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, 1998
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 10, 1998 registrant had 12,060,066 shares of common stock
outstanding.
ELECTRO RENT CORPORATION
FORM 10-Q
FEBRUARY 28, 1998
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended February 28, 1998 and 1997 3
Condensed Consolidated Balance Sheets at
February 28, 1998 and May 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended February 28, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II: OTHER INFORMATION 12
SIGNATURES 13
Page 2
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
Three Months Ended Nine Months Ended
February 28 February 28
1998 1997 1998 1997
-------- -------- --------- ---------
Revenues:
Rentals and leases $ 73,313 $ 32,010 $ 150,099 $ 96,881
Sales of equipment
and other revenues 11,879 4,794 24,486 16,045
-------- -------- --------- ---------
Total revenues 85,192 36,804 174,585 112,926
-------- -------- --------- ---------
Costs and expenses:
Depreciation of equipment 31,362 11,440 58,093 33,591
Costs of revenues other
than depreciation 9,513 4,613 21,805 15,409
Selling, general and
administrative expenses 22,057 10,679 47,245 31,201
Interest 4,224 173 5,320 705
-------- -------- --------- ---------
Total costs and expenses 67,156 26,905 132,463 80,906
-------- -------- --------- ---------
Income before income taxes 18,036 9,899 42,122 32,020
Income taxes 7,396 4,058 17,270 13,127
-------- -------- --------- ---------
Net income $ 10,640 $ 5,841 $ 24,852 $ 18,893
======== ======== ========= =========
Net income per common and common
equivalent share $ 0.85 $ 0.47 $ 1.99 $ 1.52
======== ======== ========= =========
Average common and common
equivalent shares outstanding 12,568 12,466 12,556 12,440
======== ======== ========= =========
<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
1998 1997
--------- ---------
Cash $ 48 $ 2,207
Accounts receivable, net 72,320 19,968
Rental and lease equipment, net
of accumulated depreciation 317,119 139,377
Other property, net of accumulated
depreciation and amortization 28,409 19,438
Goodwill, net 44,491 3,135
Other 10,592 4,088
--------- ---------
$ 472,979 $ 188,213
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 250,200 $ 4,200
Accounts payable 26,030 20,096
Accrued expenses 19,350 11,001
Deferred income taxes 13,178 13,696
--------- ---------
Total liabilities 308,758 48,993
--------- ---------
Shareholders' equity
Common stock 10,114 9,965
Retained earnings 154,107 129,255
--------- ---------
Total shareholders' equity 164,221 139,220
--------- ---------
$ 472,979 $ 188,213
========= =========
<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
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 24,852 $ 18,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60,814 34,693
Provision for losses on accounts receivable 3,022 605
Gain on sale of equipment (4,934) (4,169)
Change in operating assets and liabilities:
Increase in accounts receivable (47,049) (1,595)
(Increase) decrease in other assets (3,977) 420
Decrease in accounts payable (4,080) (896)
Increase (decrease) in accrued expenses 1,765 (1,645)
Decrease in deferred income taxes (518) (362)
--------- ---------
Net cash provided by operating activities 29,895 45,944
--------- ---------
Cash flows from investing activities:
Payment for acquisition of business (239,212) -
Proceeds from sale of equipment 21,659 13,912
Payments for purchase of rental and lease equipment (59,228) (51,733)
Payments for purchase of other property (1,422) (873)
--------- ---------
Net cash used in investing activities (278,203) (38,694)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term bank borrowings 246,000 (8,700)
Proceeds from issuance of common stock 149 544
--------- ---------
Net cash provided by (used in) financing activities 246,149 (8,156)
--------- ---------
Net increase (decrease) in cash (2,159) (909)
Cash at beginning of period 2,207 1,394
--------- ---------
Cash at end of period $ 48 $ 485
========= =========
<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 -- Net Income Per Common and Common Equivalent Share
- -----------------------------------
Earnings per share were computed based on the weighted average number of
common and common equivalent shares outstanding of 12,568,000 and 12,466,000
for the three month periods ended February 28, 1998 and 1997 and 12,556,000
and 12,440,000 for the the nine month periods ended February 28, 1998 and
1997.
Note 3 -- Interest and Income Taxes Paid
- -------------------------------------------
Total interest paid during the nine month periods ended February 28,
1998 and 1997 was $3,443,000 and $700,000, respectively. Total income taxes
paid during the nine month period ended February 28, 1998 was $18,340,000
compared to $15,613,000 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 $7,148,000 and $19,405,000 as of
February 28, 1998 and May 31, 1997, respectively, and $17,946,000 and
$15,832,000 as of February 28, 1997 and May 31, 1996, respectively, which was
paid for 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, 1998 investment in sales-type leases of $969,000 net of deferred
interest of $63,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Page 6
Note 6 -- Acquisition
- ----------------------------
On November 14, 1997, the Company acquired the computer and test and
measurement rental business of GE Capital Technology Management Services
(TMS), a business engaged in renting, leasing and selling computers,
workstations and general purpose test and measurement equipment. TMS' finance
leasing business was not purchased. The initial purchase price based on TMS'
estimated tangible net assets at November 14, 1997, was $239.2 million,
payable in cash. The purchase price is subject to adjustment as a result of
an audit of net tangible assets. Financing for the transaction was achieved
through short-term borrowings under a $330 million reducing revolving credit
facility dated as of November 14, 1997.
The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of TMS have been included with those of
the Company since the date of acquisition. The purchase price has been
allocated to assets and liabilities based on preliminary estimates of fair
value as of the date of acquisition. The final allocation of the purchase
price will be determined when appraisals and other studies are completed. As
part of the purchase price allocation, the Company recorded a reserve for
estimated costs to be incurred in the consolidation of duplicate TMS
facilities and termination of employment of certain members of the TMS
management and staff who will not be replaced. Based on the allocation of the
purchase price over the net assets acquired, goodwill of approximately
$41,379,000 was recorded. Such goodwill is being amortized on a straight-line
basis over 40 years. The purchase price has been allocated as follows (in
thousands):
Accounts receivable $ 7,349
Rental and lease equipment 194,542
Other property 10,990
Other assets 1,784
Goodwill 41,379
Accounts payable (10,248)
Accrued expenses (6,584)
$ 239,212
The following unaudited pro forma summary for the nine month periods ended
February 28, 1998 and 1997, combines the consolidated results of operations of
the Company and TMS as if the acquisition had occurred at the beginning of the
respective fiscal years after giving effect to certain adjustments, including
amortization of goodwill, depreciation charges, estimated changes in interest
expense due to acquisition debt, and related income tax effects. The pro
forma results have been prepared for comparative purposes only and do not
purport to indicate the results of operations which would actually have
occurred had the combination been in effect on the dates indicated, or which
may occur in the future. Furthermore, no effect has been given in the pro
forma information for operating and synergistic benefits that are expected to
be realized through the combination of the businesses.
For the Nine Months
Ended February 28,
1998 1997
(In thousands, except per share data)
Net revenues $ 285,442 $ 297,346
Net income $ 31,980 $ 20,212
Earnings per common share $ 2.55 $ 1.62
Average shares outstanding 12,568 12,420
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------
Results of Operations
- ----------------------------
Comparison of Three Months Ended February 28, 1998 and 1997
- -----------------------------------------------------------
Revenues
Total revenues increased 131.5% to $85.2 million for the three months ended
February 28, 1998 from $36.8 million for the three months ended February 28,
1997. Most of the percentage increase is attributed to the acquisition of
GE Capital Technology Management Services (TMS). Rental and lease revenue
for the three months ended February 28, 1998 was $73.3 million, a 129.0%
increase from $32.0 million for the corresponding period in fiscal 1997.
The TMS acquisition resulted in most of the additional rental and lease
revenue for the three months ended February 28, 1998, including the partial
effect of the changing from TMS' accrual method of accounting for revenues
to the Company's method of recognizing revenues when billed. Sales of
equipment and other revenues increased 147.9% to $11.9 million in the three
months ended February 28, 1997 from $4.8 million in the quarter ended
February 28, 1998. Most of the percentage increase is a result of the TMS
acquisition. It is not possible to accurately determine the effects of the
TMS acquisition on revenues because of the almost immediate integration of
all TMS operations.
Costs and Expenses
Depreciation of equipment increased from 35.7% of rental and lease revenue in
third quarter of fiscal 1997 to 42.7% of rental and lease revenue in fiscal
1998. This increase is a result of the change to an accelerated depreciation
method for desktop computers that began in December 1996 and the increased
proportion of lower yield personal computer operating leases in the acquired
TMS equipment pool.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from
68.1% of equipment sales in the third quarter of fiscal 1997 to 83.2% of
equipment sales in fiscal 1998. The majority of this increase is attributable
to increased sales of personal computers with lower margins. Equipment parts
and repair expenses decreased from 5.4% of rental and lease revenue in the
third quarter of fiscal 1997 to 1.9% of rental and lease revenue in fiscal
1998, primarily due to declining PC parts prices and increased bundling of PC
parts in the platforms by manufacturers.
Selling, general and administrative expenses totaled $22.1 million or 25.8% of
total revenues for the quarter ended February 28, 1998 as compared to $10.7
million or 29.0% of total revenues for the quarter ended February 28, 1997.
The increase reflects the significant cost savings resulting from the
integration of TMS, including the elimination of redundant functions and
facilities.
Operating Earnings
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $22.3 million or 26.1% of total revenue in the
third quarter of fiscal 1998 compared to $10.1 million or 27.4% of total
revenue in the third quarter of fiscal 1997.
Interest Expense
Interest expense for the quarter increased to $4,224,000 in fiscal 1998 from
$173,000 in fiscal 1997. The increase is a result of additional bank
borrowings used to finance the TMS acquisition.
Comparison of Nine Months Ended February 28, 1998 and 1997
- -----------------------------------------------------------
Revenues
Total revenues increased 54.6% to $174.6 million for the nine months ended
February 28, 1998 from $112.9 million for the nine months ended February 28,
1997. The acquisition of TMS contributed most of the percentage increase for
the nine months ended February 28, 1998. Rental and lease revenue for the
nine
months ended February 28, 1998 was $150.1 million, a 54.9% increase from $96.9
million for the nine months ended February 28, 1997. The acquisition of TMS
resulted in most of the additional rental and lease revenue for the nine
months
ended February 28, 1998, including the partial effect of changing from TMS'
accrual method of accounting for revenues to the Company's method of
recognizing revenues when billed. Sales of equipment and other revenues
increased 53.1% to $24.5 million in the nine months ended February 28, 1998
from $16.0 million in the nine months ended February 28, 1997. Most of the
percentage increase is a result of the TMS acquisition. It is not possible to
accurately determine the effects of the TMS acquisition on revenues because of
the almost immediate integration of all TMS operations.
Costs and Expenses
Depreciation of equipment increased from 34.6% of rental and lease revenue in
first nine months of fiscal 1997 to 38.7% of rental and lease revenue in
fiscal
1998. This increase is a result of the change to an accelerated depreciation
method for desktop computers that began in December 1996 and the increased
proportion of lower yield personal computer operating leases in the acquired
TMS equipment pool.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from
70.0% of equipment sales in the first nine months of fiscal 1997 to 77.2% of
equipment sales in fiscal 1998. The majority of this increase is attributable
to increased sales of personal computers with lower margins. Equipment parts
and repair expenses decreased from 5.5% of rental and lease revenue in the
first nine months of fiscal 1997 to 3.3% of rental and lease revenue in fiscal
1998, primarily due to declining PC parts prices and increased bundling of PC
parts in the platforms by manufacturers.
Selling, general and administrative expenses totaled $47.2 million or 27.0% of
total revenues for the nine months ended February 28, 1998 as compared to
$31.2 million or 27.6% of total revenues for the nine months ended February
28, 1997. The increase reflects significant cost savings resulting from the
integration of TMS, including the elimination of redundant functions and
facilities.
Operating Earnings
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $47.4 million or 27.1% of total revenue in the
first nine months of fiscal 1998 compared to $32.7 million or 28.9% of total
revenue in the first nine months of fiscal 1997.
Interest Expense
Interest expense for the nine months increased to $5,320,000 in fiscal 1998
from $705,000 in fiscal 1997. The increase is a result of additional bank
borrowings used to finance the TMS acquisition.
Purchases of Rental and Lease Equipment
Payments for the purchase of equipment totaled $59.2 million in the nine
months ended February 28, 1998, an increase of 14.5% from $51.7 million
purchased in the nine months ended February 28, 1997. The increase supports
the growth in equipment rental revenues and replenishes equipment which has
been sold or disposed of.
Liquidity and Capital Resources
- ----------------------------
The Company's primary capital requirements are purchases of rental and lease
equipment and debt service. The Company purchases equipment throughout each
year to replace equipment which has been sold and to maintain adequate levels
of rental equipment to meet existing and new customer needs. As the Company's
growth strategies continue to be implemented, equipment purchases are expected
to increase.
During the nine months ended February 28, 1998 and 1997 net cash provided by
operating activities was $29.9 million and $45.9 million, respectively. The
decrease in fiscal 1998 results primarily from the effects of the TMS
acquisition, including the build-up of accounts receivable, partially offset
by increased depreciation and net income. During the nine months ended
February 28, 1998 and 1997 net cash used in investing activities was $278.2
million and $38.7 million, respectively. In fiscal 1998, approximately $239.2
million was used for the acquisition of TMS. The remaining cash used in
investing activities consists primarily of purchases of rental and lease
equipment. During the nine months ended February 28, 1998 net cash provided in
financing activities was $246.1 million, of which approximately $239.2 million
was borrowed to acquire TMS. During the nine months ended February 28, 1997
net cash used in financing activities was $8.2 million.
The Company has available a revolving line of credit of $330 million, subject
to certain borrowing base restrictions, to meet acquisition and expansion
needs as well as working capital and general corporate requirements. The
Company had borrowings of $250.2 million under the Credit Facility at February
28, 1998.
Part II. OTHER INFORMATION
- ----------------------------
Items 1. through 3.
- ----------------------------
Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to report.
Item 5.
- ----------------------------
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
(b) Reports of Form 8-K
The Company filed one (1) report on form 8-K/A dated January 23, 1998, to
provide the requisite financial statements and pro forma financial statements
relating to the acquisition of GE Capital Technology Management Services.
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 14, 1998 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer
Page 13