management. Also, we were honored as a Frost & Sullivan 2012 company of the year. |
| Global Platform. Although our customers represent a cross-section of the economy, much of our business is conducted with large companies in the aerospace and defense, semiconductor, electronics and telecommunications industries. As the largest T&M rental, leasing and sales company in North America, and one of the only rental companies in the world with a global platform and key locations in the US, Canada, China and Europe, our size and reach appeals to our multinational customers and assists us in maximizing our equipment utilization and inventory management across different geographic markets. |
| Multichannel Offerings. In the last two years, we have expanded our business to offer customers a single source for their equipment acquisitions, whether they want to rent, lease or buy new or used equipment. We believe that we offer the greatest breadth of acquisition options in the industry, allowing our customers to match the appropriate option to their usage and capital needs, budget and other factors, such as accounting rules and regulatory requirements. In addition, spreading costs over multiple channels allows us to maintain the largest sales force among our principal competitors, which in turn broadens and deepens our customer contacts and provides them more technical strength and assistance. |
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| Inventory Management Systems. To maximize our overall profit from the rental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis by controlling the timing, pricing and mix of our purchases and sales. We acquire new and used equipment to meet current technological standards and current and anticipated customer demand, and we sell our used equipment when we believe that is the most lucrative option. We employ a complex equipment management strategy and our proprietary PERFECT software to adjust our inventory and pricing in order to maximize equipment availability, utilization and profitability. We manage each specific equipment class based on a separate assessment of that equipments historical and projected life cycle and numerous other factors, including the U.S. and global economy, interest rates and new product launches. |
Our Strategic Growth Initiatives. We believe that our resources and financial infrastructure remain capable of handling a significantly greater volume of business activity without a proportionate increase in expenses. Based on this belief, we have been seeking ways to increase revenues to leverage that infrastructure through internal growth and external acquisitions. Despite the global economic downturn, we have used our strong balance sheet to make significant equipment purchases to meet T&M rental demand, support areas of potential growth and keep our equipment pool technologically up-to-date. In response to increasing customer demand, we increased our purchases of equipment during fiscal 2012 by 5.6% compared to fiscal 2011, excluding an additional $15.8 million of rental equipment, at fair value, acquired in connection with our purchase of certain assets and post-closing liabilities of Equipment Management Technology, Inc. (EMT) in August 2011. As a result, we have been able to expand and upgrade our equipment base with equipment that is limited in supply but growing in demand, enhancing our ability to meet the needs of a wide range of customers, as well as expand our equipment pool offerings in some related areas such as telecom and industrial products.
Our Markets and Competition. We believe the North American general purpose test equipment rental market generates in excess of $300 million of annual rental and lease revenue, and is characterized by intense competition from several large competitors. Although no single competitor holds a dominant market share in North America, our primary competitors in the T&M rental area include McGrath RentCorp, Continental Resources, Inc., Test Equity LLC, and Microlease plc. We compete for rental business with Microlease plc and Livingston Group Ltd. in Europe, and ORIX Corporation and a number of local operators in Asia. These entities also compete with us in leasing T&M equipment, as do banks, vendors and other financing sources. In addition, in selling our equipment, we may also compete with sales of new equipment by our suppliers, including Agilent and Tektronix, and their other distributors. Our competitors engage in aggressive pricing for both rentals and sales. In order to maintain or increase our market share, we may choose to lower our prices, resulting in lower revenues and decreased profitability.
The market for the lease and rental of computers and servers is highly fragmented, although our principal competitors include SmartSource Rentals, Source One Rentals, Rentex and CRE Rentals. The computer rental market has been characterized by intense competition that has led to industry consolidation. We acquired two competitors during the last fifteen years and SmartSource, our largest competitor, has expanded primarily due to its numerous acquisitions. While we have focused on the rental of large quantities of computers to unique customers, SmartSource concentrates more on audio visual and trade show technology rentals.
Our Backlog. As of May 31, 2012, we had a sales order backlog for new T&M equipment of $8.4 million, compared to $17.0 million as of May 31, 2011 and $9.7 million as of May 31, 2010. The decline in backlog for fiscal 2012 is primarily due to shorter manufacturing lead time.
Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Backlog is increased when an order is received, and backlog is decreased when we recognize sales. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. Backlog, on any particular date, while indicative of short-term revenue performance, is not necessarily a reliable indicator of medium or long-term revenue performance.
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International Operations. We have rental, leasing and sales activity in foreign countries, which in the aggregate accounted for approximately 13.8% of our revenues in 2012, 12.6% in 2011 and 14.6% in 2010. Selected financial information regarding our international operations is presented below:
Year ended May 31, (in thousands) |
2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Revenues: 1 |
||||||||||||
U.S. |
$ | 214,354 | $ | 199,861 | $ | 124,618 | ||||||
Other 2 |
34,200 | 28,868 | 21,249 | |||||||||
|
||||||||||||
Total |
$ | 248,554 | $ | 228,729 | $ | 145,867 | ||||||
|
||||||||||||
As of May 31, (in thousands) |
2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Net Long Lived Assets: 3 |
||||||||||||
U.S. |
$ | 211,759 | $ | 180,591 | $ | 166,533 | ||||||
Other 2 |
49,595 | 33,491 | 25,206 | |||||||||
|
||||||||||||
Total |
$ | 261,354 | $ | 214,082 | $ | 191,739 | ||||||
|
1 | Revenues by country are based on the location of shipping destination, whether the order originates in the U.S. parent or a foreign subsidiary. |
2 | Other consists of other foreign countries that each individually accounts for less that 10% of the total revenues or assets. |
3 | Net long-lived assets include rental and lease equipment, other property, goodwill and intangibles, net of accumulated depreciation and amortization. |
For risks relating to our international operations, see Item 1A. Risk Factors Risks Associated with International Operations.
Other Information about Us. The following table shows, for each of the last three fiscal years, revenues from rentals and leases and sales of equipment and other revenues for our T&M and DP operating segments:
Years ended May 31, (in thousands) |
T&M | DP | Total | |||||||||
|
||||||||||||
2012 |
||||||||||||
Rentals and leases |
$ | 113,540 | $ | 16,197 | $ | 129,737 | ||||||
Sales of equipment and other revenues |
116,417 | 2,400 | 118,817 | |||||||||
|
||||||||||||
$ | 229,957 | $ | 18,597 | $ | 248,554 | |||||||
|
||||||||||||
2011 |
||||||||||||
Rentals and leases |
$ | 101,273 | $ | 16,789 | $ | 118,062 | ||||||
Sales of equipment and other revenues |
108,450 | 2,217 | 110,667 | |||||||||
|
||||||||||||
$ | 209,723 | $ | 19,006 | $ | 228,729 | |||||||
|
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2010 |
||||||||||||
Rentals and leases |
$ | 77,874 | $ | 16,327 | $ | 94,201 | ||||||
Sales of equipment and other revenues |
49,282 | 2,384 | 51,666 | |||||||||
|
||||||||||||
$ | 127,156 | $ | 18,711 | $ | 145,867 | |||||||
|
The majority of our rental equipment inventory not out on rent is located at our Van Nuys, California warehouse and is serviced by an ISO9001:2000 and AS9100 Revision B registered and compliant laboratory. We also service our customers through sales offices and calibration and service centers in the United States, Canada, China and Europe, which are linked by a proprietary on-line computer system. These centers also function as depots for the sale of used equipment.
For additional financial information about our segments, see Note 14 to our consolidated financial statements included in this Form 10-K.
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No single customer accounted for more than 10% of our total revenues during fiscal 2012, 2011 or 2010. We do not derive any significant portion of our revenues from direct United States Government contracts.
We have no material patents, trademarks, licenses, franchises or concessions.
At May 31, 2012, we employed approximately 393 individuals. With the exception of China, none of these employees are a member of a labor union. None of our employees are subject to collective bargaining agreements. We believe that our employee relations are satisfactory.
Electro Rent Corporation was incorporated in California in 1965 and became a publicly held corporation in 1980.
Obtaining Additional Information. Our Internet address is www.electrorent.com. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website via links to the Securities and Exchange Commissions website as soon as reasonably practicable after we electronically file those materials with the Securities and Exchange Commission. We provide paper copies of these reports to shareholders upon written request to Shareholder Relations, Electro Rent Corporation, 6060 Sepulveda Boulevard, Van Nuys, California 91411-2512.
Item 1A. Risk Factors.
Please carefully consider the following discussion of various risks and uncertainties. We believe these risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. The following risk factors are not the only risk factors that we face. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occur or materialize. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment.
COMMON STOCK PRICE FLUCTUATIONS
Our Common Stock price has fluctuated significantly and may continue to do so in the future.
General Factors. We believe some of the reasons for past fluctuations in the price of our stock have included:
| announcements of developments related to our business; |
| announcements concerning new products or enhancements in the equipment that we rent, or developments in our relationships with our customers; |
| variations in our revenues, gross margins, earnings or other financial results from investors expectations; and |
| fluctuations in results of our operations and general conditions in the economy, our market, and the markets served by our customers. |
In addition, prices in the stock market have been volatile in recent years. In many cases, the fluctuations have been unrelated to the operating performance of the affected companies. As a result, the price of our Common Stock could fluctuate in the future without regard to our operating performance.
Future Sales of our Common Stock. Sales of our Common Stock by our officers, directors and employees could adversely and unpredictably affect the price of our shares. Additionally, the price could
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be affected even by the potential for sales by these persons. In addition to the 23,995,626 shares outstanding as of August 10, 2012, as of such date, we are authorized to issue up to 385,239 shares of Common Stock upon conversion of our stock units previously granted under our equity incentive plan.
We cannot predict the effect that any future sales of our Common Stock, or the potential for those sales, will have on our share price.
FLUCTUATIONS IN OPERATING RESULTS
Historically, our operating results have fluctuated, and we expect that fluctuations could continue in the future. The fluctuations in our past results have resulted from many factors, some of which are beyond our control. In the future, these or other factors could have a material adverse impact on our operating results and cause our stock price to decrease.
Timing of Equipment Purchases and Sales and Equipment Pool Management. The profitability of our business depends in part on controlling the timing, pricing and mix of purchases and sales of equipment and on managing our equipment pool. We seek to acquire new and used equipment at attractive prices, from which we feel we can make a profit as a result of a combination of renting and/or selling that equipment. We base expenditures for equipment purchases, sales and marketing and other items on our expectations of future customer demand. In order to maximize overall profit from the rental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis by analyzing our product strategy for each specific equipment class in light of that equipments historical and projected lifecycle. In doing so, we compare our estimate of potential profit from rental with the potential profit from the products immediate sale and replacement with new or other equipment.
Our overall equipment management is complex and our equipment strategy can change during the equipments lifetime based upon numerous factors, including the U.S. and global economy, interest rates and new product launches. Our strategic equipment decisions are based on the following fundamentals:
| our acquisition cost; |
| our estimates of current and future market demand for rentals; |
| our estimates of current and future supply of equipment; |
| the book value of the equipment after depreciation and other impairment; |
| our estimates of the effect of interest rates on rental and leasing fees as well as capital financing; and |
| our estimates of the potential current and future sale prices of equipment. |
However, historical trends are not necessarily indicative of future trends. If our assumptions prove to be wrong, not only may our revenues fall short of our expectations, but we may not be able to adjust our inventory quickly enough to compensate for lower demand for one or more products in our inventory. In addition, as demand for a product falls, we may have difficulty in selling any of our excess equipment at a favorable price or at all. Both of these factors can compound the impact of any revenue shortfall and further affect our operating results and the price of our stock.
Risks Associated with Changing Economic Conditions. In recent years, our financial results were impacted by competitive pressure on rental rates due in large part to the recession in the U.S. and our major international markets. Our customers historically have reduced their expenditures for electronic equipment during economic downturns. Accordingly, when the domestic and/or international economy weakens, demand for our services declines. A large part of our equipment pool is rented or leased to customers in the aerospace, defense, electronics and telecommunications industries. Continued slowdowns in the U.S. and global economy, or one or more of these specific industries, may result in
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lower demand and price pressure and could have a material adverse effect on our operating results and stock price. In fact, in fiscal 2002 and fiscal 2003, the U.S. economy experienced a downturn, and the core industries we serve were negatively impacted. As a result, we experienced a decline in revenues, and we recorded a loss on impairment of goodwill and intangibles. In fiscal 2010, the recession in the U.S. and global economy resulted in reduced revenues and a decline in our operating results. During fiscal 2011 and 2012, we experienced a modest improvement in our T&M and DP rental rates and a significant increase in our equipment on rent, in part due to our recent acquisitions, while maintaining a high utilization rate, in particular in our North American and European operations. In addition, our rental revenues have benefited from our expanded sales force and integration and cross training of our new resale organization and existing T&M sales force. As a result of these improvements, and sales of T&M equipment in connection with our resale channel, we experienced strong growth in revenues for fiscal 2011 and 2012. In fiscal 2012, compared to fiscal 2011, our operating profit modestly declined reflecting our significant investment in broadening and strengthening our sales and sales support organizations, as well as our administrative infrastructure, necessary to support our increased sales and rental demand and to better focus on future growth opportunities. Despite our revenue growth, our customers and competitors continue to be affected by the recent recession and ongoing uncertainty in the U.S. and global economy, resulting in more stringent credit requirements and reduced access to capital. We will continue to focus on remaining profitable in the current conditions, as well as being prepared for the possibility that recessionary trends may return in future periods.
Seasonal and Quarterly Fluctuations. Regardless of the overall economic outlook domestically and globally, December, January and February typically reflect lower rental activity. In addition, because February is a short month, revenue billing in that month is reduced. We cannot predict whether these seasonal factors or their effects will change in the future. The seasonal spending patterns of our customers are affected by factors such as:
| weather, holiday and vacation considerations; and |
| budgetary considerations. |
Additionally, our operating results are subject to quarterly fluctuations resulting from a variety of factors, including remarketing activities, product announcements by manufacturers, economic conditions and variations in the financial mix of new rentals and leases. The financial mix of new rentals and leases is a result of a combination of factors such as:
| changes in customer demands and/or requirements; |
| new product announcements; |
| price changes; |
| changes in delivery dates; |
| changes in maintenance policies and the pricing policies of equipment manufacturers; and |
| price competition from other rental, leasing and finance companies. |
Other Factors. Other factors that may affect our operating results include:
| competitive forces within our current and anticipated future markets; |
| changes in interest rates; |
| our ability to attract customers and meet their expectations; |
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| currency fluctuations and other risks of international operations; |
| general economic conditions; |
| differences in the timing of our spending on acquiring equipment, renting or leasing that equipment and receiving revenues from our customers; and |
| changes and reductions to government spending that could negatively impact our customers in the aerospace and defense industry. |
All or any of these and similar factors could result in our operating results differing substantially from the expectations of public market analysts and investors, which would likely have a material adverse impact on our stock price.
RISKS ASSOCIATED WITH TECHNOLOGY CHANGES
If we do not adequately anticipate or respond to changes in technology, it could have a material adverse effect on our operating results and stock price.
Technological Advancements. We must anticipate and keep pace with the introduction of new hardware, software and networking technologies and acquire equipment that will be marketable to our current and prospective customers. The equipment we rent can be the subject of rapid technological developments, evolving customer demands and frequent new product announcements and enhancements. If we fail to adequately anticipate or adapt to new technological developments or to recognize changing market conditions, our operating results and stock price could be materially and adversely affected.
Expenses Resulting from Technological Advancements. As a result of technology developments, we may have to make substantial and unanticipated expenditures to acquire new equipment or invest in further staff education on operating and servicing the equipment we deliver to our customers. Further, we may not adequately anticipate or respond successfully to technological changes for many reasons, including misjudging the impact of technological changes as well as financial, technological or other constraints. If we do not adequately anticipate or respond to changes in technological advancements or customer preferences, it would likely have a material adverse impact on our operating results and stock price.
Introduction of New Products and Services. The markets in which we operate are characterized by rapidly changing technology, evolving industry standards and declining prices of certain products. Our operating results will depend to a significant extent on our ability to continue to introduce new services and to control and/or reduce costs on existing services. Whether we succeed in our new offerings depends on several factors such as:
| proper identification of customer needs; |
| our costs; |
| timely completion and introduction of products and services as compared to our competitors; |
| our ability to differentiate our equipment and services from our competitors; and |
| market acceptance of our business. |
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RISKS ASSOCIATED WITH CUSTOMER SOLVENCY
If we do not collect on contracts with customers, it could have a material adverse effect on our operating results and stock price.
One of the reasons some of our customers find it more attractive to rent or lease electronic equipment than owning that equipment is the need to deploy their capital elsewhere. This can be particularly true in industries with high growth rates such as the telecommunications industry. However, some of our customers have liquidity issues, which have been compounded by the current economic recession, and ultimately cannot fulfill the terms of their agreements with us. If we are not able to manage credit risk issues, or if a large number of customers should have financial difficulties at the same time, our credit losses would increase above historical levels. If this should occur, our results of operations and stock price may be materially and adversely affected.
COMPETITION
If we do not effectively compete in our market, our operating results and stock price will be materially and adversely affected.
Our industry is characterized by intense competition from several large competitors, some of which have access to greater financial and other resources than we do. Although no single competitor holds a dominant market share, we face competition from both established entities and new entries in the market. Our primary competitors in the North American T&M rental area include McGrath RentCorp, Continental Resources, Inc., Test Equity LLC and Microlease plc. We compete for rental business with Microlease plc and Livingston Group Ltd. in Europe and ORIX Corporation in Asia. These entities also compete with us in leasing T&M equipment, as do banks, vendors and other financing sources. In addition, in selling our equipment, we may also compete with sales of new equipment by our suppliers, including Agilent and Tektronix, and their other distributors.
The market for the lease and rental of computers and servers is highly fragmented, although our principal competitors include SmartSource Rentals, Source One Rentals, Rentex and CRE Rentals. The computer rental market has been characterized by intense competition that has led to industry consolidation. We acquired two competitors during the last sixteen years and SmartSource, our largest competitor, has expanded primarily due to its numerous acquisitions.
Our competitors engage in aggressive pricing for both rentals and sales. In order to maintain or increase our market share, we may choose to lower our prices, resulting in lower revenues and decreased profitability.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
If we do not adequately anticipate and respond to the risks inherent in international operations, it could have a material adverse effect on our operating results and stock price.
Currency Risks. We generated 13.8% of our revenues from international operations during the past fiscal year. Our contracts to supply equipment outside of the U.S. are generally priced in local currency. However, our consolidated financial statements are prepared in U.S. dollars. Consequently, changes in exchange rates can unpredictably and adversely affect our consolidated operating results, and could result in exchange losses. Although we use foreign currency forward contracts to mitigate the risks associated with fluctuations in exchange rates, we may not be able to eliminate or reduce the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock price.
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Other Risks Associated with International Operations. Additionally, our financial results may be adversely affected by other international risks, such as:
| international political and economic conditions; |
| changes in government regulation in various countries; |
| trade barriers; |
| difficulty in staffing our foreign sales and service centers, and in training and retaining foreign employees; |
| issues relating to the repatriation of any profits; |
| adverse tax consequences; and |
| costs associated with expansion into new territories. |
We expect to continue our international operations and that the revenues we derive from these activities will continue to be a meaningful portion of our total revenues. If we do not anticipate and respond to the risks associated with international operations, it could have a material adverse effect on our operating results and stock price.
RISKS ASSOCIATED WITH OUR MANUFACTURERS AND SUPPLIERS
If we are not able to obtain equipment at favorable rates, it could have a material adverse effect on our operating results and stock price.
About 92% of our equipment portfolio at acquisition cost consists of general purpose T&M instruments purchased from leading manufacturers such as Agilent and Tektronix. The remainder of our equipment pool consists of personal computers and workstations, which include personal computers from Dell, Apple, and Toshiba and workstations primarily from Hewlett Packard. We depend on these manufacturers and suppliers to contract for our equipment. If, in the future, we are not able to purchase necessary equipment from one or more of these suppliers on favorable terms, we may not be able to meet our customers demands in a timely manner or for a price that generates a profit. If this should occur, we can make no assurance that we will be able to secure necessary equipment from an alternative source on acceptable terms and our business and stock price may be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results and stock price.
Our success depends in large part on the continued services of our executive officers, our senior managers and other key personnel, including, among others, our Chief Executive Officer, Daniel Greenberg, our President, Steven Markheim, and our Chief Financial Officer, Craig Jones. The loss of these people, especially without advance notice, could materially and adversely impact our results of operations. It is also very important that we attract and retain highly skilled personnel to accommodate growth and to replace personnel who leave. Competition for qualified personnel can be intense, especially in technology industries, and there are a limited number of people with the requisite knowledge and experience to market, sell and service our equipment. Under these conditions, we could be unable to recruit, train, and retain employees. If we cannot attract and retain qualified personnel, it could have a material adverse impact on our operating results and stock price.
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CONTROL BY MANAGEMENT AND OTHERS
Senior management has significant influence over our policies and affairs and may be in a position to determine the outcome of corporate actions.
As of August 10, 2012, our executive officers and directors collectively own approximately 21.8% of our Common Stock.
As of that date, (i) Mr. Daniel Greenberg, our Chairman and Chief Executive Officer, beneficially owns approximately 19.9% of our outstanding shares of Common Stock, and (ii) one other shareholder controls 16.1% of our outstanding shares of Common Stock. Consequently, these shareholders may have significant influence over our policies and affairs and may be in a position to determine the outcome of corporate actions requiring shareholder approval. These may include, for example, the election of directors, the adoption of amendments to our corporate documents and the approval of mergers and sales of our assets.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS AND NEW BUSINESS VENTURES
If we cannot successfully implement any recent or future acquisitions or new business ventures, it could have a material adverse effect on our operating results and stock price.
On occasion, we evaluate business opportunities that appear to fit within our overall business strategy. We have completed the following acquisitions in recent years:
| In fiscal 2010, we acquired certain assets and select post-closing liabilities of Telogy, LLC (Telogy), a private company headquartered in Union City, California, and a leading provider of electronic T&M equipment. |
| In fiscal 2012, we acquired certain assets and select post-closing liabilities of EMT, a private company based in Las Vegas, Nevada, and a provider of electronic T&M equipment. |
In fiscal 2010, we became a reseller of Agilents new T&M equipment in the U.S. and Canada, resulting in the hiring of additional sales and support staff. We could decide to pursue one or more other opportunities by acquisition or internal development. Acquisitions and new business ventures, both domestic and foreign, involve many risks, including:
| the difficulty of integrating acquired operations and personnel with our existing operations; |
| the difficulty of developing and marketing new products and services; |
| the diversion of our managements attention as a result of evaluating, negotiating and integrating acquisitions or new business ventures; |
| our exposure to unforeseen liabilities of acquired companies; and |
| the loss of key employees of an acquired operation. |
In addition, an acquisition or new business venture could adversely impact cash flows and/or operating results, and dilute shareholder interests, for many reasons, including:
| charges to our income to reflect the impairment of acquired intangible assets, including goodwill; |
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| interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and |
| any issuance of securities in connection with an acquisition or new business venture that dilutes or lessens the rights of our current shareholders. |
Additionally, we have implemented various new business ventures in the past, and not all of such ventures have been successful. The risks associated with acquisitions and new business ventures could have a material adverse impact on our operating results and stock price.
RISKS ASSOCIATED WITH FLUCTUATING INTEREST RATES
Interest rate fluctuations could have a material adverse effect on our operating results and stock price.
Our leasing yields tend to correlate with market interest rates. When interest rates are higher, our leasing terms incorporate a higher financing charge. However, in times of relatively lower interest rates our financing charges also decrease, and some of our customers choose to purchase new equipment, rather than leasing equipment at all. Lower leasing yields are reflected in lower rental and lease revenues.
RISKS ASSOCIATED WITH CHANGES IN GOVERNMENT SPENDING
We have customers in the aerospace and defense industry that derive a significant amount of revenue from the U.S. Government.
The federal government is implementing significant changes and reductions to government spending and other programs. In addition, uncertainty and other concerns resulting from previously announced defense spending reductions and the potential future, additional reductions have impacted, and are likely to continue to impact, the manner in which our customers in the aerospace and defense industry make procurement decisions, resulting in reduced demand by such customers in our rental services and resale business. A shift in government priorities to government programs in which our customers do not participate and/or reductions in funding for or the termination of government programs in which our customers do participate, unless offset by other programs and opportunities, could have a material adverse effect on the demand of our services and products and, as a consequence, our financial results.
ANTI-TAKEOVER PROVISIONS
The anti-takeover provisions contained in our Articles of Incorporation and Bylaws and in California law could materially and adversely impact the value of our Common Stock.
Certain provisions of our Articles of Incorporation, our Bylaws and California law could, together or separately, discourage, delay or prevent a third party from acquiring us, even if doing so might benefit our shareholders. This may adversely impact the interests of our shareholders with respect to a potential acquisition and may also affect the price investors would receive for their shares of Common Stock. Some examples of these provisions in our Articles of Incorporation and Bylaws are:
| the right of our board of directors to issue preferred stock with rights and privileges that are senior to the Common Stock, without prior shareholder approval; and |
| certain limitations of the rights of shareholders to call a special meeting of shareholders. |
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
We own a building that houses our corporate headquarters and Los Angeles sales office located at 6060 Sepulveda Boulevard, Van Nuys, California. The building contains approximately 84,500 square feet of office space. Approximately 40,500 square feet are currently leased to others. These tenant arrangements provide for all of the leased property to be available for our future needs.
We own a building at 15385 Oxnard Street, Van Nuys, California, which contains approximately 68,200 square feet. We use all of this space, except for 1,000 square feet that are currently being leased to others. This building houses our California warehouse and equipment calibration center.
We own a facility in Wood Dale, Illinois, containing approximately 30,750 square feet. This facility houses our Illinois warehouse and service center.
As of May 31, 2012, we had sales offices in the metropolitan areas of Atlanta and Los Angeles. We also have service centers in Chicago, Dallas, Los Angeles, New York/Newark, San Francisco, Charlotte, Orlando, Toronto and Washington/Baltimore. We have foreign sales offices and warehouses in Mechelen, Belgium, and Beijing, China.
Our facilities aggregate approximately 269,000 square feet as of May 31, 2012. Except for the corporate headquarters, the Wood Dale, Illinois facilities and the Oxnard Street building, each of which we own, all of our facilities are rented pursuant to leases for up to seven years for aggregate annual rentals of approximately $1.0 million in fiscal 2012. We do not consider any rented facility essential to our operations. We consider our facilities to be in good condition, well maintained and adequate for our needs.
Item 3. Legal Proceedings.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business, including claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. As of the date of this report, we are not a party to any litigation which we believe would have a material adverse effect on our business operations or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Stock; Holders.
Our common stock is quoted on the NASDAQ stock market under the symbol ELRC. There were approximately 323 shareholders of record at August 10, 2012. The following table sets forth, for the period shown, the high and low sale prices of our Common Stock as reported by NASDAQ.
Fiscal Year 2012 | Fiscal Year 2011 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 17.98 | $ | 13.55 | $ | 14.36 | $ | 11.09 | ||||||||
Second Quarter |
17.30 | 12.64 | 15.68 | 11.99 | ||||||||||||
Third Quarter |
18.93 | 15.65 | 17.19 | 14.56 | ||||||||||||
Fourth Quarter |
19.35 | 13.51 | 17.80 | 13.76 |
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Sales of Unregistered Securities.
We did not make any unregistered sales of our securities during the quarter ended May 31, 2012.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides information as of May 31, 2012 with respect to shares of our Common Stock that may be issued under our existing stock incentive plans, all of which were approved by our shareholders:
EQUITY COMPENSATION PLAN INFORMATION
Number of shares of common stock to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of shares of common stock remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) (c) | ||
0 |
$0 | 615,256 |
Stock Repurchases.
We have from time to time repurchased shares of our common stock under an authorization from our Board of Directors. Shares repurchased by us are retired and returned to the status of authorized but unissued stock.
We did not repurchase any shares in fiscal 2012 and 2011, respectively. During fiscal 2010, we repurchased 44,114 shares of our common stock. We may choose to make additional open market or other purchases of our common stock in the future, but we have no commitment to do so.
Dividends.
Since July 2007, we have been paying quarterly dividends in each January, April, July and October. The total amount of cash dividends we paid in fiscal 2012, 2011 and 2010 is discussed under Item 7. Managements Discussion and Analysis and Results of Operations-Liquidity and Capital Resources. We expect to continue paying a quarterly dividend in future quarters, although the amount and timing of dividends, if any, will be made by our Board of Directors in each quarter, subject to compliance with applicable law.
Performance Graph.
This graph compares our total shareholder return with (1) the NASDAQ Composite Index, (2) the Russell 2000 Index, and (3) the composite prices of the companies listed by Value Line, Inc. in its Industrial Services Industry Group. Our Common Stock is listed in both the Russell 2000 Index and the Industrial Services Industry Group. The comparison is over a five year period, beginning May 31, 2007 and ending May 31, 2012. The total shareholder return assumes $100 invested at the beginning of the period in our Common Stock and in each index. It also assumes reinvestment of all dividends.
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Cumulative Five Year Total Return
Value of $100 Invested on May 31, 2007
Fiscal Years Ended May 31
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||||||||
Electro Rent Corporation |
100 | 101 | 73 | 108 | 127 | 120 | ||||||||||||||||||
NASDAQ Composite |
100 | 98 | 69 | 89 | 113 | 114 | ||||||||||||||||||
Russell 2000 |
100 | 89 | 61 | 82 | 106 | 96 | ||||||||||||||||||
Value Line Industrial Services |
100 | 102 | 87 | 112 | 154 | 143 |
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Item 6. Selected Financial Data.
(in thousands, except per share amounts)
The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in Item 8. Financial Statements and Supplementary Data below and other financial and statistical information included in this Form 10-K.
Fiscal year ended May 31, | ||||||||||||||||||||
2012 (1) | 2011 | 2010 (2) | 2009 | 2008 | ||||||||||||||||
|
||||||||||||||||||||
Operations data: |
||||||||||||||||||||
Revenues |
$ | 248,554 | $ | 228,729 | $ | 145,867 | $ | 130,481 | $ | 144,536 | ||||||||||
|
||||||||||||||||||||
Costs of revenues and depreciation |
148,507 | 134,571 | 81,666 | 68,630 | 69,901 | |||||||||||||||
Selling, general and administrative expenses |
63,961 | 57,423 | 46,447 | 44,456 | 43,940 | |||||||||||||||
Operating profit |
36,086 | 36,735 | 17,754 | 17,395 | 30,695 | |||||||||||||||
Bargain purchase gain, net (3) |
(3,435 | ) | (202 | ) | (679 | ) | | | ||||||||||||
Interest and other, net |
(484 | ) | (352 | ) | (1,599 | ) | (1,507 | ) | (3,292 | ) | ||||||||||
|
||||||||||||||||||||
Income before income taxes |
40,005 | 37,289 | 20,032 | 18,902 | 33,987 | |||||||||||||||
Income tax provision |
14,233 | 13,533 | 8,435 | 7,150 | 12,883 | |||||||||||||||
|
||||||||||||||||||||
Net income |
$ | 25,772 | $ | 23,756 | $ | 11,597 | $ | 11,752 | $ | 21,104 | ||||||||||
|
||||||||||||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 1.07 | $ | 0.99 | $ | 0.48 | $ | 0.47 | $ | 0.81 | ||||||||||
Diluted |
$ | 1.07 | $ | 0.99 | $ | 0.48 | $ | 0.47 | $ | 0.81 | ||||||||||
Shares used in per share calculation: |
||||||||||||||||||||
Basic |
23,983 | 23,974 | 23,932 | 24,899 | 25,910 | |||||||||||||||
Diluted |
24,152 | 24,072 | 24,004 | 24,980 | 26,079 | |||||||||||||||
Balance sheet data (at end of year): |
||||||||||||||||||||
Total assets |
$ | 329,831 | $ | 305,927 | $ | 276,068 | $ | 271,334 | $ | 293,082 | ||||||||||
Shareholders equity |
$ | 248,131 | $ | 240,375 | $ | 229,962 | $ | 228,753 | $ | 256,108 | ||||||||||
Shareholders equity per common share |
$ | 10.34 | $ | 10.02 | $ | 9.60 | $ | 9.55 | $ | 9.87 | ||||||||||
Cash dividends declared per common share |
$ | 0.80 | $ | 0.60 | $ | 0.45 | $ | 0.75 | $ | 0.35 |
(1) | Includes the post-acquisition operating results and year-end balance sheet information for the assets acquired from EMT on August 24, 2011. (See Note 3 to the consolidated financial statements included in this Form 10-K) |
(2) | Includes the post-acquisition operating results and year-end balance sheet information for the assets acquired from Telogy on March 31, 2010. (See Note 3 to the consolidated financial statements included in this Form 10-K) |
(3) | The estimated fair value of the net assets acquired from EMT in fiscal 2012, and Telogy in fiscal 2010, exceeded the acquisition cost, resulting in bargain purchase gains with respect to these transactions. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except per share amounts)
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto and the other financial and statistical information appearing elsewhere in this Form 10-K.
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Overview
We are one of the largest global organizations devoted to the rental, lease and sale of new and used electronic T&M equipment. We purchase that equipment from leading manufacturers such as Agilent and Tektronix primarily for use by our customers in the aerospace, defense, telecommunications, electronics, industrial and semiconductor industries. Although it represents only approximately 7%, 8% and 13% of our revenues in fiscal 2012, 2011 and 2010, respectively, we believe our DP division is one of the largest rental businesses in the United States for personal computers and servers from manufacturers including Dell, Hewlett Packard and Toshiba.
We became a reseller for Agilent in fiscal 2010. Through January 31, 2014, we have the exclusive right to sell Agilents more complex T&M equipment to small and medium size customers (who previously purchased directly from Agilent) in the United States and Canada. Since establishing our resale channel, we have expanded our sales force to support our sales of Agilents T&M equipment and have cross trained our new resale organization and existing T&M sales force to provide both new and existing customers a complete product offering, including rental, lease and sales of new and used equipment.
On March 31, 2010, we completed the acquisition of certain assets (including accounts receivable and rental equipment but excluding certain designated assets) and select liabilities of Telogy for $24.7 million in cash, subject to post-closing adjustments. The purchase price was reduced by $0.3 million in fiscal 2011 reflecting the final determination of assets acquired and other components of the purchase price in accordance with specific provisions of the asset purchase agreement with Telogy. Telogy, headquartered in Union City, California, was a leading provider of electronic T&M equipment in North America.
On August 24, 2011, we completed the acquisition of certain assets (including accounts receivable and rental equipment but excluding certain designated assets) and the assumption of specified post-closing liabilities of EMT, for $10.7 million in cash, of which $0.5 million was deposited into an escrow account for any post-closing adjustments. The purchase price was reduced by $0.3 million reflecting the final determination of the post-closing adjustment of the purchase price in accordance with the asset purchase agreement with EMT. (See Note 3 to the consolidated financial statements included in this Form 10-K.)
Our financial results for fiscal 2010 were impacted by competitive pressure on rental rates due in large part to the recession in the U.S. and our major international markets. During fiscal 2011 and 2012, we experienced a modest improvement in our T&M and DP rental rates and a significant increase in our equipment on rent, in part due to our recent acquisitions, while maintaining a high utilization rate, in particular in our North American and European operations. In addition, our rental revenues have benefited from our expanded sales force and integration and cross training of our new resale organization and existing T&M sales force. As a result of these continued improvements, and sales of new Agilent T&M equipment, we experienced strong growth in revenues for fiscal 2011 and 2012. For fiscal 2012 compared to fiscal 2011, our operating profit modestly declined reflecting our significant investment in broadening and strengthening our sales and sales support organizations, as well as our administrative infrastructure, necessary to support our increased sales and rental demand and to better focus on future growth opportunities. Despite our revenue growth, our customers and competitors continue to be affected by the recent recession and ongoing uncertainty in the U.S. and global economy, resulting in more stringent credit requirements and reduced access to capital. We will continue to focus on remaining profitable in the current conditions, as well as being prepared for the possibility that recessionary trends may continue into future periods.
In fiscal 2012, 88% of our rental and lease revenues were derived from T&M equipment, compared to 86% for fiscal 2011. We have experienced growth in our T&M rental and lease revenues, due to increased demand, our acquisition of EMT, a modest increase in rates, and the integration of our new resale organization and existing T&M sales force, while our DP lease revenues declined.
For fiscal 2012 and 2011, rental revenues were 90% of our rental and lease revenues. Although we have experienced an increase in T&M and DP rental demand, our lease revenues have also increased as a result of the EMT acquisition.
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To maximize our overall profit from the rental, leasing, and sales of equipment, we manage our equipment pool on an on-going basis by controlling the timing, pricing and mix of our purchases and sales of equipment. We acquire new and used equipment to meet current technological standards and current and anticipated customer demand, and we sell our used equipment where we believe that is the most lucrative option. We employ a complex equipment management strategy and our proprietary PERFECT software to adjust our inventory and pricing on a dynamic basis in order to maximize equipment availability, utilization and profitability. We manage each specific equipment class based on a separate assessment of that equipments historical and projected life cycle and numerous other factors, including the U.S. and global economy, interest rates and new product launches. If we do not accurately predict market trends, or if demand for the equipment we supply declines, we can be left with inventory that we are unable to rent or sell for a profit. We assess the carrying value of the equipment pool on a quarterly basis or more frequently when factors indicating potential impairment are present.
Profitability and key business trends
Comparing fiscal 2012 to fiscal 2011, our revenues increased by 8.7% from $228.7 million to $248.6 million, our operating profit decreased 1.8% from $36.7 million to $36.1 million and our net income increased by 8.5% from $23.8 million to $25.8 million.
Our rental and lease revenues increased 9.9% from $118.1 million to $129.7 million. Our rental and lease revenues have grown as a result of the EMT acquisition in August 2011, increased rental demand and rental rates in our North American and European operations, and the integration of our new resale organization and existing T&M sales force.
In addition, our T&M sales and other revenues increased 7.3% from $108.5 million to $116.4 million. Our sales revenues have increased due to continued growth in sales of new Agilent equipment and an increase in our finance leases, offsetting declines in our used equipment sales.
Some of our key profitability measurements are presented below:
Fiscal 2012 | Fiscal 2011 | Fiscal 2010 | ||||||||||
|
||||||||||||
Net income per diluted common share (EPS) |
$ | 1.07 | $ | 0.99 | $ | 0.48 | ||||||
Net income as a percentage of average assets |
8.1 | % | 8.2 | % | 4.2 | % | ||||||
Net income as a percentage of average equity |
10.7 | % | 10.3 | % | 5.2 | % | ||||||
|
Our net income includes bargain purchase gains, net of deferred taxes, of $3.4 million and $0.2 million for fiscal 2012 and 2011, respectively, as a result of our acquisitions of EMT and Telogy, respectively. Our operating profit modestly decreased, as growth in our rental revenues and sales of new equipment were offset by lower used equipment sales and an increase in depreciation expense of $5.7 million, or 12.0%, as we have invested in additional rental equipment to support our growth, and an increase in selling, general and administrative expenses of $6.5 million, or 11.4%, primarily related to the broadening and strengthening of our sales organization in support of our resale channel, higher rental demand, and future growth opportunities.
The amount of our equipment on rent, based on acquisition cost, increased 13.8% to $244.1 million at May 31, 2012 from $214.5 million at May 31, 2011. Acquisition cost of equipment on lease increased 18.0% to $32.8 million at May 31, 2012 from $27.8 million at May 31, 2011.
The average amount of our equipment on rent, based on average acquisition cost, increased 10.4% to $234.1 million for fiscal 2012 from $212.1 million for fiscal 2011. The average acquisition cost of equipment on lease increased 10.3% to $31.7 million for fiscal 2012 from $28.7 million for fiscal 2011. The increase in our average equipment on rent and lease was due, in part, to the acquisition of EMT during fiscal 2012.
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Average rental rates for our T&M and DP segments increased by 1.0% for fiscal 2012 from fiscal 2011, while average lease rates declined by 2.8% for the same period. Average utilization for our T&M equipment pool, based on average cost of equipment on rent and lease compared to the total average equipment pool, was 67.7% for fiscal 2012 compared to 70.0% for fiscal 2011. Over the same period, the average utilization of our DP equipment pool decreased to 38.1% from 41.9%.
RESULTS OF OPERATIONS
Fiscal 2012 Compared with Fiscal 2011
Total Revenues: Total revenues for fiscal 2012 and 2011 were $248.6 million and $228.7 million, respectively. The 8.7% increase in total revenues was due to a 9.9% increase in rental and lease revenues and a 7.4% increase in sales of equipment and other revenues.
Rental and lease revenues for fiscal 2012 were $129.7 million, compared to $118.1 million for the prior fiscal year. This increase reflects the EMT acquisition in August 2011 and an increase in T&M rental demand and rental rates in our North American and European operations, due to improved market conditions and the integration of our new resale organization and existing T&M sales force, providing additional rental opportunities to an expanding customer base. This increase was offset by a decline in lease revenues in our DP business, due to a decrease in demand.
Sales of equipment and other revenues increased to $118.8 million for fiscal 2012 from $110.7 million in fiscal 2011. The increase is due to an increase in our sales of new T&M equipment through our resale channel and increased finance lease activity, partially offset by a decline in the sales of used equipment. Our unfilled sales orders for new T&M equipment were $8.4 million at May 31, 2012, compared to $17.0 million at May 31, 2011. The decline in backlog for fiscal 2012 is primarily due to shorter manufacturing lead time.
Depreciation of Rental and Lease Equipment: Depreciation of rental and lease equipment increased in fiscal 2012 to $53.7 million, or 41.4% of rental and lease revenues, from $47.9 million, or 40.6% of rental and lease revenues, in fiscal 2011. The increased depreciation expense in fiscal 2012 was due to a higher average rental and lease equipment pool. The depreciation ratio, as a percentage of rental and lease revenues, increased slightly as modest improvements in our average rental rates were offset by a decrease in our average utilization rates.
Costs of Revenues Other Than Depreciation: Costs of revenues other than depreciation increased 9.5% to $94.9 million in fiscal 2012 from $86.6 million in fiscal 2011. Costs of revenues other than depreciation primarily include the cost of equipment sales, which increased as a percentage of equipment sales to 77.8% in fiscal 2012 from 77.0% for fiscal 2011. This increase is due to a decrease in used equipment sales and an increase in sales of new T&M equipment, which generally carry a lower margin than used equipment sales. Our sales margin percentage is expected to fluctuate depending on the mix of used and new equipment sales. Our sales margin is also impacted by competition, the global recession, and customer requirements and funding.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased 11.4% to $64.0 million in fiscal 2012 compared to $57.4 million in fiscal 2011. As a percentage of total revenues, selling, general and administrative expenses increased modestly to 25.7% in fiscal 2012 from 25.1% in fiscal 2011. Our selling, general and administrative expenses increased primarily due to the broadening and strengthening of our sales organization in support of our resale channel and higher rental demand.
Operating Profit: Although our rental and lease revenues and sales of equipment have increased, due in part to the EMT acquisition in fiscal 2012 and growth in our sales of new T&M equipment, operating profit decreased 1.8% to $36.1 million, or 14.5% of total revenues, in fiscal 2012, compared to an operating profit of $36.7 million, or 16.1% of total revenues, in fiscal 2011. This decrease is due primarily to lower used equipment sales, which have high margins; lower equipment utilization, resulting in a higher depreciation ratio; and an increase in our selling, general and administrative expenses in support of current and future demand.
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Gain on Bargain Purchase: We recorded gain on bargain purchase, net of deferred taxes, of $3.4 million during fiscal 2012 related to our acquisition of EMT and $0.2 million during fiscal 2011 related to our acquisition of Telogy. The gain on bargain purchase, net of deferred taxes, resulted from the excess of the net fair value of the assets acquired and liabilities assumed in the EMT and Telogy acquisitions, respectively, over the respective purchase prices. A majority of the Telogy bargain purchase gain was recorded in fiscal 2010, the year of acquisition. We believe that we were able to negotiate bargain purchase prices as a result of our access to the liquidity necessary to complete the transactions, and the recurring losses and bankruptcy filings of both EMT and Telogy.
Income Tax Provision: Our effective tax rate was 35.6% for fiscal 2012, compared to 36.3% for fiscal 2011. Our effective tax rate for fiscal 2012 includes our bargain purchase gain, net of deferred taxes, of $3.4 million compared to $0.2 for the prior year period, resulting from of our purchase of EMT on August 24, 2011. Bargain purchase gains are recorded net of deferred taxes and are treated as permanent differences, resulting in a lower effective tax rate in the period recorded. Our effective tax rate for fiscal 2011 includes the benefit from derecognition of $1.4 million of interest and penalties resulting from the effective settlement of our uncertain tax positions. (See Note 6 to our consolidated financial statements included in this Form 10-K.)
Fiscal 2011 Compared with Fiscal 2010
Total Revenues: Total revenues for fiscal 2011 and 2010 were $228.7 million and $145.9 million, respectively. The 56.8% increase in total revenues was due to a 25.3% increase in rental and lease revenues and a 114.2% increase in sales of equipment and other revenues.
Rental and lease revenues in fiscal 2011 were $118.1 million, compared to $94.2 million in fiscal 2010. This increase reflects an increase in our T&M and DP rental activity and rental rates in our North American and European operations, due to improved market conditions, the acquisition of Telogy in the fourth quarter of fiscal 2010, and an increase in T&M leasing activity that was partially offset by a continued decline in DP leasing demand.
Sales of equipment and other revenues increased to $110.7 million for fiscal 2011 from $51.7 million in fiscal 2010. The increase is due to the full year effect of sales of new T&M equipment through our resale channel and an increase in our sales of used equipment in our T&M business, due in part to a large sale to a customer, partially offset by a decline in finance lease activity and distribution sales. Our unfilled sales orders for new T&M equipment were $17.0 million at May 31, 2011, compared to $9.7 million at May 31, 2010.
Depreciation of Rental and Lease Equipment: Depreciation of rental and lease equipment increased in fiscal 2011 to $47.9 million, or 40.6% of rental and lease revenues, from $42.6 million, or 45.2% of rental and lease revenues, in fiscal 2010. The increased depreciation expense in fiscal 2011 was due to a higher average rental and lease equipment pool, while the decreased ratio, as a percentage of rental and lease revenues, was due to higher average utilization for fiscal 2011.
Costs of Revenues Other Than Depreciation: Costs of revenues other than depreciation increased 121.8% to $86.6 million in fiscal 2011 from $39.1 million in fiscal 2010. Costs of revenues other than depreciation primarily include the cost of equipment sales, which increased as a percentage of equipment sales to 77.0% in fiscal 2011 from 73.2% for fiscal 2010. This increase is due to an increase in sales of new T&M equipment, which generally carry a lower margin than used equipment sales.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased 23.6% to $57.4 million in fiscal 2011 compared to $46.4 million in fiscal 2010. Our selling, general and administrative expenses increased primarily due to additional sales and support staff in connection with our resale channel. As a percentage of total revenues, selling, general and administrative expenses decreased to 25.1% in fiscal 2011 from 31.8% in fiscal 2010, due to the increase in total revenues.
21
Operating Profit: As a result of significant growth in both our rental and lease revenues and our sales of equipment and other revenues, due to improved market conditions, the acquisition of Telogy in the fourth quarter of fiscal 2010, and growth in our sales of new T&M equipment, operating profit increased 106.9% to $36.7 million, or 16.1% of total revenues, in fiscal 2011, compared to an operating profit of $17.8 million, or 12.2% of total revenues, in fiscal 2010.
Interest Income, Net: Interest income, net, was $0.4 million in fiscal 2011, compared to $1.6 million in fiscal 2010, due to a lower cash balance, lower interest rates on our money market funds, and the redemption of our auction rate securities (ARS) (which carried a higher interest rate) in our first fiscal quarter of fiscal 2011.
Income Tax Provision: Our effective tax rate was 36.3% for fiscal 2011, compared to 42.1% for fiscal 2010. The decrease is due primarily to the derecognition of $1.4 million of interest and penalties resulting from the effective settlement of our uncertain tax positions in fiscal 2011. (See Note 6 to our consolidated financial statements included in this Form 10-K.)
Liquidity and Capital Resources
Capital Expenditures. During the last three fiscal years, our primary capital requirements have been purchases of rental and lease equipment. We generally purchase equipment throughout the year to replace equipment that has been sold and to maintain adequate levels of rental equipment to meet existing and expected customer demands. To meet T&M rental demand, support areas of potential growth for both T&M and DP equipment and to keep our equipment pool technologically up-to-date, we made payments for purchases of $96.7 million of rental and lease equipment during fiscal 2012, $91.5 million in fiscal 2011, and $56.9 million in fiscal 2010. In response to increasing customer demand beginning in the second half of fiscal 2010 and continuing throughout fiscal 2011 and 2012, purchases of equipment in fiscal 2012 were 5.6% higher than fiscal 2011. In connection with our acquisitions of EMT in fiscal 2012 and Telogy in fiscal 2010, we acquired $15.8 million and $22.9 million, respectively, at fair value, of rental and lease equipment.
Share Repurchases and Dividends. We periodically repurchase shares of our common stock under an authorization from our board of directors. Shares we repurchase are retired and returned to the status of authorized but unissued stock. During fiscal 2010, we repurchased 44 shares of our common stock for $0.4 million at an average price per share of $8.94. There were no shares repurchased in fiscal 2012 and 2011. We may make repurchases of our common stock in the future through open market transactions or otherwise, but we have no commitments to do so.
For fiscal 2012, 2011 and 2010, we paid aggregate dividends of $19.4 million, $14.4 million and $14.4 million, respectively. The amount and timing of dividends, if any, will be made at the discretion of our board of directors in each quarter, subject to compliance with applicable law.
Dividend and Repurchase Summary
Fiscal Year Ended May 31, | ||||||||||||||||
(in thousands, except per share information) | Three Year Totals |
2012 | 2011 | 2010 | ||||||||||||
|
||||||||||||||||
Cash dividends paid |
$ | 48,187 | $ | 19,378 | $ | 14,449 | $ | 14,360 | ||||||||
Shares repurchased |
44 | | | 44 | ||||||||||||
Average price per share repurchased |
$ | 8.94 | $ | | $ | | $ | 8.94 | ||||||||
Aggregate purchase price |
$ | 395 | $ | | $ | | $ | 395 | ||||||||
Total cash returned to shareholders |
$ | 48,582 | $ | 19,378 | $ | 14,449 | $ | 14,755 | ||||||||
|
Cash and Cash Equivalents and Investments. The balance of our cash and cash equivalents was $9.3 million as of May 31, 2012, a decline of $32.2 million from May 31, 2011. This reflects our use of cash to pay increased dividends to shareholders as well as cash used to take advantage of strategic acquisitions and new customer opportunities. Since the beginning of fiscal 2010 we have returned $48.6 million in cash to our shareholders. We have also made payments of $34.7 million in connection with the
22
acquisitions of EMT in fiscal 2012 and Telogy in fiscal 2010, and invested heavily in new equipment to take advantage of key new customer opportunities. We expect that the level of our cash needs may increase as we pay dividends in future quarters, or if we decide to buy back our common stock, increase equipment purchases in response to demand, finance another acquisition, or pursue other opportunities and, therefore, we may need to draw further upon our $25 million unused bank line of credit. During fiscal 2012 we borrowed and repaid $3.3 million on our line of credit. We may also need to expand our borrowing capacity in order to ensure sufficient resources to quickly respond to strategic growth opportunities. Given the growth we achieved without any debt, we believe that we have ample access to borrowing capacity, and that our cash flow from operations and ability to borrow will allow us to continue funding our current and future growth.
During the second quarter of fiscal 2010, we sold our investments available-for-sale, which consisted of corporate and government bond funds, for $28.7 million, including a realized gain of $0.8 million which we included in interest income, net, in our consolidated statements of operations.
Cash Flows and Credit Facilities. We have three principal sources of liquidity: cash flows provided by our operating activities, proceeds from the sale of equipment from our portfolio, and external funds that historically have been provided by bank borrowings.
During fiscal 2012, 2011, and 2010 net cash provided by operating activities was $69.9 million, $68.8 million and $34.2 million, respectively. Operating cash flow for fiscal 2012 was comparable to fiscal 2011 as improvements in working capital, including a tax refund of $2.5 million, and an increase in income, after giving effect to non-cash items, was offset by a significantly smaller increase in our deferred tax liability. The increase in our deferred tax liability in fiscal 2011 benefited from a retroactive adjustment for fiscal 2010 as a result of the enactment of bonus depreciation.
The increase in our operating cash flow for fiscal 2011 compared to fiscal 2010 was due primarily to:
| an increase in income, after giving effect to non-cash items, for fiscal 2011; and |
| an increase in our deferred tax liability of $23.5 million, due to the effective settlement of $4.5 million in unrecognized tax positions during fiscal 2011, and the benefits (including retroactively for fiscal 2010) from the enactment of bonus depreciation; |
| Partially offset by an increase in our demonstration pool inventory of $3.1 million and recording of an income tax receivable of $3.1 million. |
During fiscal 2012, 2011 and 2010 net cash used in investing activities was $82.9 million, $45.7 million and $9.5 million, respectively. The increase in cash used in investing activities for fiscal 2012 was primarily due to increased purchases of rental and lease equipment of $96.7 million, compared to $91.5 million and $56.9 million for fiscal 2011 and 2010, respectively. For fiscal 2012 and 2011, there were no purchases of investments or redemptions of investments, available-for-sale, compared to redemptions of investments, available-for-sale, of $28.7 million in fiscal 2010. There were no redemptions of investments, trading, in fiscal 2012, compared to redemptions of investments, trading, of $14.3 million and $7.3 million for fiscal 2011 and 2010, respectively. Proceeds from sale of rental and lease equipment decreased to $25.0 million for fiscal 2012 compared to $32.9 million for fiscal 2011 and $36.7 million for fiscal 2010. Fiscal 2012 includes cash paid for the acquisition of EMT of $10.3 million, and fiscal 2010 includes cash paid for the acquisition of Telogy of $24.7 million.
Net cash flows used in financing activities were $19.3 million for fiscal 2012, compared to $14.2 million in fiscal 2011 and 2010, respectively. These funds used were primarily composed of payments for dividends of $19.4 million for fiscal 2012 and $14.4 million for fiscal 2011 and 2010, respectively. There were no payments for the repurchase of common stock for fiscal 2012 and 2011, compared to $0.4 million in fiscal 2010.
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As the following table illustrates, aggregate cash flows from operating activities and proceeds from the sale of equipment have provided 109% of the funds required for equipment purchased for the three years ended May 31, 2012, excluding equipment purchased in connection with acquisitions.
(in thousands) | Three Years May 31, 2012 |
2012 | 2011 | 2010 | ||||||||||||
|
||||||||||||||||
Cash flows from operating activities1 |
$ | 172,799 | $ | 69,875 | $ | 68,751 | $ | 34,173 | ||||||||
Proceeds from sale of equipment |
94,620 | 25,042 | 32,917 | 36,661 | ||||||||||||
|
||||||||||||||||
Total |
267,419 | 94,917 | 101,668 | 70,834 | ||||||||||||
Payments for equipment purchases |
(245,138 | ) | (96,709 | ) | (91,538 | ) | (56,891 | ) | ||||||||
Net increase in equipment portfolio at acquisition cost |
109,711 | 60,489 | 35,765 | 13,457 | ||||||||||||
|
¹ | For the components of cash flows from operating activities see the consolidated statements of cash flows. |
We have a $25.0 million revolving bank line of credit, subject to certain restrictions, to meet equipment acquisition needs as well as working capital and general corporate requirements. We borrowed and repaid $3.3 million on our line of credit during the third and fourth quarters of fiscal 2012. There have been no other bank borrowings outstanding or off balance sheet financing arrangements during the last three fiscal years.
We believe that cash and cash equivalents, cash flows from operating activities, proceeds from the sale of equipment and our borrowing capacity will be sufficient to fund our operations for at least the next twelve months.
Inflation. Inflation generally has favorably influenced our results of operations by enhancing the sale prices of our used equipment. However, lower inflation rates and the continued availability of newer, less expensive equipment with similar or better specifications over a period of several years could result in lower relative sale prices for used electronic equipment, which could reduce margins and earnings. Prices of new and used electronic test equipment have not consistently followed the overall inflation rate, while prices of new and used personal computers and servers have consistently declined. Because we are unable to predict the advances in technology and the rate of inflation for the next several years, it is not possible to estimate the impact of these factors on our margins and earnings.
CONTRACTUAL OBLIGATIONS
We lease certain facilities under various operating leases. Most of the lease agreements provide us with the option of renewing the lease at the end of the initial lease term, at the fair rental value, for periods of up to seven years. In most cases, we expect that facility leases will be renewed or replaced by other leases in the normal course of business.
The table below presents the expected amount of payments due under our contractual obligations, as of May 31, 2012, but does not reflect changes that could arise after that time:
Payments due by period | ||||||||||||||||||||
Contractual Obligations (in thousands) | Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
|||||||||||||||
|
||||||||||||||||||||
Facility lease payments, not including property taxes and insurance |
$ | 2,148 | $841 | $ | 966 | $ | 282 | $ | 59 | |||||||||||
|
||||||||||||||||||||
Total |
$ | 2,148 | $841 | $ | 966 | $ | 282 | $ | 59 | |||||||||||
|
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On a regular basis, we review these estimates, including those related to asset lives and depreciation methods, impairment of long-lived assets (including rental and lease equipment), impairment of goodwill and definite lived intangible assets, investments, allowance for doubtful accounts and income taxes. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies include the more significant judgments and estimates used in the preparation of our financial statements:
Asset Lives and Depreciation Methods: Our primary business involves the purchase and subsequent rental and lease of long-lived electronic equipment. We have chosen asset lives that we believe correspond to the economic lives of the related assets. We have chosen depreciation methods that we believe generally match our benefit from the assets with the associated costs. These judgments have been made based on our expertise in each equipment type that we carry. If the asset life and depreciation method chosen do not reduce the book value of the asset to at least our potential future cash flows from the asset, we would be required to record an impairment loss. Depreciation methods and useful lives are periodically reviewed and revised as deemed appropriate.
Impairment of Long-Lived Assets: On a quarterly basis, we review the carrying value of our rental and lease equipment to determine if the carrying value of the assets may not be recoverable due to current and forecasted economic conditions. This requires us to make estimates related to future cash flows from the assets and to determine whether any deterioration is other than temporary. If these estimates or the related assumptions change in the future, we may be required to record additional impairment charges.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to pay our invoices. The estimated losses are based on historical collection experience in conjunction with an evaluation of the status of the existing accounts. If the financial condition of our customers was to deteriorate, then additional allowances could be required that would reduce income. Conversely, if the financial condition of our customers was to improve or if legal remedies to collect past due amounts were more successful than expected, then the allowance for doubtful accounts might need to be reduced and income would be increased.
Goodwill Impairment: Goodwill is the excess of the acquisition cost of a business over the fair value of the identifiable net assets acquired. We recognized goodwill of $3.1 million on the acquisition of Rush Computer Rentals in January 2006. Impairment testing for goodwill is performed annually, on May 31, or more frequently if indications of potential impairment exist under the provisions of ASC 350, IntangiblesGoodwill and Other (ASC 350). The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. We have separate operating segments (reporting units) for T&M and DP equipment, although these two segments are aggregated into a single reportable segment in accordance with ASC 280, Segment Reporting. Step one of the impairment test compares the fair value of the reporting unit using a market approach to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting units goodwill to its implied fair value (i.e., fair value of reporting unit less the fair value of the units assets and liabilities, including identifiable intangible assets). If the implied fair value of goodwill is less than the carrying amount of goodwill, impairment is recognized.
Definite-lived Intangible Assets: Definite-lived intangible assets consist of customer lists and covenants not-to-compete. The assets are amortized over their useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with ASC 350. If any indications of impairment are present, then we test for
25
recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset. If the net undiscounted cash flows indicate the asset is not recoverable, we determine the fair value of the asset and record any impairment. We reevaluate the useful life determinations for these intangible assets each reporting period to determine whether events and circumstances warrant a revision in their remaining useful lives.
Income Taxes: We are required to estimate income taxes in each of the jurisdictions in which we operate. Significant judgment is required in determining the provision for income taxes and deferred tax assets and liabilities. This process involves us estimating actual current tax exposure and assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered. To the extent management believes that recovery is not likely, we establish a valuation allowance. We determined that a valuation allowance was required in fiscal 2012, 2011 and 2010 of $0.9 million, $0.6 million and $0.5 million, respectively, for our deferred tax asset related to certain foreign net operating loss carry forwards and other related timing differences.
The guidance for uncertain income tax positions provides that the tax effects of a position be recognized only if it is more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by us that our company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. During the second quarter of fiscal 2011 we effectively settled our remaining uncertain tax positions, and derecognized $4,515 of previously recognized uncertain tax positions, and the related deferred tax asset, and $1,396 for interest and penalties previously recognized. (See Note 6 to our consolidated financial statements included in this form 10-K.)
OFF BALANCE SHEET TRANSACTIONS
As of May 31, 2012 we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We could be exposed to market risks related to changes in interest rates and foreign currency exchange rates.
Interest Rate and Market Risk.
We have the ability to draw on our revolving credit line. During fiscal 2012, we borrowed and repaid $3.3 million. Prior to fiscal 2012, we have not had any borrowings under that credit facility.
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in a variety of high quality securities, including direct obligations of the United States government, securities issued by agencies of the United States government and AAA-rated money market or cash management funds. A hypothetical increase in interest rates by 10% would not have a material impact on our financial condition or results of operations.
Changes in foreign currencies.
We have wholly owned Chinese and European subsidiaries. In addition, we have revenues, cash and cash equivalents and accounts receivable in other foreign currencies, primarily the Canadian dollar. Our
26
international operations subject us to foreign currency risks (i.e., the possibility that the financial results could be better or worse than planned because of changes in foreign currency exchange rates). During fiscal 2010 we began using forward contracts to hedge our economic exposure with respect to assets and liabilities denominated in foreign currencies. Although there can be no assurances, given the extent of our international operations and our hedging, we do not expect a 10% change in foreign currency rates to have a material impact on our consolidated balance sheet.
Item 8. Financial Statements and Supplementary Data.
See Consolidated Financial Statements beginning on page F-1 of this Form 10-K.
Supplemental Financial Information regarding quarterly results is contained in Note 15 Quarterly Information (unaudited), in the Notes to our Consolidated Financial Statements on page F-24 of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
As of May 31, 2012, the end of the period covered by this Annual Report on Form 10-K, we have, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934 as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934). Our management assessed the effectiveness of our internal control over financial reporting as of May 31, 2012. In making this assessment, our management used the criteria set forth in Internal Control Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded that, as of May 31, 2012, our internal control over financial reporting is effective based on these criteria.
Deloitte & Touche LLP, an independent registered public accounting firm, who audited our consolidated financial statements included in this Form 10-K has issued an attestation report on our internal control over financial reporting, which is included below.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Electro Rent Corporation
Van Nuys, California
We have audited the internal control over financial reporting of Electro Rent Corporation and subsidiaries (the Company) as of May 31, 2012, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2012, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements as of and for the year ended May 31, 2012 of the Company and our report dated August 10, 2012 expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
August 10, 2012
28
Item 9B. Other Information.
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than September 28, 2012.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than September 28, 2012.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than September 28, 2012.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than September 28, 2012.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by reference to our definitive Proxy Statement with respect to our Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than September 28, 2012.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) | Financial Statements. |
1. |
Index to Financial Statements: | Page | ||||
See Consolidated Financial Statements included as part of this Form 10-K. Pursuant to Rule 7-05 of Regulation S-X, the schedules have been omitted as the information to be set forth therein is included in the notes of the audited consolidated financial statements. | F-1 |
All other schedules have been omitted since the required information is not present or is not present in amounts sufficient to require submission of a schedule, or because the information required is included in the financial statements or related notes.
29
(b) | Exhibits. |
Exhibit |
Description of Document |
Incorporation by Reference | ||
3.1 |
Restated Articles of Incorporation, filed October 3, 1984 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
3.2 |
Certificate of Amendment of Restated Articles of Incorporation, filed October 24, 1988 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
3.3 |
Certificate of Amendment of Restated Articles of Incorporation, filed October 15, 1997 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1998. | ||
3.4 |
Bylaws of Registrant, adopted February 6, 1979 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
3.5 |
Amendment of Bylaws of Registrant, adopted October 6, 1994 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1995. | ||
3.6 |
Amendment of Bylaws of Registrant, adopted November 15, 1996 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1997. | ||
3.7 |
Amendment of Bylaws of Registrant, adopted July 11, 2002 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
4.1 |
Form of Common Stock Certificate | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
10.1* |
Electro Rent Corporation Supplemental Executive Retirement Plan | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
10.2* |
Executive Employment Agreement (Amended and Restated as of July 15, 1992) between Registrant and Daniel Greenberg | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
10.3* |
Amendment No. 1 to Executive Employment Agreement (Amended and Restated as of July 15, 1992) between Registrant and Daniel Greenberg, dated October 12, 2001 | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2003. | ||
10.4* |
Employment Agreement between Registrant and Steven Markheim, dated as of October 31, 2005 | Incorporated by reference from Registrants Current Report on Form 8-K filed November 1, 2005. | ||
10.5* |
Employment Agreement between Registrant and Craig R. Jones, dated as of October 31, 2005 | Incorporated by reference from Registrants Current Report on Form 8-K filed November 1, 2005. | ||
10.6* |
1996 Stock Option Plan | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1996. | ||
10.7* |
Form of Stock Option Agreement (Incentive Stock Option) (1996 Plan) | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1996. | ||
10.8* |
Form of Stock Option Agreement (Nonstatutory Stock Option) (1996 Plan) | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 1996. | ||
10.9* |
Amendment Number One to 1996 Stock Option Plan, adopted November 1, 1996 | Incorporated by reference from Registrants Registration Statement on Form S-8 filed December 5, 1996 (Registration No. 333-17295). |
30
Exhibit |
Description of Document |
Incorporation by Reference | ||
10.10* |
Amendment No. 1 to 1996 Stock Option Plan, 1996 Director Option Plan, and 2002 Employee Stock Option Plan | Incorporated by reference from Registrants Proxy Statement on Form DEF 14A filed December 2, 2003. | ||
10.11* |
2005 Equity Incentive Plan | Incorporated by reference from Registrants Registration Statement on Form S-8 filed December 20, 2005 (File No. 333-130487). | ||
10.12* |
Form of 2005 Stock Option Agreement | Incorporated by reference from Registrants Registration Statement on Form S-8 filed December 20, 2005 (File No. 333-130487). | ||
10.13* |
Form of Stock Unit Award Agreement (Employee) | Incorporated by reference from Registrants Current Report on Form 8-K filed July 21, 2009. | ||
10.14* |
Form of Stock Unit Award Agreement (Director) | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
10.15* |
Form of Indemnification Agreement | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. | ||
10.16 |
Commercial Credit Agreement dated as of September 29, 2008 between Electro Rent Corporation (the Company) and Union Bank of California, N.A. | Incorporated by reference from Registrants Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2010. | ||
10.17 |
First Amendment to Commercial Credit Agreement dated as of March 4, 2009 between the Company and Union Bank of California, N.A | Incorporated by reference from Registrants Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2010. | ||
10.18 |
Second Amendment to Commercial Credit Agreement dated as of September 16, 2009 between the Company and Union Bank of California, N.A. | Incorporated by reference from Registrants Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2010. | ||
10.19 |
Third Amendment to Commercial Credit Agreement dated as of September 22, 2010 between the Company and Union Bank of California, N.A. | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2011. | ||
10.20 |
Asset Purchase Agreement between Registrant and Telogy, LLC dated as of March 16, 2010 | Incorporated by reference from Registrants Current Report on Form 8-K filed March 22, 2010. | ||
10.21 |
Agreement between the Company and UBS regarding Auction Rate Securities | Incorporated by reference from Registrants Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2010. | ||
10.22 |
Fourth amendment to Commercial Credit Agreement dated as of September 28, 2011 between the Company and Union Bank of California, N.A. | Incorporated by reference from Registrants Current Report on Form 8-K filed September 30, 2011. | ||
10.23 |
Fifth amendment to Commercial Credit Agreement dated as of February 3, 2012 between the Company and Union Bank of California, N.A. | Incorporated by reference from Registrants Current Report on Form 8-K filed February 9, 2012. | ||
14 |
Code of Business Conduct and Ethics | Incorporated by reference from Registrants Annual Report on Form 10-K for the fiscal year ended May 31, 2009. |
31
Exhibit No. |
Description of Document |
Incorporation by Reference | ||
21 |
Subsidiaries of the Registrant.
Genstar Rental Electronics, Inc., a Canadian corporation
ER International, Inc., a Delaware corporation
Electro Rent Asia, Inc., a California corporation
Electro Rent (Tianjin) Rental Co., Ltd., a Chinese wholly foreign-owned enterprise
Electro Rent (Beijing) Technology Rental Co., Ltd., a Chinese wholly foreign-owned enterprise
Electro Rent Europe NV, a Belgium corporation
Electro Rent, LLC, a Delaware limited liability company
|
|||
23 |
Consent of Deloitte & Touche LLP, the Companys independent registered public accounting firm | Filed herewith. | ||
31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer | Filed herewith. | ||
31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer | Filed herewith. | ||
32.1** |
Section 1350 Certification by Principal Executive Officer | Filed herewith. | ||
32.2** |
Section 1350 Certification by Principal Financial Officer | Filed herewith. | ||
101.INS*** |
XBRL Instance Document. | |||
101.SCH*** |
XBRL Taxonomy Extension Schema Document. | |||
101.CAL*** |
XBRL Taxonomy Extension Calculation Linkbase Document. | |||
101.DEF*** |
XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB*** |
XBRL Taxonomy Label Linkbase Document. | |||
101.PRE*** |
XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Management contract or compensatory plan or arrangement. |
** | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
*** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections. |
(c) | Schedule of Financial Statements |
None.
32
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Electro Rent Corporation | ||||||
Dated: August 10, 2012 | By | /s/ Daniel Greenberg | ||||
Daniel Greenberg | ||||||
Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Daniel Greenberg Daniel Greenberg |
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
August 10, 2012 | ||
/s/ Craig R. Jones Craig R. Jones |
Chief Financial Officer (Principal Financial and Accounting Officer) |
August 10, 2012 | ||
/s/ Gerald D. Barrone Gerald D. Barrone |
Director | August 10, 2012 | ||
/s/ Nancy Y. Bekavac Nancy Y. Bekavac |
Director | August 10, 2012 | ||
/s/ Karen J. Curtin Karen J. Curtin |
Director | August 10, 2012 | ||
/s/ Theodore E. Guth Theodore E. Guth |
Director | August 10, 2012 | ||
/s/ Joseph J. Kearns Joseph J. Kearns |
Director | August 10, 2012 | ||
/s/ James S. Pignatelli James S. Pignatelli |
Director | August 10, 2012 |
33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2012
Page Number | ||||||
1. |
Financial Statements |
|||||
F-2 | ||||||
Consolidated Statements of Operations for each of the three years in the period ended May 31, 2012 |
F-3 | |||||
F-4 | ||||||
F-5 | ||||||
Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2012 |
F-6 | |||||
F-7 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Electro Rent Corporation
Van Nuys, California
We have audited the accompanying consolidated balance sheets of Electro Rent Corporation and subsidiaries (the Company) as of May 31, 2012 and 2011, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended May 31, 2012. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of May 31, 2012, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 10, 2012 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
LOS ANGELES, CALIFORNIA
AUGUST 10, 2012
F-2
ELECTRO RENT 2012 ANNUAL REPORT
Consolidated Statements of Operations
Year Ended May 31, (in thousands, except per share information) |
2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Revenues: |
||||||||||||
Rentals and leases |
$ | 129,737 | $ | 118,062 | $ | 94,201 | ||||||
Sales of equipment and other revenues |
118,817 | 110,667 | 51,666 | |||||||||
|
||||||||||||
Total revenues |
248,554 | 228,729 | 145,867 | |||||||||
|
||||||||||||
Operating expenses: |
||||||||||||
Depreciation of rental and lease equipment |
53,651 | 47,922 | 42,605 | |||||||||
Costs of revenues other than depreciation of rental and lease equipment |
94,856 | 86,649 | 39,061 | |||||||||
Selling, general and administrative expenses |
63,961 | 57,423 | 46,447 | |||||||||
|
||||||||||||
Total operating expenses |
212,468 | 191,994 | 128,113 | |||||||||
|
||||||||||||
Operating profit |
36,086 | 36,735 | 17,754 | |||||||||
Gain on bargain purchase, net of deferred taxes |
3,435 | 202 | 679 | |||||||||
Interest income, net |
484 | 352 | 1,599 | |||||||||
|
||||||||||||
Income before income taxes |
40,005 | 37,289 | 20,032 | |||||||||
Income tax provision |
14,233 | 13,533 | 8,435 | |||||||||
|
||||||||||||
Net income |
$ | 25,772 | $ | 23,756 | $ | 11,597 | ||||||
|
||||||||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.07 | $ | 0.99 | $ | 0.48 | ||||||
Diluted |
$ | 1.07 | $ | 0.99 | $ | 0.48 | ||||||
Shares used in per share calculation: |
||||||||||||
Basic |
23,983 | 23,974 | 23,932 | |||||||||
Diluted |
24,152 | 24,072 | 24,004 | |||||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ELECTRO RENT 2012 ANNUAL REPORT
Consolidated Balance Sheets
As of May 31, (in thousands, except share information) |
2012 | 2011 | ||||||
|
||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 9,290 | $ | 41,441 | ||||
Accounts receivable, net of allowance for doubtful accounts of $522 and $602 |
35,915 | 30,616 | ||||||
Rental and lease equipment, net of accumulated depreciation of $204,108 and $191,160 |
243,173 | 195,632 | ||||||
Other property, net of accumulated depreciation and amortization of $17,832 and $16,825 |
13,871 | 14,127 | ||||||
Goodwill |
3,109 | 3,109 | ||||||
Intangibles, net of amortization of $1,304 and $2,201 |
1,201 | 1,214 | ||||||
Other assets |
23,272 | 19,788 | ||||||
|
||||||||
$ | 329,831 | $ | 305,927 | |||||
|
||||||||
Liabilities and Shareholders Equity |
||||||||
Liabilities: |
||||||||
Accounts payable |
$ | 8,555 | $ | 8,237 | ||||
Accrued expenses |
11,870 | 10,437 | ||||||
Deferred revenue |
6,904 | 5,874 | ||||||
Deferred tax liability |
54,371 | 41,004 | ||||||
|
||||||||
Total liabilities |
81,700 | 65,552 | ||||||
|
||||||||
Commitments and contingencies (Note 11) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, $1 par - shares authorized 1,000,000; none issued |
||||||||
Common stock, no par - shares authorized 40,000,000; issued and outstanding 2012 - 23,987,826; 2011 - 23,980,581 |
36,179 | 34,742 | ||||||
Retained earnings |
211,952 | 205,633 | ||||||
|
||||||||
Total shareholders equity |
248,131 | 240,375 | ||||||
|
||||||||
$ | 329,831 | $ | 305,927 | |||||
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ELECTRO RENT 2012 ANNUAL REPORT
Consolidated Statements of Shareholders Equity
Accumulated | ||||||||||||||||||||
Common Stock | Other | Total | ||||||||||||||||||
Three years ended May 31, (in thousands) |
Number of Shares |
Amount | Comprehensive Income/(Loss) |
Retained Earnings |
Shareholders Equity |
|||||||||||||||
|
||||||||||||||||||||
Balance, May 31, 2009 |
23,954 | $ | 32,596 | $ | 176 | $ | 195,981 | $228,753 | ||||||||||||
Exercise of stock options and issuance of restricted shares |
51 | 454 | | | 454 | |||||||||||||||
Excess tax benefit for share based compensation, net of tax deficit |
| (45 | ) | | | (45 | ) | |||||||||||||
Non-cash stock compensation expense |
| 610 | | | 610 | |||||||||||||||
Repurchase of common stock |
(44 | ) | (60 | ) | | (335 | ) | (395 | ) | |||||||||||
Dividends declared |
| | | (10,836 | ) | (10,836 | ) | |||||||||||||
Comprehensive income: |
||||||||||||||||||||
Realized loss on transfer of investments available-for-sale to investments, trading |
| | (176 | ) | | (176 | ) | |||||||||||||
Net income for the year ended May 31, 2010 |
| | | 11,597 | 11,597 | |||||||||||||||
|
|
|||||||||||||||||||
Total comprehensive income |
11,421 | |||||||||||||||||||
|
||||||||||||||||||||
Balance, May 31, 2010 |
23,961 | 33,555 | | 196,407 | 229,962 | |||||||||||||||
Exercise of stock options and issuance of restricted shares |
20 | 197 | | | 197 | |||||||||||||||
Excess tax benefit for share based compensation, net of tax deficit |
| 34 | | | 34 | |||||||||||||||
Non-cash stock compensation expense |
| 956 | | | 956 | |||||||||||||||
Dividends declared |
| | | (14,530 | ) | (14,530 | ) | |||||||||||||
Net income for the year ended May 31, 2011 and total comprehensive income |
| | | 23,756 | 23,756 | |||||||||||||||
|
||||||||||||||||||||
Balance, May 31, 2011 |
23,981 | 34,742 | | 205,633 | 240,375 | |||||||||||||||
Exercise of stock options and issuance of restricted shares |
7 | | | | | |||||||||||||||
Excess tax benefit for share based compensation, net of tax deficit |
| 46 | | | 46 | |||||||||||||||
Non-cash stock compensation expense |
| 1,438 | | | 1,438 | |||||||||||||||
Dividends declared |
| | | (19,453 | ) | (19,453 | ) | |||||||||||||
Net settlement of shares |
| (47 | ) | | | (47 | ) | |||||||||||||
Net income for the year ended May 31, 2012 and total comprehensive income |
| | | 25,772 | 25,772 | |||||||||||||||
|
||||||||||||||||||||
Balance, May 31, 2012 |
23,988 | $ | 36,179 | $ | | $ | 211,952 | $248,131 | ||||||||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ELECTRO RENT 2012 ANNUAL REPORT
Consolidated Statements of Cash Flows
Year Ended May 31, (in thousands) |
2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 25,772 | $ | 23,756 | $ | 11,597 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
54,960 | 49,127 | 43,759 | |||||||||
Put option loss |
| 952 | 671 | |||||||||
Realized gain on redemption of trading securities |
| (952 | ) | (671 | ) | |||||||
Remeasurement loss on foreign currency |
267 | 43 | 93 | |||||||||
Provision for losses on accounts receivable |
233 | 500 | 529 | |||||||||
Realized gain on sale of investments available for sale |
| | (841 | ) | ||||||||
Gain on sale of rental and lease equipment |
(10,954 | ) | (12,083 | ) | (10,768 | ) | ||||||
Gain on bargain purchase, net of taxes |
(3,435 | ) | (202 | ) | (679 | ) | ||||||
Stock compensation expense |
1,438 | 956 | 610 | |||||||||
Excess tax benefit for share based compensation |
(102 | ) | (37 | ) | (62 | ) | ||||||
Deferred income taxes |
11,120 | 23,454 | (2,802 | ) | ||||||||
Change in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(5,594 | ) | (4,819 | ) | (7,545 | ) | ||||||
Other assets |
(5,839 | ) | (8,950 | ) | (4,268 | ) | ||||||
Accounts payable |
(120 | ) | 1,184 | 939 | ||||||||
Accrued expenses |
1,516 | (3,974 | ) | 2,467 | ||||||||
Deferred revenue |
613 | (204 | ) | 1,144 | ||||||||
|
||||||||||||
Net cash provided by operating activities |
69,875 | 68,751 | 34,173 | |||||||||
|
||||||||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sale of rental and lease equipment |
25,042 | 32,917 | 36,661 | |||||||||
Cash paid for acquisition |
(10,327 | ) | | (24,653 | ) | |||||||
Proceeds from acquisition purchase price adjustment |
| 260 | | |||||||||
Payments for purchase of rental and lease equipment |
(96,709 | ) | (91,538 | ) | (56,891 | ) | ||||||
Redemptions of investments, available-for-sale |
| | 28,737 | |||||||||
Redemptions of investments, trading |
| 14,275 | 7,325 | |||||||||
Payments for purchase of other property |
(900 | ) | (1,563 | ) | (682 | ) | ||||||
|
||||||||||||
Net cash used in investing activities |
(82,894 | ) | (45,649 | ) | (9,503 | ) | ||||||
|
||||||||||||
Cash flows from financing activities: |
||||||||||||
Borrowing under bank line of credit |
3,250 | | | |||||||||
Payment under bank line of credit |
(3,250 | ) | | | ||||||||
Proceeds from issuance of common stock |
| 197 | 454 | |||||||||
Minimum tax withholdings on share based compensation |
(47 | ) | | | ||||||||
Excess tax benefit for share based compensation |
102 | 37 | 62 | |||||||||
Payments for repurchase of common stock |
| | (395 | ) | ||||||||
Payment of dividends |
(19,378 | ) | (14,449 | ) | (14,360 | ) | ||||||
|
||||||||||||
Net cash used in financing activities |
(19,323 | ) | (14,215 | ) | (14,239 | ) | ||||||
|
||||||||||||
Net (decrease) increase in cash and cash equivalents |
(32,342 | ) | 8,887 | 10,431 | ||||||||
Effect of exchange rate changes on cash |
191 | (352 | ) | 260 | ||||||||
Cash and cash equivalents at beginning of year |
41,441 | 32,906 | 22,215 | |||||||||
|
||||||||||||
Cash and cash equivalents at end of year |
$ | 9,290 | $ | 41,441 | $ | 32,906 | ||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2012, 2011 AND 2010
(in thousands, except per share amounts)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include Electro Rent Corporation and its wholly owned subsidiaries (collectively we, us, or our hereafter). All intercompany balances and transactions have been eliminated in consolidation.
Business and Organization: We primarily engage in the short-term rental, lease, and sale of state-of-the-art electronic equipment. We maintain an equipment portfolio composed primarily of test and measurement equipment (T&M) and personal computer-related data products (DP) equipment purchased from leading manufacturers. Another aspect of our business is the sale of equipment after its utilization for rental or lease and the sale of a range of new T&M equipment for Agilent Technologies, Inc. (Agilent) beginning on December 1, 2009. Agilent has given us the exclusive right to sell Agilents more complex T&M equipment to small and medium size customers (who previously purchased directly from Agilent) in the United States and Canada.
We conduct our business activities in the United States, as well as through our wholly owned subsidiaries, Electro Rent, LLC, Electro Rent Europe, NV, and Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd. which conduct some or all of these business activities in Canada, Europe and China, respectively. Our wholly owned subsidiary, Genstar Rental Electronics, Inc. conducted some of these business activities in Canada through fiscal 2010, but is now inactive. Our wholly owned subsidiary, Electro Rent Asia, Inc., is the U.S. parent company of Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd., and our wholly owned subsidiary, ER International, Inc., is the U.S. parent company of Electro Rent Europe, NV.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosures of contingent assets and liabilities as of the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we review these estimates including those related to asset lives and depreciation methods, impairment of long-lived assets, including rental and lease equipment, goodwill and intangibles, investments, allowance for doubtful accounts, income taxes and contingencies and litigation. These estimates are based on our evaluation of current business and economic conditions, historical experience and on various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe, however, that our estimates, including those for the above-listed items, are reasonable.
Revenue Recognition: Rental and lease revenues are recognized in the month they are due on the accrual basis of accounting. Rentals and leases are primarily billed to customers in advance, and unearned billings are recorded as deferred revenue. Sales of new equipment through our resale channel and used equipment from our rental and lease equipment pool are recognized in the period in which the respective equipment is shipped and risk of loss is passed to the customer. Other revenues, consisting primarily of billings to customers for delivery and repairs are recognized in the period in which the respective services are performed. In the case of equipment that is sold to customers that is already on rent or lease to the same party, revenue is recognized at the agreed-upon date when the rent or lease term ends. Negotiated lease early-termination charges are recognized upon receipt.
Rental and Lease Equipment and Other Property: Assets are generally stated at cost, less accumulated depreciation. Upon retirement or disposal of assets, the cost and the related accumulated depreciation are eliminated from the accounts and any gain or loss is recognized. We depreciate our buildings over 31.5 years, furniture and other equipment over three to ten years, and leasehold
F-7
improvements over three to five years. Each is depreciated on a straight-line basis. Depreciation of rental and lease equipment and other property is computed using straight-line and accelerated methods over the estimated useful lives of the respective equipment. Generally, new rental and lease equipment is depreciated over three to ten years, and used equipment over two to nine years, depending on the type of equipment. Depreciation methods and useful lives are periodically reviewed and revised, as deemed appropriate, including revisions to reflect shorter useful lives to more closely match depreciation expense with rental revenue for rental arrangements where the customer can acquire title through payment of all required rentals. Normal maintenance and repairs are expensed as incurred. Rental and lease equipment at net book value comprised $239,620 of T&M equipment and $3,553 of DP equipment at May 31, 2012 and $192,484 of T&M equipment and $3,148 of DP equipment at May 31, 2011.
Income Taxes: We recognize a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets are periodically reviewed for recoverability.
We recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We recognize interest, penalties and foreign currency gains and losses with respect to uncertain tax positions as components of our income tax provision. Accrued interest and penalties are included within accrued expenses in the consolidated balance sheet. Significant judgment is required in the identification of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions. During the second quarter of fiscal 2011 we effectively settled our remaining uncertain tax positions, and derecognized $4,515 of previously recognized uncertain tax positions, and the related deferred tax asset, and $1,396 for interest and penalties previously recognized. (See Note 6 for further discussion.)
Impairment of Assets: The carrying value of equipment held for rental and lease is assessed quarterly or when factors indicating impairment are present. We recognize impairment losses on equipment held for rental and lease when the expected future undiscounted cash flows are less than the assets carrying value, in which case the asset is written down to its estimated fair value. There were no such impairment charges during fiscal 2012, 2011 and 2010.
Goodwill and Other Intangible Assets: Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, and other intangible assets, such as customer relationships, non-compete agreements and trade name as a result of our acquisition of Rush Computer Rentals, Inc. in January 2006, Telogy, LLC in March 2010, and EMT in August 2011 are discussed further in Note 3. We evaluate our goodwill and intangible assets for impairment pursuant to FASB ASC Topic No. 350, Intangibles Goodwill and Other (ASC 350), which provides that goodwill and other intangible assets with indefinite lives are not amortized but are reviewed for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The intangible assets, with the exception of the trade name, are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment of goodwill and identifiable intangible assets is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value. Goodwill and intangibles have not been impaired.
Cash and Cash Equivalents: We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make rental and lease payments. The estimated losses are based on historical collection experience in conjunction with an evaluation of the current status of the
F-8
existing accounts. If the financial condition of our customers were to deteriorate, then additional allowances could be required that would reduce income. Conversely, if the financial condition of our customers were to improve or if legal remedies to collect past due amounts were more successful than expected, then the allowance for doubtful accounts may need to be reduced and income would be increased.
A roll-forward of the allowance for doubtful accounts is as follows at May 31:
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Beginning of year |
$ | 602 | $ | 536 | $ | 317 | ||||||
Provision for doubtful accounts |
233 | 500 | 529 | |||||||||
Write-offs |
(313 | ) | (434 | ) | (310 | ) | ||||||
|
||||||||||||
End of year |
$ | 522 | $ | 602 | $ | 536 | ||||||
|
Other Assets: We include demonstration equipment used in connection with our resale activity of $5,495 and $3,894 as of May 31, 2012 and 2011, respectively, in other assets for a period up to two years. Demonstration equipment is recorded at the lower of cost or estimated market value until the units are sold or transferred to our rental and lease equipment pool. Demonstration equipment transferred to our rental and lease equipment pool is depreciated over its remaining estimated useful life.
Other assets consisted of the following at May 31:
2012 | 2011 | |||||||
|
||||||||
Net investment in sales-type leases |
$ | 11,681 | $ | 7,478 | ||||
Demonstration equipment |
5,495 | 3,894 | ||||||
Supplemental executive retirement plan assets |
2,370 | 2,671 | ||||||
Income taxes receivable |
861 | 3,066 | ||||||
Prepaid expenses and other |
2,865 | 2,679 | ||||||
|
||||||||
$ | 23,272 | $ | 19,788 | |||||
|
Concentration of Credit Risk: Financial instruments that potentially expose us to concentration of credit risk consist primarily of cash equivalents and trade accounts receivable. We invest excess cash primarily in money market funds of major financial institutions. Excess cash of $2,507 and $32,868 as of May 31, 2012 and 2011, respectively, was invested in four large government money market funds. We believe that we are not exposed to any significant financial risk with respect to cash and cash equivalents. For trade accounts receivable, we sell primarily on 30-day terms, perform credit evaluation procedures on each customers individual transactions and require security deposits or personal guarantees from our customers when significant credit risks are identified. Typically, most customers are large, established firms.
We purchase rental and lease equipment from numerous vendors and resale equipment from Agilent. During fiscal 2012, 2011 and 2010, Agilent accounted for approximately 75%, 82% and 75%, respectively, of all new equipment purchases. No other vendor accounted for more than 10% of such purchases.
Foreign Currency: The U.S. dollar has been determined to be our functional currency. The assets and liabilities of our foreign subsidiaries are remeasured from their functional currency to U.S. dollars at current or historic exchange rates, as appropriate. Revenues and expenses are remeasured from any foreign currencies to U.S. dollars using historic or average monthly exchange rates, as appropriate, for the month in which the transaction occurred. Remeasurement gains and losses are included in selling, general and administrative expenses or income taxes, as appropriate. The assets, liabilities, revenues and expenses of our foreign subsidiaries are individually less than 10% of our respective consolidated amounts. The euro, Canadian dollar and Chinese yuan are our primary foreign currencies.
F-9
We enter into forward contracts to hedge against unfavorable currency fluctuations in our monetary assets and liabilities in our European and Canadian operations. These contracts are designed to minimize the effect of fluctuations in foreign currencies. Such derivative instruments are not designated as hedging instruments and, therefore, are recorded at fair value as a current asset or liability, and any changes in fair value are recorded in our consolidated statements of operations.
The fair value of our foreign exchange forward contracts in the consolidated balance sheets is shown in the table below:
Derivatives Not Designated as Hedging Instruments |
Consolidated Balance Sheet Location |
May 31, 2012 |
May 31, 2011 |
|||||||
|
|
|
|
|
|
|||||
Foreign exchange forward contracts |
Other | $179 | $15 |
The table below provides data about the amount of fiscal 2012 and 2011 gains and (losses) recognized in income for derivative instruments not designated as hedging instruments:
Derivatives Not Designated | Location of Gain (Loss) Recognized | Year ended May 31, | ||||||||
as Hedging Instruments |
in Income on Derivatives |
2012 | 2011 | |||||||
Foreign exchange forward contracts |
Selling, general and administrative expenses | $ | 507 | $ | (592 | ) |
Net Income Per Common and Common Equivalent Share: Basic earnings per share (EPS) is computed as net income divided by the weighted average number of shares of common stock outstanding for the reported year, excluding the dilutive effects of stock options and other potentially dilutive securities. Diluted EPS is computed as net income divided by the weighted average number of shares outstanding of common stock and common stock equivalents for the reported year. Common stock equivalents result from the dilutive effects of restricted stock and stock options computed using the treasury stock method.
Cash Flow: Supplemental disclosures of cash paid (refunded) during the fiscal year for:
Year ended May 31, | 2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Interest |
$ | 21 | $ | 56 | $ | 21 | ||||||
Income taxes |
(543 | ) | (2,048 | ) | 10,022 | |||||||
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities: We had accounts payable and other accruals related to acquired equipment totaling $5,418, $4,860 and $6,167, at May 31, 2012, 2011 and 2010, respectively, which amounts were subsequently paid. During fiscal 2012 and 2011, we transferred $2,207 and $520 of demonstration equipment, respectively, included in other assets, to rental and lease equipment. There were no similar activities in fiscal 2010.
Stock-Based Compensation: Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements as compensation expense over the period that an employee provides service in exchange for the award based on its fair value. Compensation expense resulting from restricted stock and restricted stock units is measured at fair value on the date of grant and is recognized in selling, general and administrative expenses over the vesting period (see Note 12 for further discussion).
Fair Value Measurements: As of May 31, 2012 and 2011 we held certain assets and liabilities that are required to be measured at fair value on a recurring basis. These included cash equivalents and foreign currency derivatives.
F-10
Recent Accounting Pronouncements: In December 2010, the Financial Accounting Standards Board (FASB) issued an update to its existing guidance for goodwill and other intangible assets. This guidance modifies testing for reporting units with zero or negative carrying amounts. For those reporting units, in addition to evaluating whether the carrying amount of a reporting unit exceeds fair value, an entity must assess whether it is more likely than not that a goodwill impairment exists. To make that determination, an entity must consider whether there are any adverse qualitative factors indicating potential impairment. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We adopted this guidance effective June 1, 2011 with no material impact on our consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. The guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for reporting periods beginning on or after December 15, 2011, with early adoption prohibited. We have adopted this guidance beginning with our fourth quarter of fiscal 2012. The adoption of this guidance did not have a material impact on our financial condition, results of operations or cash flows.
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present components of comprehensive income in either (1) a continuous statement of net income or (2) two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption of the new guidance is permitted and full retrospective application is required. We will be required to adopt this guidance beginning with our first quarter of fiscal 2013. We do not anticipate that the adoption of this guidance will have a material impact on our financial condition, results of operations or cash flows.
Under the amended guidance discussed in the preceding paragraph, an entity is required to present the effect of reclassification adjustments out of accumulated other comprehensive income in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. In December 2011, the FASB issued an amendment to the provision and decided to defer the effective date, pending reconsideration, of the presentation requirements for reclassification adjustments of items out of accumulated other comprehensive income. We do not anticipate that the adoption of this amendment, when it becomes effective, will have a material impact on our financial condition, results of operations or cash flows.
In September 2011, the FASB issued guidance to simplify how an entity tests goodwill for impairment. The amendments in the update provide for an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity that adopts this option will no longer be required to calculate the fair value of a reporting unit (Step 1) unless the entity determines, based on a qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. This guidance is effective for fiscal years beginning after December 15, 2011. We will have the option to adopt the qualitative process beginning with our first quarter of fiscal 2013. We do not currently plan to adopt this option.
Reclassifications: We have reclassified our gain on bargain purchase, net of deferred taxes of $202 and $679 for the fiscal years ended May 31, 2011 and 2010, respectively, from operating expenses to non-operating income to conform to the current year presentation. As a result, our operating expenses increased, and our operating profit decreased by $202 and $679 for the fiscal years ended May 31, 2011 and 2010, respectively.
F-11
Note 2: Fair Value Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, supplemental executive retirement plan assets and liabilities, and foreign currency derivatives. The fair value of financial assets and liabilities can be determined based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
Level 1 Observable inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2 Inputs, other than the quoted prices in active markets, that are observable either directly or through corroboration with observable market data; and
Level 3 Unobservable inputs, for which there is little or no market data for the assets or liabilities, such as internally-developed valuation models.
Our assets and liabilities measured at fair value on a recurring basis were determined as follows:
At May 31, 2012 | ||||||||||||||||
|
||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Balance |
|||||||||||||
|
||||||||||||||||
Assets |
||||||||||||||||
Money market funds |
$2,507 | $ | | $ | $2,507 | |||||||||||
Supplemental executive retirement plan |
2,370 | | | 2,370 | ||||||||||||
Foreign exchange forward contracts |
| 179 | | 179 | ||||||||||||
|
||||||||||||||||
Total assets measured at fair value |
$4,877 | $ | 179 | $ | $5,056 | |||||||||||
|
||||||||||||||||
Liabilities |
||||||||||||||||
Supplemental executive retirement plan |
$2,370 | $ | | $ | $2,370 | |||||||||||
|
||||||||||||||||
Total liabilities measured at fair value |
$2,370 | $ | |
|
$ |
|
$2,370 | |||||||||
|
||||||||||||||||
At May 31, 2011 | ||||||||||||||||
|
||||||||||||||||
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Balance |
|||||||||||||
|
||||||||||||||||
Assets |
||||||||||||||||
Money market funds |
$32,868 | $ | | $ | $32,868 | |||||||||||
Supplemental executive retirement plan |
2,671 | | | 2,671 | ||||||||||||
Foreign exchange forward contracts |
| 15 | | 15 | ||||||||||||
|
||||||||||||||||
Total assets measured at fair value |
$35,539 | $ | 15 | $ | $35,554 | |||||||||||
|
||||||||||||||||
Liabilities |
||||||||||||||||
Supplemental executive retirement plan |
$ 2,671 | $ | | $ | $ 2,671 | |||||||||||
|
||||||||||||||||
Total liabilities measured at fair value |
$ 2,671 | $ | | $ | $ 2,671 | |||||||||||
|
F-12
The fair value measures for our money market funds and supplemental executive retirement plan asset and liability were derived from quoted market prices in active markets and are included in Level 1 inputs. Foreign currency forward contracts were valued based on observable market spot and forward rates as of our reporting date and are included in Level 2 inputs.
The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3):
May 31, 2011 | ||||||||
|
||||||||
Put Option | Auction Rate Securities |
|||||||
|
||||||||
Fair value at beginning of period |
$ | 952 | $ | 13,323 | ||||
Settlements (at par) |
| (14,275 | ) | |||||
Realized gains (losses) included in interest income, net |
(952 | ) | 952 | |||||
|
||||||||
Fair value at end of period |
$ | | $ | | ||||
|
During the first quarter of fiscal 2011, we sold our remaining Auction Rate Securities (ARS) to UBS AG (UBS) at par plus accrued interest, for $14,275 in cash when we exercised our put right (the Put Option) under a November 2008 settlement agreement (Agreement) with UBS. As a result, we included in earnings a realized gain of $952 attributable to the sale and a realized loss of $952 attributable to the Put Option. The ARS were long-term debt instruments backed by student loans, a substantial portion of which were guaranteed by the United States government. The ARS and Put Option were valued from quotes received from our broker, UBS, which were derived from UBSs internally developed model. In accordance with accounting guidance, which permits an entity to elect the fair value option for financial assets and liabilities, we elected to measure the Put Option at fair value in order to match the changes in the fair value of the ARS. There was no Level 3 activity during fiscal 2012.
Note 3: Acquisition
Equipment Management Technology, Inc.
On August 24, 2011, pursuant to an Asset Purchase Agreement (APA), we completed the purchase of certain assets and the assumption of specified post-closing liabilities of Equipment Management Technology, Inc., a Nevada Corporation (EMT), for cash consideration of $10,673. EMT, headquartered in Las Vegas, Nevada, was a provider of electronic T&M equipment. We acquired EMT in order to facilitate growth in our T&M business. EMT had previously filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada. The sale was approved by the Bankruptcy Court on August 11, 2011, and the related sale order was issued on August 12, 2011. At closing, $500 was deposited into an escrow account for any post-closing adjustments that reduce the purchase price. We have accounted for the acquisition of EMT as a business combination in accordance with accounting guidance.
At August 31, 2011, we completed our estimates of the fair value of rental and lease equipment and deferred revenue. Due to the timing of the acquisition, we completed our evaluation of intangible assets and accounts receivable in our second quarter ended November 30, 2011. We acquired gross accounts receivable of $972, of which an estimated $430 is not expected to be collected, resulting in a fair value of $542. Under accounting guidance, a bargain purchase gain results if the fair value of the purchase consideration is less than the net fair value of the assets acquired and liabilities assumed. We recorded a bargain purchase gain of $3,194, net of deferred taxes, related to our acquisition of EMT at August 31, 2011. We believe that we were able to negotiate a bargain purchase price as a result of our access to the liquidity necessary to complete the transaction and EMTs recurring losses and recent bankruptcy filing.
F-13
The following table provides the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition.
Total cash consideration |
$ | 10,673 | ||
|
|
|||
Preliminary purchase price allocation: |
||||
Accounts receivable |
542 | |||
Rental and lease equipment |
15,896 | |||
Deferred tax liability |
(2,092 | ) | ||
Deferred revenue |
(479 | ) | ||
|
|
|||
Net assets acquired |
13,867 | |||
|
|
|||
Bargain purchase gain, net of deferred taxes of $2,092 |
$ | (3,194 | ) | |
|
|
The bargain purchase gain is classified separately in our condensed consolidated statements of operations.
Acquisition-related transaction costs of $55 were accounted for as expenses in the periods in which the costs were incurred and are included in our selling, general and administrative expenses during fiscal 2012.
The acquisition of EMT was an asset purchase, and EMTs operations were integrated with ours immediately after the acquisition date. Revenues and income before income taxes from the acquired assets included in our consolidated statements of operations were $5,232 and $2,862, respectively, for fiscal 2012.
During the second and third quarters of fiscal 2012, we increased the bargain purchase gain by a total of $396 ($241, net of deferred tax), consisting of (i) $140, representing the estimated fair value of customer relationships acquired, (ii) $273, of post-closing adjustments, which were disbursed from the escrow funds in accordance with the APA, offset by (iii) $17, representing the final determination of assets acquired and other components of the purchase price.
Supplemental pro forma information reflecting the acquisition of EMT as if it occurred on June 1, 2010 is not practicable because we are not able to obtain reliable historical financial information for 2010 and 2011, primarily due to a deterioration of the organization and controls leading up to and following EMTs February 2011 bankruptcy filing.
Telogy, LLC
We recorded additional bargain purchase gain associated with our March 31, 2010 acquisition of Telogy LLC (Telogy) of $342 ($202, net of deferred tax), during the fiscal year ended May 31, 2011. The increase in the bargain purchase gain consisted of (i) $260, representing the final determination of assets acquired and other components of the purchase price in accordance with specific provisions of the APA, and (ii) $82, resulting from a final determination of fair value of certain assets and liabilities acquired from Telogy.
Note 4: Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are recorded at the estimated fair value of the assets acquired. Identifiable intangible assets consist of purchased customer relationships and trade names.
F-14
The changes in carrying amount of goodwill and other intangible assets for fiscal 2012 and 2011 were as follows:
Balance as of June 1, 2011 (net of amortization) |
Additions | Amortization | Balance as of May 31, 2012 |
|||||||||||||
|
||||||||||||||||
Goodwill |
$ | 3,109 | $ | | $ | | $ | 3,109 | ||||||||
Trade name |
411 | | | 411 | ||||||||||||
Customer relationships |
803 | 140 | (153 | ) | 790 | |||||||||||
|
||||||||||||||||
$ | 4,323 | $ | 140 | $ | (153 | ) | $ | 4,310 | ||||||||
|
||||||||||||||||
Balance as of June 1, 2010 (net of amortization) |
Additions | Amortization | Balance as of May 31, 2011 |
|||||||||||||
|
||||||||||||||||
Goodwill |
$ | 3,109 | $ | | $ | | $ | 3,109 | ||||||||
Trade name |
411 | | | 411 | ||||||||||||
Non-compete agreements |
66 | | (66 | ) | | |||||||||||
Customer relationships |
921 | | (118 | ) | 803 | |||||||||||
|
||||||||||||||||
$ | 4,507 | $ | | $ | (184 | ) | $ | 4,323 | ||||||||
|
Goodwill is not deductible for tax purposes.
There were no conditions that indicated any impairment of goodwill or identifiable intangible assets in fiscal 2012, 2011 and 2010. The annual impairment review date for goodwill is May 31.
Intangible assets with finite useful lives are amortized over their respective estimated useful lives. The following table provides a summary of our intangible assets:
May 31, 2012 | ||||||||||||||||
|
||||||||||||||||
Estimated Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||
|
||||||||||||||||
Trade name |
| $ | 411 | $ | | $ | 411 | |||||||||
Customer relationships |
3-8 years | 2,094 | (1,304 | ) | 790 | |||||||||||
|
||||||||||||||||
$ | 2,505 | $ | (1,304 | ) | $ | 1,201 | ||||||||||
|
||||||||||||||||
May 31, 2011 | ||||||||||||||||
|
||||||||||||||||
Estimated Useful Life |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||
|
||||||||||||||||
Trade name |
| $ | 411 | $ | | $ | 411 | |||||||||
Non-compete agreements |
2-5 years | 1,050 | (1,050 | ) | | |||||||||||
Customer relationships |
3-8 years | 1,954 | (1,151 | ) | 803 | |||||||||||
|
||||||||||||||||
$ | 3,415 | $ | (2,201 | ) | $ | 1,214 | ||||||||||
|
Amortization expense was $153, $184 and $276 for fiscal 2012, 2011 and 2010, respectively.
F-15
Amortization expense for customer relationships and non-compete agreements is included in selling, general and administrative expenses. The following table provides estimated future amortization expense related to intangible assets:
Year ending May 31, | Future Amortization |
|||
|
||||
2013 |
$ | 164 | ||
2014 |
164 | |||
2015 |
129 | |||
2016 |
118 | |||
2017 |
118 | |||
Thereafter |
97 | |||
|
||||
$ | 790 | |||
|
Note 5: Borrowings
On February 3, 2012, we entered into a fifth amendment to commercial credit agreement (Credit Agreement Amendment) with an institutional lender. The Credit Agreement Amendment amends the commercial credit agreement dated September 29, 2008 (the Commercial Credit Agreement), pursuant to which the lender provides us with a revolving line of credit. The Credit Agreement Amendment amends the Commercial Credit Agreement by (i) increasing the permitted maximum aggregate outstanding principal amount under the Commercial Credit Agreement from $10,000 to $25,000; (ii) increasing the letter of credit sublimits from $5,000 to $10,000; (iii) extending the term and maturity date of the Commercial Credit Agreement from October 1, 2012 to October 1, 2015; (iv) amending the interest rate provisions in the loan agreement such that the margin on loans bears interest at the reference rate minus 0.25% or LIBOR plus 1.50%; (v) amending the quick ratio financial covenant; and (vi) amending the minimum tangible net worth financial covenant. We are in compliance with all loan covenants at May 31, 2012.
During fiscal 2012, we borrowed and repaid $3,250 under the Commercial Credit Agreement. We do not currently have any loan balance under the Commercial Credit Agreement.
Note 6: Income Taxes
Accounting guidance for accounting for uncertain tax positions prescribes a recognition threshold required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.
During the second quarter of fiscal 2011 we effectively settled our remaining uncertain tax positions. The derecognition of $4,515 of previously recognized uncertain tax positions, and the related deferred tax asset, had no impact on our effective tax rate. However, the derecognition of $1,396 for interest and penalties previously recognized reduced our tax provision by a corresponding amount for fiscal 2011. This derecognition reduced our effective tax rate from 40.0% to 36.3% for fiscal 2011.
We recognize interest and penalties accrued with respect to uncertain tax positions as components of our income tax provision. At May 31, 2012 and 2011, we did not have any accrual for interest and penalties.
The reconciliation of our unrecognized tax benefits is as follows for the fiscal years ended May 31:
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Balance as of June 1 |
$ | | $ | 4,691 | $ | 3,943 | ||||||
Increase/(decrease) related to prior year tax positions |
| (4,691 | ) | 748 | ||||||||
|
||||||||||||
Balance as of May 31 |
$ | | $ | | $ | 4,691 | ||||||
|
F-16
We are subject to taxation in the U.S., as well as various states and foreign jurisdictions. We have substantially settled all income tax matters for the United States federal jurisdiction for years through fiscal 2009. Major state jurisdictions have been examined through fiscal 2004 and 2005, and foreign jurisdictions have not been examined for their respective maximum statutory periods.
For financial reporting purposes, income before income taxes comprised the following as of May 31:
|
| |||||||||||
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Domestic |
$ | 40,364 | $ | 36,817 | $ | 20,184 | ||||||
Foreign |
(359 | ) | 472 | (152 | ) | |||||||
|
||||||||||||
$ | 40,005 | $ | 37,289 | $ | 20,032 | |||||||
|
||||||||||||
The provision for income taxes consisted of the following for the fiscal years ended May 31: | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Current |
||||||||||||
Federal |
$ | 1,057 | $ | (5,583 | ) | $ | 8,117 | |||||
State |
1,523 | 2,028 | 1,698 | |||||||||
Foreign |
538 | (521 | ) | 1,427 | ||||||||
Deferred |
||||||||||||
Federal |
10,541 | 17,083 | (2,476 | ) | ||||||||
State |
559 | 540 | (330 | ) | ||||||||
Foreign |
15 | (14 | ) | (1 | ) | |||||||
|
||||||||||||
$ | 14,233 | $ | 13,533 | $ | 8,435 | |||||||
|
The following reconciles the statutory federal income tax rate to the effective tax rate for the fiscal years ended May 31:
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Statutory federal rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State taxes, net of federal benefit |
3.4 | 4.5 | 4.6 | |||||||||
Changes in reserves due to changes in tax estimates |
| | 1.4 | |||||||||
Derecognition of uncertain tax positions |
| (3.4 | ) | | ||||||||
Bargain purchase gain |
(3.0 | ) | (0.2 | ) | (1.1 | ) | ||||||
Foreign tax refund |
(0.4 | ) | | | ||||||||
Permanent differences resulting from valuation allowances |
0.7 | 0.3 | 1.1 | |||||||||
Interest inclusion |
| | 1.0 | |||||||||
Other |
(0.1 | ) | 0.1 | 0.1 | ||||||||
|
||||||||||||
Effective tax rate |
35.6 | % | 36.3 | % | 42.1 | % | ||||||
|
Our effective tax rate in fiscal 2012, 2011 and 2010 was 35.6%, 36.3% and 42.1%, respectively. The lower effective rate in fiscal 2012 was due to the bargain purchase gain on EMT and state tax credits offset by an increase in the foreign valuation allowance. The lower effective rate in fiscal 2011 was due to our effective settlement of our remaining uncertain tax positions and the resulting derecognition of $1,396 for interest and penalties previously recognized in our income tax provision. Tax advantaged investments reduced expense by $0, $2 and $52 for fiscal 2012, 2011 and 2010, respectively.
F-17
The tax effects of temporary differences that gave rise to significant portions of the net deferred tax liabilities consisted of the following at May 31:
2012 | 2011 | |||||||
|
||||||||
Deferred tax assets: |
||||||||
Goodwill and intangible assets |
$ | 300 | $ | 1,194 | ||||
Allowance for doubtful accounts |
206 | 238 | ||||||
Deferred compensation and benefits |
2,813 | 1,734 | ||||||
Net operating losses |
871 | 1,364 | ||||||
Valuation allowance |
(871 | ) | (593 | ) | ||||
Other |
1,390 | 1,400 | ||||||
|
||||||||
4,709 | 5,337 | |||||||
Deferred tax liabilities: |
||||||||
Accumulated depreciation |
(56,532 | ) | (45,800 | ) | ||||
Deferred taxes on bargain purchase |
(2,548 | ) | (541 | ) | ||||
|
||||||||
Net deferred tax liabilities |
$ | (54,371 | ) | $ | (41,004 | ) | ||
|
We determined that a valuation allowance was required in fiscal 2012 and 2011 of $871 and $593, respectively, for our deferred tax asset related to certain foreign net operating loss carry forwards and other related timing differences, which, if unused, will expire between fiscal 2014 and 2017. As of May 31, 2012, 2011 and 2010, U.S. income taxes had not been assessed on approximately $1,599, $1,425 and $853, respectively, of undistributed earnings of foreign subsidiaries because we consider these earnings to be invested indefinitely.
Note 7: Sales-type Leases
We had certain customer leases providing bargain purchase options, which are accounted for as sales-type leases. Interest income is recognized over the life of the lease using the effective interest method.
The initial acceptance of customer finance arrangements is based on an in-depth review of each customers credit profile, including review of third party credit reports, customer financial statements and bank verifications. We monitor the credit quality of our sales-type lease portfolio based on payment activity that drives the finance lease receivable aging. This credit quality is assessed on a monthly basis. Our historical losses on finance lease receivables are insignificant, and therefore we do not have a specific allowance for credit losses.
The minimum lease payments receivable and the net investment included in other assets were as follows at May 31:
2012 | 2011 | |||||||
|
||||||||
Gross minimum lease payments receivable |
$ | 12,284 | $ | 7,834 | ||||
Less unearned interest |
(603 | ) | (356 | ) | ||||
|
||||||||
Net investment in sales-type lease receivables |
$ | 11,681 | $ | 7,478 | ||||
|
The following table provides estimated future minimum lease payments by year related to sales-type leases:
Year ending May 31, | Future Amortization |
|||
|
||||
2013 |
$ 7,366 | |||
2014 |
3,477 | |||
2015 |
1,176 | |||
2016 |
152 | |||
2017 |
113 | |||
|
||||
$12,284 | ||||
|
F-18
Note 8: Computation of Earnings Per Share
The following is a reconciliation of the denominator used in the computation of basic and diluted EPS for the fiscal years ended May 31:
2012 | 2011 | 2010 | ||||||||||
|
||||||||||||
Denominator: |
||||||||||||
Denominator for basic earnings per share weighted average common shares outstanding |
23,983 | 23,974 | 23,932 | |||||||||
Effect of dilutive options and restricted stock |
169 | 98 | 72 | |||||||||
|
||||||||||||
Diluted shares used in per share calculation |
24,152 | 24,072 | 24,004 | |||||||||
|
||||||||||||
Net income |
$ | 25,772 | $ | 23,756 | $ | 11,597 | ||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.07 | $ | 0.99 | $ | 0.48 | ||||||
Diluted |
$ | 1.07 | $ | 0.99 | $ | 0.48 | ||||||
|
Certain options to purchase our common stock were not included in the computation of diluted earnings per share because to do so would have been antidilutive. The quantity of such options was 0, 36 and 54 for fiscal 2012, 2011 and 2010, respectively.
Note 9: Rentals Under Noncancellable Operating Leases
We rent equipment on a short-term basis and lease equipment for periods greater than 12 months. Such leases provide the lessee with the option of renewing the agreement for periods of up to 12 months or purchasing the equipment at fair market value at the end of the initial or renewal term. Our cost of equipment under operating leases at May 31, 2012, with remaining noncancellable lease terms of more than one year, was $8,662, before accumulated depreciation of $2,631, and the net book value was $6,031.
The following sets forth a schedule of minimum future rentals to be received on noncancellable operating leases with remaining lease terms of more than one year as of May 31, 2012:
2013 |
$ | 2,774 | ||
2014 |
2,094 | |||
2015 |
875 | |||
2016 |
37 | |||
2017 |
5 | |||
|
||||
$ | 5,785 | |||
|
Note 10: Other Property
Other property, at cost, consisted of the following at May 31:
2012 | 2011 | |||||||
|
||||||||
Land |
$ | 6,985 | $ | 6,985 | ||||
Buildings |
15,442 | 14,917 | ||||||
Furniture and other equipment |
9,071 | 8,831 | ||||||
Leasehold improvements |
205 | 219 | ||||||
|
||||||||
31,703 | 30,952 | |||||||
Less accumulated depreciation and amortization |
(17,832 | ) | (16,825 | ) | ||||
|
||||||||
$ | 13,871 | $ | 14,127 | |||||
|
Depreciation expense was $1,157, $1,020 and $878 for fiscal 2012, 2011 and 2010, respectively. Depreciation expense is included in selling, general and administrative expenses.
F-19
Note 11: Commitments and Contingencies
We lease certain facilities under various operating leases. Most of the lease agreements provide us with the option of renewing our leases at the end of the initial lease term, at the fair rental value, for periods of up to five years. In most cases, we expect that in the normal course of business facility leases will be renewed or replaced by other leases.
Minimum payments over the next five years under these leases as of May 31, 2012, exclusive of property taxes and insurance, were as follows:
2013 |
$ | 841 | ||
2014 |
599 | |||
2015 |
367 | |||
2016 |
182 | |||
2017 |
100 | |||
Thereafter |
59 | |||
|
||||
$ | 2,148 | |||
|
Rent expense was $1,007, $1,057 and $1,135 for fiscal 2012, 2011 and 2010, respectively. Rent expense is included in selling, general and administrative expenses.
We purchase substantial amounts of rental equipment from numerous vendors. As a result, we have occasionally been included as a member of the plaintiff class in class action lawsuits related to product warranties or price adjustments. Settlements of such claims can result in distributions of cash or product coupons that can be redeemed, sold or used to purchase new equipment. We recognize any benefits from such settlements when all contingencies have expired to the extent either cash has been received and/or realization of value from any coupon is assured.
We are subject to legal proceedings and business disputes involving ordinary and routine claims. The ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates in recording liabilities for potential litigation settlements. Estimates for losses from litigation are made after consultation with outside counsel. If estimates of potential losses increase or the related facts and circumstances change in the future, we may be required to record either more or less litigation expense. We are not involved in any pending or threatened legal proceedings that we believe could reasonably be expected to have a material adverse effect on our financial condition, results of operations or cash flows at May 31, 2012.
Note 12: Stock Option Plans and Equity Incentive Plan
Our 2005 Equity Incentive Plan (the Equity Incentive Plan) authorizes our Board of Directors to grant incentive and non-statutory stock option grants, stock appreciation rights, restricted stock awards, restricted stock units, performance unit awards and performance share awards covering a maximum of 1,000 shares of our common stock. The Equity Incentive Plan replaced our prior stock option plans, under which there are no outstanding options. Pursuant to the Equity Incentive Plan, we have granted incentive and non-statutory options to directors, officers and key employees at prices not less than 100% of the fair market value on the day of grant. In addition, we have granted restricted stock and restricted stock units to directors, officers and key employees. The Equity Incentive Plan provides for a variety of vesting dates. All outstanding options expired in October 2011.
F-20
Stock Options
The following table summarizes certain information relative to options for common stock:
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in years) |
Aggregate Value |
|||||||||||||
|
||||||||||||||||
Outstanding at June 1, 2011 |
36 | $ | 17.69 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited/cancelled |
(36 | ) | 17.69 | |||||||||||||
|
||||||||||||||||
Outstanding at May 31, 2012, all vested and exercisable |
| $ | | | $ | | ||||||||||
|
There were no stock options granted during fiscal 2012, 2011 or 2010. The total fair value of shares vested during fiscal 2012, 2011 and 2010 was $0, $0 and $54, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. The aggregate intrinsic value of options exercised during fiscal 2012, 2011 and 2010 was $0, $13 and $180, respectively. Shares of newly issued common stock were issued upon exercise of stock options.
Restricted Stock Units
Restricted stock units represent the right to receive one share of our common stock provided that the vesting conditions are satisfied. The following table represents restricted stock unit activity for fiscal 2012:
Restricted Stock |
Weighted Average Grant Fair Value |
|||||||
|
|
|
|
|||||
Nonvested at June 1, 2011 |
204 | $ | 11.36 | |||||
Granted |
101 | 16.47 | ||||||
Vested |
(91 | ) | 11.39 | |||||
Forfeited/canceled |
(11 | ) | 12.88 | |||||
|
|
|
|
|||||
Nonvested at May 31, 2012 |
203 | $ | 13.82 | |||||
|
|
|
|
We granted 101, 107 and 166 restricted stock units during fiscal 2012, 2011 and 2010, respectively. As of May 31, 2012, we have unrecognized share-based compensation cost of approximately $1,551 associated with restricted stock units. This cost is expected to be recognized over a weighted-average period of approximately 1.7 years.
The total fair value of shares that vested during fiscal 2012 was $1,030, which was calculated based on the closing price of our common stock on the Nasdaq Stock Market on the applicable date of vesting.
Accounting for Share Based Payments
Accounting guidance requires all share-based payments to employees, including grants of employee stock options, restricted stock and restricted stock units, to be recognized as compensation expense in the consolidated financial statements based on their fair values. Compensation expense is recognized over the period that an employee provides service in exchange for the award.
F-21
We use the Black-Scholes option pricing model to calculate the fair value of any option grant. Our computation of expected volatility is based on historical volatility. Our computation of expected term is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The expected term represents the period that our option awards are expected to be outstanding and was determined based on historical experience of similar awards. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option at the date of grant. Forfeitures are estimated at the date of grant based on historical experience. We use the market price of our common stock on the date of grant to calculate the fair value of each grant of restricted stock and restricted stock units.
We recorded $1,438, $956 and $610 of stock-based compensation as part of selling, general and administrative expenses for fiscal 2012, 2011 and 2010, respectively.
We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair value of our common stock at the date of exercise over the exercise price of the options, and dividends paid on vested restricted stock units. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. The total tax benefit realized from stock option exercises, shares issued and dividend payments for vested restricted stock units for fiscal 2012, 2011 and 2010 was $102, $37 and $62, respectively. Cash received from stock option exercises was $0, $197 and $454 for fiscal 2012, 2011 and 2010, respectively.
Note 13: Savings Plan, Employee Stock Ownership Plan and Retirement Plan
We maintain a Savings Plan (401(k)) and a frozen Employee Stock Ownership Plan (ESOP). Employees become eligible to participate in the 401(k) after 90 days of employment. We have the option to match contributions of participants at a rate we determine each year. For participants with three or more years of service, we also may elect to make additional discretionary matching contributions in excess of the rate elected for participants with less than three years of service.
The Board of Directors determines the amount to be contributed annually to the 401(k) in cash, provided that such contributions shall not exceed the amount deductible for federal income tax purposes. Cash contributions to the 401(k) of $728, $483 and $259 were made for fiscal 2012, 2011 and 2010, respectively.
The ESOP was established in 1975 and was frozen in 1994, at which time all participants became fully vested. Contributions to the ESOP were invested primarily in our common stock. The ESOP held 18,913 shares of our common stock and cash of $147 at May 31, 2012.
We have a Supplemental Executive Retirement Plan (SERP) that provides for automatic deferral of contributions in excess of the maximum amount permitted under the 401(k) plan for our executives who choose to participate. The SERP is a non-qualified deferred compensation program, and we have an unfunded contractual obligation under this plan. We have the option to match contributions of participants at a rate we determine each year. Cash contributions to the SERP were $30, $14 and $5 for fiscal 2012, 2011 and 2010, respectively. As of May 31, 2012 and 2011, we had $2,370 and $2,671, respectively, of obligations for this plan included in accrued expenses. We have investments in money market and stock funds, as directed by the participants, of $2,370 and $2,671 as of May 31, 2012 and 2011, respectively, included in other assets.
Note 14: Segment Reporting and Related Disclosures
Accounting guidance establishes reporting standards for an enterprises operating segments and related disclosures about its products, services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in
F-22
assessing performance. In order to determine our operating segments, we considered the following: an operating segment is a component of an enterprise (i) that engages in business activities from which it may earn revenues and incur expenses, (ii) whose operating results are regularly reviewed by the enterprises chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. In accordance with this guidance, we have identified two operating segments: the rental, lease and sale of T&M and of DP equipment.
Although we have separate operating segments for T&M and DP equipment, these two segments are aggregated into a single reportable segment because they have similar economic characteristics and qualitative factors. The T&M and DP segments have similar long-term average gross margins, and both rent, lease and sell electronic equipment to large corporations, purchase directly from major manufacturers, configure and calibrate the equipment, and ship directly to customers.
Our equipment pool, based on acquisition cost, comprised $409,686 of T&M equipment and $37,595 of DP equipment at May 31, 2012 and $347,138 of T&M equipment and $39,654 of DP equipment at May 31, 2011.
Revenues for these operating segments were as follows for the fiscal year ended May 31:
T&M | DP | Total | ||||||||||
|
||||||||||||
2012 |
||||||||||||
Rentals and leases |
$ | 113,540 | $ | 16,197 | $ | 129,737 | ||||||
Sales of equipment and other revenues |
116,417 | 2,400 | 118,817 | |||||||||
|
||||||||||||
$ | 229,957 | $ | 18,597 | $ | 248,554 | |||||||
|
||||||||||||
2011 |
||||||||||||
Rentals and leases |
$ | 101,273 | $ | 16,789 | $ | 118,062 | ||||||
Sales of equipment and other revenues |
108,450 | 2,217 | 110,667 | |||||||||
|
||||||||||||
$ | 209,723 | $ | 19,006 | $ | 228,729 | |||||||
|
||||||||||||
2010 |
||||||||||||
Rentals and leases |
$ | 77,874 | $ | 16,327 | $ | 94,201 | ||||||
Sales of equipment and other revenues |
49,282 | 2,384 | 51,666 | |||||||||
|
||||||||||||
$ | 127,156 | $ | 18,711 | $ | 145,867 | |||||||
|
No single customer accounted for more than 10% of total revenues during fiscal 2012, 2011 or 2010.
Selected country information is presented below:
Year ended May 31, | 2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Revenues: 1 |
||||||||||||
U.S. |
$ | 214,354 | $ | 199,861 | $ | 124,618 | ||||||
Other 2 |
34,200 | 28,868 | 21,249 | |||||||||
|
||||||||||||
Total |
$ | 248,554 | $ | 228,729 | $ | 145,867 | ||||||
|
||||||||||||
As of May 31, | 2012 | 2011 | 2010 | |||||||||
|
||||||||||||
Net Long Lived Assets: 3 |
||||||||||||
U.S. |
$ | 211,759 | $ | 180,591 | $ | 166,533 | ||||||
Other 2 |
49,595 | 33,491 | 25,206 | |||||||||
|
||||||||||||
Total |
$ | 261,354 | $ | 214,082 | $ | 191,739 | ||||||
|
1 | Revenues by country are based on the location of shipping destination, whether the order originates in the U.S. parent or a foreign subsidiary. |
2 | Other consists of other foreign countries that each individually accounts for less that 10% of the total revenues or assets. |
F-23
3 | Net long-lived assets include rental and lease equipment, other property, goodwill and intangibles, net of accumulated depreciation and amortization. |
Note 15: Quarterly Information (Unaudited)
Summarized quarterly financial data for fiscal 2012 and 2011 was as follows:
Total | Gross | Income Before |
Net | Earnings per share | ||||||||||||||||||||
Revenues | Profit | Taxes | Income | Basic | Diluted | |||||||||||||||||||
|
||||||||||||||||||||||||
Fiscal Year 2012 |
||||||||||||||||||||||||
First Quarter |
$ | 58,650 | $ | 24,513 | $ | 11,913 | $ | 8,505 | $ | 0.35 | $ | 0.35 | ||||||||||||
Second Quarter |
61,643 | 25,368 | 9,735 | 6,019 | 0.25 | 0.25 | ||||||||||||||||||
Third Quarter |
60,079 | 23,563 | 8,023 | 4,995 | 0.21 | 0.21 | ||||||||||||||||||
Fourth Quarter |
68,182 | 26,603 | 10,334 | 6,253 | 0.26 | 0.26 | ||||||||||||||||||
|
||||||||||||||||||||||||
Annual totals |
$ | 248,554 | $ | 100,047 | $ | 40,005 | $ | 25,772 | $ | 1.07 | $ | 1.07 | ||||||||||||
|
||||||||||||||||||||||||
Fiscal Year 2011 |
||||||||||||||||||||||||
First Quarter |
$ | 50,825 | $ | 21,947 | $ | 8,650 | $ | 5,221 | $ | 0.22 | $ | 0.22 | ||||||||||||
Second Quarter |
53,277 | 23,271 | 9,707 | 7,119 | 0.30 | 0.30 | ||||||||||||||||||
Third Quarter |
59,450 | 22,557 | 8,336 | 5,077 | 0.21 | 0.21 | ||||||||||||||||||
Fourth Quarter |
65,177 | 26,383 | 10,596 | 6,339 | 0.27 | 0.26 | ||||||||||||||||||
|
||||||||||||||||||||||||
Annual totals |
$ | 228,729 | $ | 94,158 | $ | 37,289 | $ | 23,756 | $ | 0.99 | $ | 0.99 | ||||||||||||
|
F-24
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos. 333-130487, 333-110194, and 333-17295 on Form S-8 of our reports dated August 10, 2012, relating to the consolidated financial statements of Electro Rent Corporation, and the effectiveness of Electro Rent Corporations internal control over financial reporting, appearing in this Annual Report on Form 10-K of Electro Rent Corporation for the year ended May 31, 2012.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, CA
August 10, 2012
EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a) Certification
By Principal Executive Officer
I, Daniel Greenberg, certify that:
1. I have reviewed this Annual Report on Form 10-K of Electro Rent Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 10, 2012
/s/ Daniel Greenberg |
Daniel Greenberg Chief Executive Officer |
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a) Certification
By Principal Financial Officer
I, Craig R. Jones, certify that:
1. I have reviewed this Annual Report on Form 10-K of Electro Rent Corporation (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 10, 2012
/s/ Craig R. Jones |
Craig R. Jones Chief Financial Officer |
EXHIBIT 32.1
Section 1350 Certification
By Principal Executive Officer
I, Daniel Greenberg, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Electro Rent Corporation (the Company) for the fiscal year ended May 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request.
Dated: August 10, 2012
/s/ Daniel Greenberg |
Daniel Greenberg Chief Executive Officer |
EXHIBIT 32.2
Section 1350 Certification
By Principal Financial Officer
I, Craig R. Jones, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Electro Rent Corporation (the Company) for the fiscal year ended May 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request.
Dated: August 10, 2012
/s/ Craig R. Jones |
Craig R. Jones Chief Financial Officer |
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MQ$I7*JZM>L[>H*>*;P41TMM,;(;&:R HD Note 3: Acquisition Equipment Management Technology, Inc. On
August 24, 2011, pursuant to an Asset Purchase Agreement (“APA”), we completed the purchase of certain assets and the assumption of specified post-closing liabilities of Equipment Management Technology, Inc., a Nevada Corporation
(“EMT”), for cash consideration of $10,673. EMT, headquartered in Las Vegas, Nevada, was a provider of electronic T&M equipment. We acquired EMT in order to facilitate growth in our T&M business. EMT had previously filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada. The sale was approved by the Bankruptcy Court on August 11, 2011, and the related sale order was issued on
August 12, 2011. At closing, $500 was deposited into an escrow account for any post-closing adjustments that reduce the purchase price. We have accounted for the acquisition of EMT as a business combination in accordance with accounting
guidance. At August 31, 2011, we completed our estimates of the fair value of rental and lease equipment and deferred revenue. Due to the timing of
the acquisition, we completed our evaluation of intangible assets and accounts receivable in our second quarter ended November 30, 2011. We acquired gross accounts receivable of $972, of which an estimated $430 is not expected to be collected,
resulting in a fair value of $542. Under accounting guidance, a bargain purchase gain results if the fair value of the purchase consideration is less than the net fair value of the assets acquired and liabilities assumed. We recorded a bargain
purchase gain of $3,194, net of deferred taxes, related to our acquisition of EMT at August 31, 2011. We believe that we were able to negotiate a bargain purchase price as a result of our access to the liquidity necessary to complete the
transaction and EMT’s recurring losses and recent bankruptcy filing. The following table provides the estimated fair
values of the assets acquired and liabilities assumed as of the date of acquisition. Total cash consideration Preliminary purchase price allocation: Accounts receivable Rental and lease equipment Deferred tax liability Deferred revenue Net assets acquired Bargain purchase gain, net of deferred taxes of $2,092 The bargain purchase gain is classified separately in our condensed consolidated statements of operations. Acquisition-related transaction costs of $55 were accounted for as expenses in the periods in which the costs were incurred and are included in our selling, general
and administrative expenses during fiscal 2012. The acquisition of EMT was an asset purchase, and EMT’s operations were integrated with ours
immediately after the acquisition date. Revenues and income before income taxes from the acquired assets included in our consolidated statements of operations were $5,232 and $2,862, respectively, for fiscal 2012. During the second and third quarters of fiscal 2012, we increased the bargain purchase gain by a total of $396 ($241, net of deferred tax), consisting of
(i) $140, representing the estimated fair value of customer relationships acquired, (ii) $273, of post-closing adjustments, which were disbursed from the escrow funds in accordance with the APA, offset by (iii) $17, representing the
final determination of assets acquired and other components of the purchase price. Supplemental pro forma information reflecting the acquisition of EMT
as if it occurred on June 1, 2010 is not practicable because we are not able to obtain reliable historical financial information for 2010 and 2011, primarily due to a deterioration of the organization and controls leading up to and following
EMT’s February 2011 bankruptcy filing. Telogy, LLC
We recorded additional bargain purchase gain associated with our March 31, 2010 acquisition of Telogy LLC (“Telogy”) of $342 ($202, net of deferred tax), during the fiscal year ended May 31,
2011. The increase in the bargain purchase gain consisted of (i) $260, representing the final determination of assets acquired and other components of the purchase price in accordance with specific provisions of the APA, and (ii) $82,
resulting from a final determination of fair value of certain assets and liabilities acquired from Telogy. ;N!O-;KSY
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12 Months Ended
Acquisition [Abstract]
Acquisition
$
10,673
542
15,896
(2,092
)
(479
)
13,867
$
(3,194
)