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, 1999
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 7, 1999 registrant had 24,456,749 shares of common stock
outstanding.
<PAGE>
ELECTRO RENT CORPORATION
FORM 10-Q
FEBRUARY 28, 1999
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three Months
and Nine Months Ended February 28, 1999 and 1998 3
Condensed Consolidated Balance Sheets at
February 28, 1999 and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended February 28, 1999 and 1998 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
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
- -----------------------------------
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
February 28 February 28
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rentals and leases $ 56,382 $ 73,313 $ 179,086 $ 150,099
Sales of equipment
and other revenues 8,430 11,879 27,320 24,486
-------- -------- --------- ---------
Total revenues 64,812 85,192 206,406 174,585
-------- -------- --------- ---------
Costs and expenses:
Depreciation of equipment 27,092 31,362 81,111 58,093
Costs of revenues other
than depreciation 6,287 9,513 25,589 21,805
Selling, general and
administrative expenses 17,164 22,057 60,770 47,245
Interest 2,708 4,224 9,908 5,320
-------- -------- --------- ---------
Total costs and expenses 53,251 67,156 177,378 132,463
-------- -------- --------- ---------
Income before income taxes 11,561 18,036 29,028 42,122
Income taxes 4,740 7,396 11,901 17,270
-------- -------- --------- ---------
Net income $ 6,821 $ 10,640 $ 17,127 $ 24,852
======== ======== ========= =========
Earnings per share:
Basic $ 0.28 $ 0.44 $ 0.70 1.02
Diluted $ 0.27 $ 0.42 $ 0.68 $ 0.99
Average shares used in
per share calculation:
Basic 24,453 24,321 24,434 24,273
Diluted 24,941 25,168 25,032 25,077
<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>
February 28, May 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash $ 891 $ 2,281
Accounts receivable, net
of allowance for doubtful accounts 53,921 66,518
Rental and lease equipment, net
of accumulated depreciation 245,652 293,048
Other property, net of accumulated
depreciation and amortization 22,801 25,867
Goodwill and intangibles, net of amortization 61,906 63,346
Other 6,351 6,836
--------- ---------
$ 391,522 $ 457,896
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 146,700 $ 226,900
Accounts payable 16,686 20,733
Accrued expenses 22,804 21,749
Deferred income taxes 16,149 16,505
--------- ---------
Total liabilities 202,339 285,887
--------- ---------
Shareholders' equity:
Common stock 10,457 10,410
Retained earnings 178,726 161,599
--------- ---------
Total shareholders' equity 189,183 172,009
--------- ---------
$ 391,522 $ 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>
Nine Months Ended
February 28,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,127 $ 24,852
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 84,822 60,814
Provision for losses on accounts receivable 2,362 3,022
Gain on sale of equipment (2,698) (4,934)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 10,235 (47,049)
(Increase) decrease in other assets 485 (3,977)
Increase (decrease) in accounts payable 541 (4,080)
Increase in accrued expenses 1,055 1,765
Decrease in deferred income taxes (356) (518)
--------- ---------
Net cash provided by operating activities 113,573 29,895
--------- ---------
Cash flows from investing activities:
Payment for acquisition of business - (239,212)
Proceeds from sale of equipment 23,480 21,659
Payments for purchase of rental and lease equipment (57,963) (59,228)
Payments for purchase of other property (327) (1,422)
--------- ---------
Net cash used in investing activities (34,810) (278,203)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term bank borrowings (80,200) 246,000
Proceeds from issuance of common stock 47 149
--------- ---------
Net cash provided by (used in) financing activities (80,153) 246,149
--------- ---------
Net increase in cash (1,390) (2,159)
Cash at beginning of period 2,281 2,207
--------- ---------
Cash at end of period $ 891 $ 48
========= =========
<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 and nine month periods ended February 28,
1999 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 nine month periods ended February 28, 1999
and 1998 was $11,057,000 and $3,443,000, respectively. Total income taxes
paid during the nine month period ended February 28, 1999 were $8,399,000
compared to $18,340,000 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 $14,642,000 and $19,231,000 as of
February 28, 1999 and May 31, 1998, respectively, and $7,148,000 and
$19,405,000 as of February 28, 1998 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
February 28, 1999 investment in sales-type leases of $993,000 net of
deferred interest of $62,000 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 February 28, 1999 and the results of operations for the nine month
periods ended February 28, 1999 and 1998. 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 February 28, 1999 and 1998
Total revenues for the three months ended February 28, 1999 decreased 24%
to $64.8 million from $85.2 million, primarily as a result of higher than
expected attrition of TMS customers and a generally weak market following
the acquisition of TMS. Rental and lease revenues decreased 23% to $56.4
million and sales of equipment and other revenues decreased 29% to $8.4
million, largely for the reasons noted above. 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.
Depreciation of equipment increased from 43% of rental and lease revenues
in the third quarter of fiscal 1998 to 48% of rental and lease revenues in
the third 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 primarily includes the cost of
equipment sales, which decreased from 77% of equipment sales in the third
quarter of fiscal 1998 to 69% of equipment sales in the third quarter of
fiscal 1999. This decrease is primarily attributable to a firming in the
continuing volatile market for used equipment sales, a profitable large
buyout in the current quarter and the revaluation of the acquired TMS
equipment pool which was completed in the second quarter of fiscal 1999.
Selling, general and administrative expenses totaled $17.2 million for the
third quarter of fiscal 1999 as compared to $22.1 million for the third
quarter of fiscal 1998, representing 26% of total revenues for both
periods. The continuity of the expense ratio reflects revenue declines
experienced during the last twelve months, 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 $14.3 million or
22% of total revenues in the third quarter of fiscal 1999 compared to $22.3
million or 26% of total revenues in the third quarter of fiscal 1998.
Interest expense decreased to $2.7 million in the third quarter of fiscal
1999 from $4.2 million in the third quarter of fiscal 1998. This decrease
is a result of repayments of the Company's loans with various banks, and to
a lesser extent, a reduction in the effective interest rate on those loans.
Comparison of Nine Months Ended February 28, 1999 and 1998
Total revenues for the nine months ended February 28, 1999 increased 18% to
$206.4 million from $174.6 million in the prior year comparable period,
primarily reflecting the acquisition of TMS. Rental and lease revenues
increased 19% to $179.1 million and sales of equipment and other revenues
increased 12% to $27.3 million. These increases primarily relate to the
full year effect in fiscal 1999 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.
Partially offsetting the additional revenue base initially provided by the
TMS acquisition were the effects of a higher than expected attrition of TMS
customers and a generally weak market following the acquisition of TMS.
Depreciation of equipment increased from 39% of rental and lease revenues
in the first nine months of fiscal 1998 to 45% of rental and lease revenues
in the first nine months 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 primarily includes the cost of
equipment sales, which increased from 77% of equipment sales in the first
nine months of fiscal 1998 to 89% of equipment sales in the nine months 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 in the first half of fiscal 1999.
Selling, general and administrative expenses totaled $60.8 million or 29%
of total revenues for the first nine months of fiscal 1999 as compared to
$47.2 million or 27% of total revenues for the first nine months 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 $38.9 million or
19% of total revenues in the first nine months of fiscal 1999 compared to
$47.4 million or 27% of total revenues in the first nine months of fiscal
1998.
Interest expense increased to $9.9 million in the first nine months of
fiscal 1999 from $5.3 million in the first nine months 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 nine months 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 nine months ended February 28, 1999 and 1998 net cash provided
by operating activities was $113.6 million and $29.9 million, respectively.
The increase in fiscal 1999 results primarily from the effects of the TMS
acquisition and a decrease in accounts receivable. During the nine months
ended February 28, 1999 and 1998 net cash used in investing activities was
$34.8 million and $278.2 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 nine months of fiscal 1999 net cash used in
financing activities was $80.2 million, reflecting decreased bank
borrowings primarily from the increase in net cash provided by operating
activities, while in the first nine months of fiscal 1998 net cash provided
by financing activities was $246.1 million, reflecting increased bank
borrowings for the TMS acquisition.
The Company has available a revolving line of credit of $180 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 $146.7 million under the Credit Facility at February 28,
1999.
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 was 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.
<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
- -------------------------------------------
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: April 13, 1999 /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-31-1999
<PERIOD-START> JUN-1-1998
<PERIOD-END> FEB-28-1999
<PERIOD-TYPE> 9-MOS
<CASH> 891
<SECURITIES> 0
<RECEIVABLES> 60,649
<ALLOWANCES> 6,728
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 510,910
<DEPRECIATION> 242,457
<TOTAL-ASSETS> 391,522
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 10,457
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 391,522
<SALES> 27,320
<TOTAL-REVENUES> 206,406
<CGS> 25,589
<TOTAL-COSTS> 167,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,908
<INCOME-PRETAX> 29,028
<INCOME-TAX> 11,901
<INCOME-CONTINUING> 17,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,127
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.68
</TABLE>
