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, 1997
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 12, 1998 registrant had 12,056,692 shares of common stock
outstanding.
<PAGE>
ELECTRO RENT CORPORATION
FORM 10-Q
NOVEMBER 30, 1997
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three Months
and Six Months Ended November 30, 1997 and 1996 3
Condensed Consolidated Balance Sheets at
November 30, 1997 and May 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended November 30, 1997 and 1996 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
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<TABLE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
<CAPTION>
Three Months Ended Six Months Ended
November 30 November 30
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rentals and leases $ 42,394 $ 32,491 $ 76,786 $ 64,871
Sales of equipment
and other revenues 8,082 5,487 12,607 11,251
-------- -------- --------- ---------
Total revenues 50,476 37,978 89,393 76,122
-------- -------- --------- ---------
Costs and expenses:
Depreciation of equipment 15,116 11,144 26,731 22,151
Costs of revenues other
than depreciation 8,135 5,233 12,292 10,796
Selling, general and
administrative expenses 13,980 10,343 25,188 20,522
Interest 983 232 1,096 532
-------- -------- --------- ---------
Total costs and expenses 38,214 26,952 65,307 54,001
-------- -------- --------- ---------
Income before income taxes 12,262 11,026 24,086 22,121
Income taxes 5,027 4,521 9,874 9,069
-------- -------- --------- ---------
Net income $ 7,235 $ 6,505 $ 14,212 $ 13,052
======== ======== ========= =========
Net income per common and common
equivalent share $ 0.58 $ 0.52 $ 1.14 $ 1.05
======== ======== ========= =========
Average common and common
equivalent shares outstanding 12,538 12,429 12,541 12,427
======== ======== ========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (000 omitted)
ASSETS
<CAPTION>
November 30 May 31
1997 1997
--------- ---------
<S> <C> <C>
Cash $ 2,539 $ 2,207
Accounts receivable, net 38,831 19,968
Rental and lease equipment, net
of accumulated depreciation 333,713 139,377
Other property, net of accumulated
depreciation and amortization 28,762 19,438
Goodwill, net 45,587 3,135
Other 9,955 4,088
--------- ---------
$ 459,387 $ 188,213
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 251,000 $ 4,200
Accounts payable 17,676 20,096
Accrued expenses 23,784 11,001
Deferred income taxes 13,399 13,696
--------- ---------
Total liabilities 305,859 48,993
--------- ---------
Shareholders' equity
Common stock 10,061 9,965
Retained earnings 143,467 129,255
--------- ---------
Total shareholders' equity 153,528 139,220
--------- ---------
$ 459,387 $ 188,213
========= =========
<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>
Six Months Ended
November 30
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,212 $ 13,052
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 27,608 22,875
Provision for losses on accounts receivable 419 367
Gain on sale of equipment (2,480) (2,872)
Change in operating assets and liabilities:
Increase in accounts receivable (11,933) (1,613)
Increase (decrease) in other assets (3,387) 276
Decrease in accounts payable (994) (983)
Increase (decrease) in accrued expenses 6,199 (1,164)
Decrease in deferred income taxes (297) (271)
--------- ---------
Net cash provided by operating activities 29,347 29,667
--------- ---------
Cash flows from investing activities:
Payment for acquisition of business (239,212) -
Proceeds from sale of equipment 10,937 9,786
Payments for purchase of rental and lease equipment (46,656) (36,656)
Payments for purchase of other property (980) (226)
--------- ---------
Net cash used in investing activities (275,911) (27,096)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term bank borrowings 246,800 (4,100)
Proceeds from issuance of common stock 96 322
--------- ---------
Net cash provided by (used in) financing activities 246,896 (3,778)
--------- ---------
Net increase (decrease) in cash 332 (1,207)
Cash at beginning of period 2,207 1,394
--------- ---------
Cash at end of period $ 2,539 $ 187
========= =========
<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 Common and Common Equivalent Share
- -----------------------------------
Earnings per share were computed based on the weighted average number of
common and common equivalent shares outstanding of 12,538,000 and 12,429,000
for the three month periods ended November 30, 1997 and 1996 and 12,541,000 and
12,427,000 for the the six month periods ended November 30, 1997 and 1996.
Note 3 -- Interest and Income Taxes Paid
- -------------------------------------------
Total interest paid during the six month periods ended November 30, 1997
and 1996 was $568,000 and $527,000, respectively. Total income taxes paid
during the six month period ended November 30, 1997 was $11,701,000 compared
to $10,035,000 during the same period in the prior year. Interest and income
taxes will vary from amounts recorded in the financial statements.
Note 4 -- Noncash Investing and Financing Activities
- -------------------------------------------------------
The Company acquired equipment totaling $11,674,000 and $19,405,000 as of
November 30, 1997 and May 31, 1997, respectively, and $13,244,000 and
$15,832,000 as of November 30, 1996 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
November 30, 1997 investment in sales-type leases of $670,000 net of deferred
interest of $39,000 is included in other assets. Interest income is recognized
over the life of the lease using the interest method.
Page 6
<PAGE>
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 to be completed within 90 days of closing. 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):
<TABLE>
<S> <C>
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
</TABLE>
The following unaudited pro forma summary for the six month periods ended
November 30, 1997 and 1996, 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
historical financial data of the Company included in the pro forma summary is
as of the periods presented. The historical financial data of TMS included in
the pro forma summary for the six months ended November 30, 1997 and 1996 are
for the six months ended September 30, 1997 and 1996 (unaudited), respectively.
The historical financial data of TMS for the six months ended September 30,
1997 has been adjusted on a pro rata basis to reflect the effect of the TMS
acquisition date. 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
Page 7
<PAGE>
given in the pro forma information for operating and synergistic benefits that
are expected to be realized through the combination of the businesses.
<TABLE>
<CAPTION>
For the Six Months
Ended November 30,
1997 1996
<S> <C> <C>
(In thousands, except per share data)
Net revenues $ 200,250 $ 197,282
Net income $ 18,897 $ 20,651
Earnings per common share $ 1.51 $ 1.66
Average shares outstanding 12,541 12,427
</TABLE>
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------
Results of Operations
- ----------------------------
Comparison of Three Months Ended November 30, 1997 and 1996
- -----------------------------------------------------------
Revenues
Total revenues increased 32.9% to $50.5 million for the three months ended
November 30, 1997 from $38.0 million for the three months ended November 30,
1996. Approximately $10.3 million or 27.1% 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 November 30, 1997
was $42.4 million, a 30.5% increase from $32.5 million for the corresponding
period in fiscal 1997. The TMS acquisition resulted in approximately $8.8
million or 26.9% of additional rental and lease revenue for the three months
ended November 30, 1997, 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. The remaining 3.6% increase in rental and
lease revenue reflects growth in operating leases of personal computers and
rentals of test and measurement equipment. Sales of equipment and other
revenues increased 47.3% to $8.1 million in the three months ended November 30,
1997 from $5.5 million in the quarter ended November 30, 1996. Approximately
27.3% of the percentage increase is a result of the TMS acquisition.
Costs and Expenses
Depreciation of equipment increased from 34.3% of rental and lease revenue in
second quarter of fiscal 1997 to 35.7% 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
70.6% of equipment sales in the second quarter of fiscal 1997 to 86.1% 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
second quarter of fiscal 1997 to 4.6% 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 $14.0 million or 27.7% of
total revenues for the quarter ended November 30, 1997 as compared to $10.3
million or 27.2% of total revenues for the quarter ended November 30, 1996.
The increase reflects the higher cost structure of TMS, including redundant
functions and facilities which will be reduced during the remainder of the
fiscal year.
Operating Earnings
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $13.2 million or 26.2% of total revenue in the
second quarter of fiscal 1998 compared to $11.3 million or 29.6% of total
revenue in the second quarter of fiscal 1997.
Interest Expense
Page 9
<PAGE>
Interest expense for the quarter increased to $983,000 in fiscal 1998 from
$232,000 in fiscal 1997. The increase is a result of additional bank
borrowings used to finance the TMS acquisition.
Comparison of Six Months Ended November 30, 1997 and 1996
- -----------------------------------------------------------
Revenues
Total revenues increased 17.4% to $89.4 million for the six months ended
November 30, 1997 from $76.1 million for the six months ended November 30,
1996. The acquisition of TMS contributed approximately $10.3 million or 13.5%
of the percentage increase for the six months ended November 30, 1997. Rental
and lease revenue for the six months ended November 30, 1997 was $76.8 million,
an 18.4% increase from $64.9 million for the six months ended November 30,
1996. The acquisition of TMS resulted in approximately $8.8 million or 13.5%
of additional rental and lease revenue for the six months ended November 30,
1997, including the partial effect of changing from TMS' accrual method of
accounting for revenues to the Company's method of recognizing revenues when
billed. The remaining 4.9% increase reflects growth in operating leases of
personal computers and rentals of test and measurement equipment. Sales of
equipment and other revenues increased 12.1% to $12.6 million in the six months
ended November 30, 1997 from $11.3 million in the six months ended November 30,
1996. Without the TMS acquisition sales of equipment and other revenues
would have declined by 1.2% for the six months ended November 30, 1997.
Costs and Expenses
Depreciation of equipment increased from 34.1% of rental and lease revenue in
first six months of fiscal 1997 to 34.8% 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
70.1% of equipment sales in the first six months of fiscal 1997 to 77.3% 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 6.0% of rental and lease revenue in the
first six months of fiscal 1997 to 5.0% 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 $25.2 million or 28.2% of
total revenues for the six months ended November 30, 1997 as compared to $20.5
million or 27.0% of total revenues for the six months ended November 30, 1996.
The increase reflects the higher cost structure of TMS, including redundant
functions and facilities which will be reduced during the remainder of the
fiscal year.
Operating Earnings
As a result of the changes in revenues, operating costs and expenses discussed
above, operating earnings were $25.2 million or 28.2% of total revenue in the
first six months of fiscal 1998 compared to $22.7 million or 29.8% of total
revenue in the first six months of fiscal 1997.
Interest Expense
Page 10
<PAGE>
Interest expense for the six months increased to $1,096,000 in fiscal 1998 from
$532,000 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 $46.7 million in the six months
ended November 30, 1997, an increase of 27.3% from $36.7 million purchased in
the six months ended November 30, 1996. 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 six months ended November 30, 1997 and 1996 net cash provided by
operating activities was $29.3 million and $29.7 million, respectively. During
the six months ended November 30, 1997 and 1996 net cash used in investing
activities was $275.9 million and $27.1 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 six months ended November 30, 1997 net
cash provided in financing activities was $246.9 million, of which
approximately $239.2 million was borrowed to acquire TMS. During the six
months ended November 30, 1996 net cash used in financing activities was $3.8
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 $251 million under the Credit Facility at November 30, 1997.
Page 11
<PAGE>
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
Page 12
<PAGE>
On November 26, 1997 a Report of Form 8-K was filed, relating to the
acquisition of the computer and test and measurement equipment rental business
of GE Capital Technology Management Services, a division of GE Capital
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: January 14, 1997 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer
Page 13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-1-1997
<PERIOD-END> NOV-30-1997
<PERIOD-TYPE> 6-MOS
<CASH> 2,539
<SECURITIES> 0
<RECEIVABLES> 40,758
<ALLOWANCES> 1,927
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 508,274
<DEPRECIATION> 145,799
<TOTAL-ASSETS> 459,387
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,061
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 459,387
<SALES> 12,607
<TOTAL-REVENUES> 89,393
<CGS> 12,292
<TOTAL-COSTS> 64,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,096
<INCOME-PRETAX> 24,086
<INCOME-TAX> 9,874
<INCOME-CONTINUING> 14,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,212
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
