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 AUGUST 31, 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 October 9, 1998 registrant had 24,431,424 shares of common stock
outstanding.
<PAGE>
ELECTRO RENT CORPORATION
FORM 10-Q
AUGUST 31, 1998
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three Months
Ended August 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets at
August 31, 1998 and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended August 31, 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 9
SIGNATURES 10
Page 2
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<TABLE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
<CAPTION>
Three Months Ended
August 31
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Rentals and leases $ 62,166 $ 34,392
Sales of equipment
and other revenues 10,435 4,525
--------- ---------
Total revenues 72,601 38,917
--------- ---------
Costs and expenses:
Depreciation of equipment 27,139 11,615
Costs of revenues other
than depreciation 12,091 4,157
Selling, general and
administrative expenses 23,160 11,208
Interest 3,853 113
--------- ---------
Total costs and expenses 66,243 27,093
--------- ---------
Income before income taxes 6,358 11,824
Income taxes 2,607 4,847
--------- ---------
Net income $ 3,751 $ 6,977
========= =========
Earnings per share:
Basic $ 0.15 0.29
Diluted $ 0.15 $ 0.28
Average shares used in per share calculation:
Basic 24,418 24,136
Diluted 25,225 24,960
<FN>
See accompanying notes to
condensed consolidated financial statements.
</TABLE>
Page 3
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<TABLE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (000 omitted)
ASSETS
<CAPTION>
August 31 May 31
1998 1998
--------- ---------
<S> <C> <C>
Cash $ 1,042 $ 2,281
Accounts receivable, net 62,003 66,518
Rental and lease equipment, net
of accumulated depreciation 277,409 293,048
Other property, net of accumulated
depreciation and amortization 25,406 25,867
Goodwill, net 63,052 63,346
Other 6,710 6,836
--------- ---------
$ 435,622 $ 457,896
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 202,100 $ 226,900
Accounts payable 20,549 20,733
Accrued expenses 20,747 21,749
Deferred income taxes 16,427 16,505
--------- ---------
Total liabilities 259,823 285,887
--------- ---------
Shareholders' equity
Common stock 10,449 10,410
Retained earnings 165,350 161,599
--------- ---------
Total shareholders' equity 175,799 172,009
--------- ---------
$ 435,622 $ 457,896
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
</TABLE>
Page 4
<PAGE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (000 omitted)
<TABLE>
<CAPTION>
Three Months Ended
August 31
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,751 $ 6,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,418 11,992
Provision for losses on accounts receivable 810 181
(Gain) loss on sale of equipment 727 (1,476)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 3,705 (2,730)
(Increase) decrease in other assets 126 (188)
Decrease in accounts payable (144) (840)
Increase (decrease) in accrued expenses (1,002) 4,076
Decrease in deferred income taxes (78) (145)
--------- ---------
Net cash provided by operating activities 36,313 17,847
--------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment 9,319 3,736
Payments for purchase of rental and lease equipment (21,836) (28,145)
Payments for purchase of other property (274) (204)
--------- ---------
Net cash used in investing activities (12,791) (24,613)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term bank borrowings (24,800) 5,500
Proceeds from issuance of common stock 39 61
--------- ---------
Net cash provided by (used in) financing activities (24,761) 5,561
--------- ---------
Net decrease in cash (1,239) (1,205)
Cash at beginning of period 2,281 2,207
--------- ---------
Cash at end of period $ 1,042 $ 1,002
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 5
</TABLE>
<PAGE>
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 months ended August 31, 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 three month period ended August 31, 1998
and 1997 was $4,287,000 and $127,000, respectively. Total income taxes paid
during the three month period ended August 31, 1998 were $1,086,000 compared
to $2,741,000 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 $19,270,000 and $19,231,000 as
of August 31, 1998 and May 31, 1998, respectively, and $10,486,000 and
$19,405,000 as of August 31, 1997 and May 31, 1997, 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
August 31, 1998 investment in sales-type leases of $1,448,000 net of deferred
interest of $86,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Page 6
<PAGE>
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 August 31, 1998 and the results of operations for the three month periods
ended August 31, 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
Total revenues for the three months ended August 31, 1998 increased 87% to
$72.6 million from $38.9 million, primarily reflecting the acquisition of TMS.
Rental revenues increased 31% to $37.3 million, lease revenues increased 323%
to $24.9 million and sales of equipment and other revenues increased 131% to
$10.4 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 nine
months.
Depreciation of equipment increased from 34% of rental and lease revenues in
the first quarter of fiscal 1998 to 44% of rental and lease revenues in the
first 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 to bring recorded equipment
values more in line with market values over time.
Costs of revenues other than depreciation includes cost of equipment sales and
equipment parts and repair expenses. Cost of equipment sales increased from
60% of equipment sales in the first quarter of fiscal 1998 to 108% of equipment
sales in the first quarter 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 5.1% of rental and lease
revenues in the first quarter of fiscal 1998 to 2.9% of rental and lease
revenues in the first 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 $23.2 million or 32% of
total revenues for the first quarter of fiscal 1999 as compared to $11.2
million or 29% of total revenues for the first quarter of fiscal 1998. The
increase in the expense ratio reflects revenue declines experienced during the
last nine 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, operating earnings were $10.2 million or 14% of total revenues in the
first quarter of fiscal 1999 compared to $11.9 million or 31% of total revenues
in the first quarter of fiscal 1998.
Interest expense increased to $3.9 million in the first quarter of fiscal 1999
from $.1 million in the first quarter 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 nine months. In spite of the larger equipment pool after the TMS
acquisition, expenditures decreased in the first quarter 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 at a significant rate.
During the three months ended August 31, 1998 and 1997 net cash provided by
operating activities was $36.3 million and $17.8 million, respectively. The
increase in fiscal 1999 results primarily from the effects of the TMS
acquisition. During the three months ended August 31, 1998 and 1997 net cash
used in investing activities was $12.8 million and $24.6 million, respectively.
The decrease results primarily from a lower level of equipment purchases and
increased equipment sales. During the first quarter of fiscal 1999 net cash
used in financing activities was $24.8 million, reflecting decreased bank
borrowings for equipment purchases, while in the first quarter of fiscal 1998
net cash provided by financing activities was $5.6 million, reflecting
increased bank borrowings for equipment purchases.
The Company has available a revolving line of credit of $260 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 $202.1 million under the Credit Facility at August 31, 1998.
<PAGE>
Part II. OTHER INFORMATION
- ----------------------------
Items 1. through 3.
- ----------------------------
Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
(a) On October 8, 1998, the 1998 Annual Meeting of Shareholders of the
Registrant was held. Proxies pursuant to Regulation 14A were solicited in
connection with the meeting. 21,839,732 shares were present in person or by
proxy out of a total of 24,425,424 shares issued and outstanding and eligible
to vote on the record date.
(b) The meeting involved the election of directors. The following
directors were elected by the number of affirmative votes set opposite their
respective names:
Name Number of Votes
Gerald D. Barrone 21,776,828
Nancy Y. Bekavac 21,778,250
Daniel Greenberg 21,778,462
Joseph J. Kearns 21,775,516
S. Lee Kling 21,776,828
Michael R. Peevey 21,676,970
Will Richeson, Jr. 21,776,628
William Weitzman 21,778,444
(c) Other matters submitted to a vote of security holders:
The shareholders ratified the appointment of Arthur Andersen LLP as the
registrant's independent public accountants for the current year. 21,669,436
shares were voted for, 6,552 were voted against, and 163,774 shares abstained
from voting.
Item 5.
- ----------------------------
Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
Nothing to report.
<PAGE>
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: October 9, 1998 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer
Page 13
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-1-1998
<PERIOD-END> AUG-31-1998
<PERIOD-TYPE> 3-MOS
<CASH> 1,042
<SECURITIES> 0
<RECEIVABLES> 67,529
<ALLOWANCES> 5,526
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 502,118
<DEPRECIATION> 199,303
<TOTAL-ASSETS> 435,622
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,449
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 435,622
<SALES> 10,435
<TOTAL-REVENUES> 72,601
<CGS> 12,091
<TOTAL-COSTS> 62,390
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,853
<INCOME-PRETAX> 6,358
<INCOME-TAX> 2,607
<INCOME-CONTINUING> 3,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,751
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
