SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED FEBRUARY 28, 2001
COMMISSION FILE NUMBER 0-9061
ELECTRO RENT CORPORATION
Exact name of registrant as specified in its charter
CALIFORNIA 95-2412961
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6060 SEPULVEDA BOULEVARD
VAN NUYS, CALIFORNIA 91411-2501
(Address of principal executive offices) (Zip code)
(818) 786-2525
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X NO
At April 6, 2001 registrant had 24,478,245 shares of common stock
outstanding.
ELECTRO RENT CORPORATION
FORM 10-Q
FEBRUARY 28, 2001
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Statements of Income for the Three
and Nine Months Ended February 28, 2001 and February 29, 2000 3
Condensed Consolidated Balance Sheets at
February 28, 2001 and May 31, 2000 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended February 28, 2001 and February 29, 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II: OTHER INFORMATION 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
NOTE ON FORWARD LOOKING STATEMENTS
The Company believes that certain statements herein constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words and phrases "looking ahead," "we are
confident," "should be," "will be," predicted," "believe," "expect" and
"anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties include, but are not limited to,
those risk factors set forth generally throughout the sections entitled
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and specifically under "Risk Factors" and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
May 31, 2000.
Part I. FINANCIAL INFORMATION
- -----------------------------------
Item 1. Financial Statements
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
Three Months Ended Nine Months Ended
February 28,February 29,February 28,February 29,
2001 2000 2001 2000
-------- -------- --------- ---------
Revenues:
Rentals and leases $ 42,417 $ 47,601 $ 134,785 $ 152,166
Sales of equipment
and other revenues 8,335 11,488 27,817 31,141
-------- -------- --------- ---------
Total revenues 50,752 59,089 162,602 183,307
-------- -------- --------- ---------
Costs and expenses:
Depreciation of equipment 17,862 23,254 55,508 73,530
Costs of revenues other
than depreciation 6,250 10,352 19,438 26,844
Selling, general and
administrative expenses 15,181 15,521 47,230 49,458
Interest (income) expense, net (620) 1,270 (12) 4,512
-------- -------- --------- ---------
Total costs and expenses 38,673 50,397 122,164 154,344
-------- -------- --------- ---------
Income before income taxes 12,079 8,692 40,438 28,963
Income taxes 4,589 3,303 15,366 11,005
-------- -------- --------- ---------
Net income $ 7,490 $ 5,389 $ 25,072 $ 17,958
======== ======== ========= =========
Earnings per share:
Basic $ 0.31 $ 0.22 $ 1.03 $ 0.73
Diluted $ 0.30 $ 0.22 $ 1.01 $ 0.72
Average shares used in
per share calculation:
Basic 24,425 24,621 24,390 24,547
Diluted 24,786 24,982 24,734 24,972
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 3
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (000 omitted)
ASSETS
February 28, May 31,
2001 2000
--------- ---------
Cash and cash equivalents $ 43,935 $ 1,605
Accounts receivable, net
of allowance for doubtful accounts 28,093 29,862
Rental and lease equipment, net
of accumulated depreciation 163,415 190,107
Other property, net of accumulated
depreciation and amortization 19,288 20,608
Goodwill and intangibles, net of amortization 37,586 59,719
Other 4,167 4,534
--------- ---------
$ 296,484 $ 306,435
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ - $ 21,800
Accounts payable 15,187 22,635
Accrued expenses 21,351 24,921
Deferred income taxes 15,567 15,414
--------- ---------
Total liabilities 52,105 84,770
--------- ---------
Shareholders' equity:
Common stock 11,762 11,139
Retained earnings 232,617 210,526
--------- ---------
Total shareholders' equity 244,379 221,665
--------- ---------
$ 296,484 $ 306,435
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 4
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (000 omitted)
Nine Months Ended
February 28,February 29,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 25,072 $ 17,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 58,845 77,185
Provision for losses on accounts receivable 1,874 923
Gain on sale of equipment (8,133) (3,907)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (105) 8,900
(Increase) decrease in other assets 9 (851)
Decrease in accounts payable (6,318) (6,124)
Decrease in accrued expenses (3,570) (4,241)
Increase in deferred income taxes 153 109
--------- ---------
Net cash provided by operating activities 67,827 89,952
--------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment 23,974 27,025
Proceeds from purchase price settlement (Note 6) 20,800 -
Payments for purchase of rental and lease equipment (45,813) (61,885)
Payments for purchase of other property (300) (247)
--------- ---------
Net cash used in investing activities (1,339) (35,107)
--------- ---------
Cash flows from financing activities:
Decrease in short-term bank borrowings (21,800) (58,400)
Proceeds from issuance of common stock 623 377
Payment for repurchase of common stock (2,981) -
--------- ---------
Net cash used in financing activities (24,158) (58,023)
--------- ---------
Net increase (decrease) in cash and cash equivalents 42,330 (3,178)
Cash and cash equivalents at beginning of period 1,605 4,039
--------- ---------
Cash and cash equivalents at end of period $ 43,935 $ 861
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -- Basis of Presentation
- -----------------------------------
The unaudited consolidated financial statements are condensed and do not
contain all information required by generally accepted accounting principles
to be included in a full set of financial statements. The condensed
consolidated financial statements include Electro Rent Corporation and the
accounts of its wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated. The
information furnished reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the financial position and the
results of operations of the Company. All such adjustments are of a normal
recurring nature.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Impairment of Assets
- ----------------------------
The carrying value of equipment held for rental and lease is assessed
quarterly and/or when factors indicating an impairment are present. The
Company recognizes impairment losses on equipment held for rental and lease
when the expected future cash flows are less than the asset's carrying value,
in which case the asset is written down to its estimated recoverable value.
The Company would recognize impairment losses on goodwill when expected future
cash flows from the related operations are less than the carrying value.
Note 3 -- Interest and Income Taxes Paid
- -------------------------------------------
Total interest paid during the nine month periods ended February 28, 2001 and
February 29, 2000 was $230,000 and $3,949,000, respectively. Total income
taxes paid during the nine month period ended February 28, 2001 were
$14,903,000 compared to $15,040,000 during the same period in the prior year.
Interest and income taxes paid will vary from amounts recorded in the
financial statements.
Note 4 -- Noncash Investing and Financing Activities
The Company acquired equipment totaling $18,817,000 and $19,947,000 as of
February 28, 2001 and May 31, 2000, respectively, and $23,054,000 and
$14,997,000 as of February 29, 2000 and May 31, 1999, respectively, payable
during subsequent quarters.
Note 5 -- Capital Leases
The Company has certain customer leases providing bargain purchase options
with a portion of lease revenue deferred until option exercise. At February
28, 2001 investment in sales-type leases of $1,296,000 net of deferred
interest of $68,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Note 6 -- Acquisition Purchase Price Settlement
- ----------------------------
On December 13, 2000, the Company entered into a settlement agreement to fully
resolve its closing balance sheet and purchase price disagreements with GE
Capital Technology Management Services ("TMS"), regarding the Company's
acquisition of the TMS computer and test and measurement equipment rental
business. The Company received the related settlement payment of $20.8
million on December 14, 2000.
On November 14, 1997, the Company acquired the TMS business for a purchase
price of approximately $240 million. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and assumed liabilities were
recorded at their estimated fair value at the date of the acquisition. Before
the settlement, the purchase price exceeded the fair market value of the
tangible net assets acquired resulting in goodwill of approximately $60
million.
The TMS acquisition agreement included provisions for a reduction in the
purchase price paid by the Company in the event there were objections to the
TMS closing date balance sheet. The Company's objections were subject to
resolution as set forth in the TMS acquisition agreement and were the subject
of on-going discussions between the parties. The settlement related to these
objections has been used primarily to reduce the TMS goodwill originally
recorded.
Note 7 -- Comprehensive Income
- ----------------------------
SFAS No. 130, "Reporting Comprehensive Income," establishes standards to
measure all changes in equity that result from transactions and other economic
events other than transactions with shareholders. Comprehensive income is the
total of net income and all other non-shareholder changes in equity. Other
than net income, the Company has no comprehensive income.
Note 8 -- Segment Reporting
- ----------------------------
The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," at May 31, 1999. SFAS No. 131 establishes annual
and interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and major
customers. Under SFAS No. 131, the Company's operations are treated as one
operating segment as it only reports profit and loss information on an
aggregate basis to the chief operating decision maker of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------
The following discussion addresses the financial condition of the Company as
of February 28, 2001 and the results of operations for the nine month period
ended February 28, 2001. This discussion should be read in conjunction with
the Management's Discussion and Analysis section included in the Company's
2000 Annual Report on Form 10-K (pages 13-15) to which the reader is directed
for additional information.
Results of Operations
- ----------------------------
Comparison of Three Months Ended February 28, 2001 and February 29, 2000
Total revenues for the three months ended February 28, 2001 decreased 14.0% to
$50.8 million from $59.1 million, primarily as a result of continuing
attrition of the TMS business acquired in November 1997 and a generally weak
PC market during the last twelve months, partially offset by continuing
improvement of test and measurement equipment rentals in the
telecommunications segment. Rental and lease revenues decreased 10.9% to
$42.4 million, largely for the reasons noted above, and sales of equipment and
other revenues decreased 27.4% to $8.3 million.
Depreciation of equipment decreased from 48.9% of rental and lease revenues in
the third quarter of fiscal 2000 to 42.1% of rental and lease revenues in the
third quarter of fiscal 2001. This decrease is primarily due to a large
portion of computers acquired from TMS in fiscal 1998 becoming fully
depreciated in the last half of fiscal 2000. The 23.2% decline in
depreciation from the prior year period more than offset the 10.9% decline in
rental and lease revenue noted above. PC equipment utilization continued a
steady decline to its lowest level since the TMS acquisition, while T&M
equipment utilization remained near its highest level since the acquisition.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which decreased from 90.8% of equipment sales in the third
quarter of fiscal 2000 to 71.8% of equipment sales in the third quarter of
fiscal 2001. This cost ratio decrease primarily results from the sale of
equipment that is generally more depreciated than in the prior fiscal year.
Selling, general and administrative expenses totaled $15.2 million for the
third quarter of fiscal 2001, or 29.9% of revenues, as compared to $15.5
million, or 26.3% of revenues, for the third quarter of fiscal 2000. This
expense ratio increase reflects a 14.0% decline in total revenues, compared
with a 1.9% decline in SG&A which resulted from a reduction in personnel and
the closing of certain locations.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and taxes were $11.5 million or 22.6% of total
revenues in the third quarter of fiscal 2001 compared to $10.0 million or
16.9% of total revenues in the third quarter of fiscal 2000.
Net interest income and expense changed from expense of $1.3 million in the
third quarter of fiscal 2000 to income of $0.6 million in the third quarter of
fiscal 2001. This change is due to the repayment of all bank borrowings
during the second quarter of fiscal 2001, and subsequent investment of cash in
money market instruments. Bank borrowings totaled $49.1 million at February
29, 2000.
Comparison of Nine Months Ended February 28, 2001 and February 29, 2000
Total revenues for the nine months ended February 28, 2001 decreased 11.3% to
$162.6 million from $183.3 million, primarily as a result of continuing
attrition of the TMS business acquired in November 1997 and a generally weak
PC market during the last twelve months, partially offset by continuing
improvement of test and measurement equipment rentals in the
telecommunications segment. Rental and lease revenues decreased 11.4% to
$134.8 million, largely for the reasons noted above, and sales of equipment and
other revenues decreased 10.6% to $27.8 million.
Depreciation of equipment decreased from 48.3% of rental and lease revenues in
the first nine months of fiscal 2000 to 41.2% of rental and lease revenues in
the first nine months of fiscal 2001. This decrease is primarily due to a
large portion of computers acquired from TMS in fiscal 1998 becoming fully
depreciated in the last half of fiscal 2000.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which decreased from 85.5% of equipment sales in the first
nine months of fiscal 2000 to 66.1% of equipment sales in the first nine
months of fiscal 2001. This cost ratio decrease primarily results from the
sale of equipment that is generally more depreciated than in the prior fiscal
year and several non-recurring customer settlements.
Selling, general and administrative expenses totaled $47.2 million for the
first nine months of fiscal 2001, or 29.0% of revenues, as compared to $49.5
million, or 27.0% of revenues, for the first nine months of fiscal 2000. This
expense ratio increase reflects the 11.3% decline in total revenues, compared
with a 4.6% decline in SG&A which resulted from a reduction in personnel and
the closing of certain locations.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and taxes were $40.4 million or 24.9% of total
revenues in the first nine months of fiscal 2001 compared to $33.5 million or
18.3% of total revenues in the first nine months of fiscal 2000.
Net interest income and expense changed from expense of $4.5 million in the
first nine months of fiscal 2000 to minimal income in the first nine months of
fiscal 2001. This change is due to the repayment of all bank borrowings
during the second quarter of fiscal 2001, and subsequent investment of cash in
money market instruments. Bank borrowings totaled $49.1 million at February
29, 2000.
Liquidity and Capital Resources
The Company's primary capital requirements are purchases of rental and lease
equipment and debt service, although all bank borrowings were repaid in the
second quarter of fiscal 2001. The Company purchases equipment throughout
each year to replace equipment which has been sold and to maintain adequate
levels of rental equipment to meet existing and new customer needs. The
market for personal computers has declined during the last twelve months.
However, during the first nine months of fiscal 2001, purchases of equipment
continued to be made to support some areas of growth for both personal
computers and test and measurement equipment, and to keep the equipment pool
technologically up-to-date. Cash and cash equivalents are likely to continue
to accumulate, unless the Company decides to buy back additional shares,
finance an acquisition, or pursue other opportunities.
During the nine months ended February 28, 2001 and February 29, 2000 net cash
provided by operating activities was $67.8 million and $90.0 million,
respectively. The decrease in fiscal 2001 results primarily from the decline
in PC rental and lease revenues and the settlement of all accounts related to
the GE TMS acquisition. During the nine months ended February 28, 2001 and
February 29, 2000 net cash used in investing activities was $1.3 million and
$35.1 million, respectively. This decrease is primarily attributable to the
receipt of a $20.8 million purchase price reduction and the settlement of all
accounts related to the GE TMS acquisition and a lower level of payments for
data products equipment purchases. During the first nine months of fiscal
2001 net cash used in financing activities was $24.2 million, compared to
$58.0 million in the first nine months of fiscal 2000, reflecting a decline in
repayments of bank borrowings, partially offset by the repurchase of $2.98
million of the Company's common stock in June 2000.
On November 14, 2000, the Company's previous revolving line of credit expired.
On December 1, 2000, the Company entered into a agreement with a bank to
provide a new revolving line of credit for $25.0 million, subject to certain
restrictions, to meet equipment acquisition needs as well as working capital
and general corporate requirements. The Company had no borrowings outstanding
at February 28, 2001.
Risk Factors
The following risks should be considered in evaluating the Company's
business and securities. These matters should be considered along with the
other information included in this Quarterly Report on Form 10-Q and in
the Company's Annual Report on Form 10-K for the year ended May 31, 2000.
Operating results are subject to quarterly fluctuations
The Company's 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, including, but not limited to,
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.
The Company's growth strategy depends on product and market development
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards, and declining prices of personal
computers. The Company's operating results will depend to a significant
extent on its ability to continue to introduce new services and to control
and/or reduce costs on existing services. The success of these and other new
offerings is dependent on several factors, including proper identification of
customer needs, cost, timely completion and introduction, differentiation from
offerings of the Company's competitors and market acceptance.
The Company's success depends in part on anticipating and adapting to new
technological developments and changing market conditions
The market for rental and leasing services is characterized by rapid
technological developments, evolving customer demands and frequent new product
announcements and enhancements. Failure to anticipate or adapt to new
technological developments or to recognize changing market conditions could
adversely affect the Company's business, including its rental and leasing
volume, revenue and earnings contribution.
The Company's growth strategy depends in part on the Internet consulting
services and communications industries. If those industries do poorly,
the Company's business and financial results may suffer
The emergence of Internet consulting services and the communications market
(facilities-based broadband communications companies, Internet Service
Providers and other telecommunications carriers) and the growth of broadband
networks, provides the Company with industries in which rental and leasing is
an attractive alternative to ownership. Some clients of the Company's
Internet consulting services customers and some of the Company's
communications equipment customers are companies with accumulated net deficits
and extensive liquidity requirements. To the extent that these companies are
unable to meet their business plans, or unable to obtain funding or funding at
reasonable rates to complete their business plans, there could be an increase
in the Company's credit losses above historical levels.
Economic conditions and other factors may negatively impact the Company's
operations
With respect to economic conditions, a recession can cause customers to put
off new investments and increase the Company's bad debt experience.
Other uncertainties include continued business conditions, competition,
including competition from other technology service providers, reductions in
technology budgets and related spending plans and price competition from other
technology service providers.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of the Company's common stock
would likely be materially and adversely affected.
Item 3. Qualitative And Quantitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company's primary market risk exposure historically has been interest rate
risk, primarily related to its borrowings under its unsecured revolving credit
facility. However, a changing interest rate environment does not necessarily
impact the Company's margins since the effects of higher or lower borrowing
costs may be reflected in the rates on newly rented and leased assets. The
Company currently has no borrowings or derivative financial instruments
outstanding.
The Company is also subject to foreign currency rate risk relating to rentals
and leases denominated in Canadian dollars. The Company has determined that
hedging of these assets is not cost effective and instead attempts to minimize
currency exposure risk through working capital management. The Company does not
believe that any foreseeable change in currency rates would have a material
effect on its financial position or results of operations.
Part II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
ELECTRO RENT CORPORATION
DATED: April 12, 2001 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer