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 NOVEMBER 30, 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 January 13, 1999 registrant had 24,454,249 shares of common stock
outstanding.
ELECTRO RENT CORPORATION
FORM 10-Q
NOVEMBER 30, 1998
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended November 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets at
November 30, 1998 and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended November 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: OTHER INFORMATION 11
SIGNATURES 12
Page 2
Part I. FINANCIAL INFORMATION
- -----------------------------------
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
Three Months Ended Six Months Ended
November 30 November 30
1998 1997 1998 1997
-------- -------- --------- ---------
Revenues:
Rentals and leases $ 60,538 $ 42,394 $ 122,704 $ 76,786
Sales of equipment
and other revenues 8,455 8,082 18,890 12,607
-------- -------- --------- ---------
Total revenues 68,993 50,476 141,594 89,393
-------- -------- --------- ---------
Costs and expenses:
Depreciation of equipment 26,880 15,116 54,019 26,731
Costs of revenues other
than depreciation 7,211 8,135 19,302 12,292
Selling, general and
administrative expenses 20,446 13,980 43,606 25,188
Interest 3,347 983 7,200 1,096
-------- -------- --------- ---------
Total costs and expenses 57,884 38,214 124,127 65,307
-------- -------- --------- ---------
Income before income taxes 11,109 12,262 17,467 24,086
Income taxes 4,554 5,027 7,161 9,874
-------- -------- --------- ---------
Net income $ 6,555 $ 7,235 $ 10,306 $ 14,212
======== ======== ========= =========
Earnings per share:
Basic $ 0.27 $ 0.30 $ 0.42 0.59
Diluted $ 0.26 $ 0.29 $ 0.41 $ 0.57
Average shares used in
per share calculation:
Basic 24,431 24,302 24,425 24,230
Diluted 24,934 25,102 25,086 25,020
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 3
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (000 omitted)
ASSETS
November 30, May 31,
1998 1998
--------- ---------
Cash $ 2,304 $ 2,281
Accounts receivable, net 59,319 66,518
Rental and lease equipment, net
of accumulated depreciation 264,629 293,048
Other property, net of accumulated
depreciation and amortization 23,073 25,867
Goodwill, net 62,343 63,346
Other 5,391 6,836
--------- ---------
$ 417,059 $ 457,896
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 177,000 $ 226,900
Accounts payable 20,446 20,733
Accrued expenses 20,968 21,749
Deferred income taxes 16,291 16,505
--------- ---------
Total liabilities 234,705 285,887
--------- ---------
Shareholders' equity:
Common stock 10,449 10,410
Retained earnings 171,905 161,599
--------- ---------
Total shareholders' equity 182,354 172,009
--------- ---------
$ 417,059 $ 457,896
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 4
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (000 omitted)
Six Months Ended
November 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 10,306 $ 14,212
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,500 27,608
Provision for losses on accounts receivable 1,434 419
Gain on sale of equipment (483) (2,480)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 5,765 (11,933)
(Increase) decrease in other assets 1,445 (3,387)
Increase (decrease) in accounts payable 5,758 (994)
Increase (decrease) in accrued expenses (781) 6,199
Decrease in deferred income taxes (214) (297)
--------- ---------
Net cash provided by operating activities 79,730 29,347
--------- ---------
Cash flows from investing activities:
Payment for acquisition of business - (239,212)
Proceeds from sale of equipment 16,261 10,937
Payments for purchase of rental and lease equipment (45,845) (46,656)
Payments for purchase of other property (262) (980)
--------- ---------
Net cash used in investing activities (29,846) (275,911)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term bank borrowings (49,900) 246,800
Proceeds from issuance of common stock 39 96
--------- ---------
Net cash provided by (used in) financing activities (49,861) 246,896
--------- ---------
Net increase in cash 23 332
Cash at beginning of period 2,281 2,207
--------- ---------
Cash at end of period $ 2,304 $ 2,539
========= =========
<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 Share
- -----------------------------------
Shares outstanding for the three and six month periods ended November 30,
1997 have been restated to give effect to the two-for-one stock split effected
in the form of a 100% stock dividend on April 30, 1998.
Note 3 -- Interest and Income Taxes Paid
- -------------------------------------------
Total interest paid during the six month periods ended November 30, 1998
and 1997 was $7,205,000 and $568,000, respectively. Total income taxes paid
during the six month period ended November 30, 1998 were $6,523,000 compared
to $11,701,000 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 $13,186,000 and $19,231,000 as
of November 30, 1998 and May 31, 1998, respectively, and $11,674,000 and
$19,405,000 as of November 30, 1997 and May 31, 1997, respectively, payable
during subsequent quarters.
Note 5 -- Capital Leases
- ----------------------------
The Company has certain customer leases providing bargain purchase
options with a portion of lease revenue deferred until option exercise. At
November 30, 1998 investment in sales-type leases of $1,189,000 net of
deferred interest of $75,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Page 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion addresses the financial condition of the Company as
of November 30, 1998 and the results of operations for the six month periods
ended November 30, 1998 and 1997. This discussion should be read in
conjunction with the Management's Discussion and Analysis section included in
the Company's Annual Report on Form 10-K (pages 13-14) to which the reader is
directed for additional information.
On November 14, 1997, the Company acquired the computer and test and
measurement rental business of GE Capital Technology Management Services
(TMS), a competitor of Electro Rent, for a purchase price of approximately
$240.8 million.
Results of Operations
Comparison of Three Months Ended November 30, 1998 and 1997
Total revenues for the three months ended November 30, 1998 increased 37% to
$69.0 million from $50.5 million, primarily reflecting the acquisition of GE
Technology Management Services (TMS) on November 14, 1997. Rental and lease
revenues increased 43% to $60.5 million and sales of equipment and other
revenues increased 5% to $8.5 million. It is not possible to accurately
determine the effects of the TMS acquisition on revenues because of the almost
immediate integration of all TMS operations. Partially offsetting the
additional revenue base initially provided by the TMS acquisition were the
effects of a significant number of acquired rental contracts disputed by TMS
customers, higher than expected attrition of TMS customers and a generally
weak market during the last twelve months.
Depreciation of equipment increased from 36% of rental and lease revenues in
the second quarter of fiscal 1998 to 44% of rental and lease revenues in the
second quarter of fiscal 1999. This increase is primarily due to lower
equipment utilization since the TMS acquisition, an increased proportion of
lower yield personal computer operating leases in the acquired TMS equipment
pool and an acceleration of depreciation for personal computers which was
implemented at the beginning of fiscal 1999.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales decreased from
86% of equipment sales in the second quarter of fiscal 1998 to 83% of
equipment sales in the second quarter of fiscal 1999. This decrease is
primarily attributable to a lower proportion of personal computer sales in
fiscal 1999 which typically have lower sales margins than test and measurement
equipment. Equipment parts and repair expenses decreased from 3.0% of rental
and lease revenues in the second quarter of fiscal 1998 to 1.9% of rental and
lease revenues in the second quarter of fiscal 1999, primarily due to the
Company's discontinuation of expensing certain personal computer parts which
was effected in conjunction with the change to more accelerated depreciation
for personal computers.
Selling, general and administrative expenses totaled $20.4 million or 30% of
total revenues for the second quarter of fiscal 1999 as compared to $14.0
million or 28% of total revenues for the second quarter of fiscal 1998. The
increase in the expense ratio reflects revenue declines experienced during the
last twelve months, partially offset by cost savings resulting from the
integration of TMS, including the elimination of redundant functions and
facilities.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and taxes were $14.5 million or 21% of total
revenues in the second quarter of fiscal 1999 compared to $13.2 million or 26%
of total revenues in the second quarter of fiscal 1998.
Interest expense increased to $3.3 million in the second quarter of fiscal
1999 from $1.0 million in the second quarter of fiscal 1998. The increase is a
result of additional bank borrowings used to finance the TMS acquisition.
Comparison of Six Months Ended November 30, 1998 and 1997
Total revenues for the six months ended November 30, 1998 increased 58% to
$141.6 million from $89.4 million in the prior year comparable period,
primarily reflecting the acquisition of TMS. Rental and lease revenues
increased 60% to $122.7 million and sales of equipment and other revenues
increased 50% to $18.9 million. It is not possible to accurately determine
the effects of the TMS acquisition on revenues because of the almost immediate
integration of all TMS operations. Partially offsetting the additional
revenue base initially provided by the TMS acquisition were the effects of a
significant number of acquired rental contracts disputed by TMS customers,
higher than expected attrition of TMS customers and a generally weak market
during the last twelve months.
Depreciation of equipment increased from 35% of rental and lease revenues in
the first half of fiscal 1998 to 44% of rental and lease revenues in the first
half of fiscal 1999. This increase is primarily due to lower equipment
utilization since the TMS acquisition, an increased proportion of lower yield
personal computer operating leases in the acquired TMS equipment pool and an
acceleration of depreciation for personal computers which was implemented at
the beginning of fiscal 1999.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from
77% of equipment sales in the first half of fiscal 1998 to 97% of equipment
sales in the first half of fiscal 1999. This increase is primarily
attributable to a weak market for both personal computers and test and
measurement equipment and an increased proportion of personal computer sales.
Equipment parts and repair expenses decreased from 4.7% of rental and lease
revenues in the first half of fiscal 1998 to 2.4% of rental and lease revenues
in the first half of fiscal 1999, primarily due to the Company's
discontinuation of expensing certain personal computer parts which was
effected in conjunction with the change to more accelerated depreciation for
personal computers.
Selling, general and administrative expenses totaled $43.6 million or 31% of
total revenues for the first half of fiscal 1999 as compared to $25.2 million
or 28% of total revenues for the first half of fiscal 1998. The increase in
the expense ratio reflects revenue declines experienced during the last twelve
months, partially offset by cost savings resulting from the integration of
TMS, including the elimination of redundant functions and facilities.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and taxes were $24.7 million or 17% of total
revenues in the first half of fiscal 1999 compared to $25.2 million or 28% of
total revenues in the first half of fiscal 1998.
Interest expense increased to $7.2 million in the first half of fiscal 1999
from $1.1 million in the first half of fiscal 1998. The increase is a result
of additional bank borrowings used to finance the TMS acquisition.
Liquidity and Capital Resources
The Company's primary capital requirements are purchases of rental and lease
equipment and debt service. The Company purchases equipment throughout each
year to replace equipment which has been sold and to maintain adequate levels
of rental equipment to meet existing and new customer needs. The market for
personal computers and test and measurement equipment has declined during the
last twelve months. In spite of the larger equipment pool after the TMS
acquisition, expenditures decreased in the first half of fiscal 1999 as
compared with the comparable prior year period and are expected to continue at
a lower level for the remainder of the year. As a result, bank borrowings are
expected to continue declining.
During the six months ended November 30, 1998 and 1997 net cash provided by
operating activities was $79.7 million and $29.3 million, respectively. The
increase in fiscal 1999 results primarily from the effects of the TMS
acquisition and a decrease in accounts receivable. During the six months
ended November 30, 1998 and 1997 net cash used in investing activities was
$29.8 million and $275.9 million, respectively. This decrease is attributable
to the TMS acquisition in the prior year, partly offset by a lower level of
equipment purchases and increased equipment sales in fiscal 1999. During the
first half of fiscal 1999 net cash used in financing activities was $49.9
million, reflecting decreased bank borrowings primarily from the increase in
net cash provided by operating activities, while in the first half of fiscal
1998 net cash provided by financing activities was $246.9 million, reflecting
increased bank borrowings for the TMS acquisition.
The Company has available a revolving line of credit of $210 million, subject
to certain borrowing base restrictions, to meet acquisition needs as well as
working capital and general corporate requirements. The Company had
borrowings of $177.0 million under the Credit Facility at November 30, 1998.
Year 2000 Compliance
General. The computer systems issue relating to dates beyond 1999 is the
result of many computer programs being written to use and store dates with
only the last two digits of the applicable year. As a result, these programs
may assume that all two digit dates are twentieth century dates. This could
result in system failure, anomalous system behavior or incorrect system
reporting. System failure could, in turn, temporarily affect the Company's
ability to process customer transactions, interface with vendors and engage in
similar normal business activities.
The Company has assessed how it may be impacted. The Company has formulated
and begun implementation of a plan to address all known aspects of the issue.
The Company has already completed a substantial portion of this plan and is on
schedule to fully complete the plan by May 1999.
Software Information Systems. Software information systems consist of the
Company's base financial and operations system (internally-developed PERFECT
system), other smaller scale software applications and other programs
developed internally. All of these systems were found to be substantially
year 2000 compliant with immaterial associated costs.
Vendor Provided Computer Hardware and Operating Systems. Vendor provided
computer hardware and operating systems include all data center equipment (Sun
Microsystems Enterprise 6000) and networks (Novell and Microsoft NT). All of
these systems were found to be substantially year 2000 compliant with the
exception of the Sun 6000 operating system. This will be upgraded in February
1999 with immaterial associated costs.
Communications Systems. Communications systems include all data center
equipment and software systems used to support external communications with
customers, employees, suppliers and business partners, and all corporate
equipment and software systems used to support internal business management
communications. Corporate communications systems have been recently replaced
and/or upgraded. Each significant component of these communications systems
has been tested and all were found to be substantially year 2000 compliant
with immaterial associated costs. The Company is currently evaluating
communications systems at each of its field offices and will make any
necessary replacements and/or upgrades by May 1999. The Company does not
expect any associated costs to be material.
Suppliers and Other Business Partners. This area of the plan called for all
significant suppliers and other business partners to be monitored for year
2000 readiness. The Company is not currently aware of any single vendor or
business partner with year 2000 compliance issues that could have a material
impact on the Company. Year 2000 business transaction tests of all direct
interfaces with vendors and other business partners will be completed by May
1999. The Company can provide no assurance that year 2000 compliance will be
successfully implemented by all of its suppliers.
Contingency Planning. The Company has not yet developed a comprehensive
contingency plan to address the risk of operational problems and costs likely
to result from a failure by the Company or by a supplier or business partner
to address year 2000 readiness. This plan will be developed by the end of May
1999. It will list specific action plans for failure in any of the identified
areas of the year 2000 compliance plan. The Company believes that failure to
complete any of the remaining work to be done will not alone adversely affect
the continuity of the core business. The Company believes its current state
of readiness is on schedule with a conservative plan to be fully year 2000
compliant by May 1999 and that business risks have been minimized. However,
there can be no guarantee that year 2000 compliance issues not yet identified
or fully addressed will not materially affect the Company's operations or
expose it to third party liability.
Part II. OTHER INFORMATION
- ----------------------------
Items 1. through 3.
- ----------------------------
Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Nothing to report.
Item 5.
- ----------------------------
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
Nothing to report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
ELECTRO RENT CORPORATION
DATED: January 13, 1999 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer
Page 13