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, 2000
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 11, 2000 registrant had 24,364,672 shares of common stock
outstanding.
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ELECTRO RENT CORPORATION
FORM 10-Q
AUGUST 31, 2000
TABLE OF CONTENTS
Page
Part I: FINANCIAL INFORMATION
Condensed Consolidated Statements of Income for the Three
Months Ended August 31, 2000 and August 31, 1999 3
Condensed Consolidated Balance Sheets at
August 31, 2000 and May 31, 2000 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended August 31, 2000 and August 31, 1999 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 10
SIGNATURES 11
Page 2
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<TABLE>
Part I. FINANCIAL INFORMATION
-----------------------------------
Item 1. Financial Statements
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (000 omitted except per share data)
<CAPTION>
Three Months Ended
August 31,
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Rentals and leases $ 46,024 $ 52,540
Sales of equipment
and other revenues 11,309 10,213
--------- ---------
Total revenues 57,333 62,753
--------- ---------
Costs and expenses:
Depreciation of equipment 19,006 25,043
Costs of revenues other
than depreciation 7,247 8,672
Selling, general and
administrative expenses 16,306 16,926
Interest 435 1,687
--------- ---------
Total costs and expenses 42,994 52,328
--------- ---------
Income before income taxes 14,339 10,425
Income taxes 5,449 3,961
--------- ---------
Net income $ 8,890 $ 6,464
========= =========
Earnings per share:
Basic $ 0.36 $ 0.26
Diluted $ 0.36 $ 0.26
Average shares used in
per share calculation:
Basic 24,389 24,484
Diluted 24,720 24,960
<FN>
See accompanying notes to
condensed consolidated financial statements.
Page 3
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</TABLE>
<TABLE>
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (000 omitted)
ASSETS
<CAPTION>
August 31, May 31,
2000 2000
--------- ---------
<S> <C> <C>
Cash $ 1,183 $ 1,605
Accounts receivable, net
of allowance for doubtful accounts 31,382 29,862
Rental and lease equipment, net
of accumulated depreciation 182,981 190,107
Other property, net of accumulated
depreciation and amortization 20,195 20,608
Goodwill and intangibles, net of amortization 59,281 59,719
Other 3,945 4,534
--------- ---------
$ 298,967 $ 306,435
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank borrowings $ 6,100 $ 21,800
Accounts payable 20,708 22,635
Accrued expenses 29,021 24,921
Deferred income taxes 15,468 15,414
--------- ---------
Total liabilities 71,297 84,770
--------- ---------
Shareholders' equity:
Common stock 11,235 11,139
Retained earnings 216,435 210,526
--------- ---------
Total shareholders' equity 227,670 221,665
--------- ---------
$ 298,967 $ 306,435
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
</TABLE>
Page 4
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ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (000 omitted)
<TABLE>
<CAPTION>
Three Months Ended
August 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,890 $ 6,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,193 26,088
Provision for losses on accounts receivable 341 254
Gain on sale of equipment (4,070) (1,427)
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,861) 5,155
Decrease in other assets 394 4
Decrease in accounts payable (2,322) (2,596)
Increase (decrease) in accrued expenses 4,100 (552)
Increase in deferred income taxes 54 39
--------- ---------
Net cash provided by operating activities 25,719 33,429
--------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment 9,781 8,960
Payments for purchase of rental and lease equipment (17,197) (17,634)
Payments for purchase of other property (140) (327)
--------- ---------
Net cash used in investing activities (7,556) (9,001)
--------- ---------
Cash flows from financing activities:
Decrease in short-term bank borrowings (15,700) (28,100)
Proceeds from issuance of common stock 96 77
Payment for repurchase of common stock (2,981) -
--------- ---------
Net cash used in financing activities (18,585) (28,023)
--------- ---------
Net decrease in cash (422) (3,595)
Cash at beginning of period 1,605 4,039
--------- ---------
Cash at end of period $ 1,183 $ 444
========= =========
<FN>
See accompanying notes to
condensed consolidated financial statements.
</TABLE>
Page 5
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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 -- Interest and Income Taxes Paid
-------------------------------------------
Total interest paid during the three month periods ended August 31, 2000 and
August 31, 1999 was $178,000 and $1,536,000, respectively. Total income taxes
paid during the three month period ended August 31, 2000 were $1,235,000
compared to $3,901,000 during the same period in the prior year. Interest and
income taxes paid will vary from amounts recorded in the financial statements.
Note 3 -- Noncash Investing and Financing Activities
-------------------------------------------------------
The Company acquired equipment totaling $19,552,000 and $19,947,000 as of
August 31, 2000 and May 31, 2000, respectively, and $25,126,000 and
$14,977,000 as of August 31, 1999 and May 31, 1999, respectively, payable
during subsequent quarters.
Note 4 -- 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, 2000 investment in sales-type leases of $1,251,000 net of deferred
interest of $64,000 is included in other assets. Interest income is
recognized over the life of the lease using the interest method.
Note 5 -- Derivative Positions
----------------------------
The Company has entered into an interest rate protection agreement. The
Company's exposure under this agreement is limited to the impact of variable
interest rate fluctuations and the periodic settlement of amounts due under
this agreement if the other party fails to perform. The Company does not
anticipate nonperformance by the counterparty, which is a major financial
institution.
As of August 31, 2000, the Company held one interest rate swap agreement
with a notional amount of $25,000,000, interest rate of 5.939% and expiration
date of December 2000.
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, 2000 and the results of operations for the three month period
ended August 31, 2000. This discussion should be read in conjunction with the
Management's Discussion and Analysis section included in the Company's 2000
Annual Report on Form 10-K (pages 13-15) to which the reader is directed for
additional information.
Results of Operations
Comparison of Three Months Ended August 31, 2000 and August 31, 1999
Total revenues for the three months ended August 31, 2000 decreased 8.8% to
$57.3 million from $62.8 million, primarily as a result of continuing
attrition of the TMS business acquired in November 1997 and a generally weak
PC market during the last twelve months, but partially offset by continuing
improvement of test and measurement equipment rentals in the
telecommunications segment. Rental and lease revenues decreased 12.4% to
$46.0 million, largely for the reasons noted above, and sales of equipment and
other revenues increased 10.8% to $11.3 million, primarily reflecting a
higher level of test and measurement equipment sales, improved margins and
several non-recurring customer settlements.
Depreciation of equipment decreased from 47.7% of rental and lease revenues in
the first quarter of fiscal 2000 to 41.3% of rental and lease revenues in the
first quarter of fiscal 2001. This decrease is primarily due to a large
portion of computers acquired from TMS in fiscal 1998 becoming fully
depreciated in the last half of fiscal 2000.
Costs of revenues other than depreciation primarily includes the cost of
equipment sales, which decreased from 84.1% of equipment sales in the first
quarter of fiscal 2000 to 58.4% of equipment sales in the first quarter of
fiscal 2001. This cost ratio decrease primarily results from the sale of
equipment that is generally more depreciated than in the prior fiscal year and
several non-recurring customer settlements.
Selling, general and administrative expenses totaled $16.3 million for the
first quarter of fiscal 2001, or 28.4% of revenues, as compared to $16.9
million, or 27.0% of revenues, for the first quarter of fiscal 2000. This
expense ratio increase reflects an 8.8% decline in total revenues, compared
with a 3.7% decline in SG&A which resulted from restructuring of the sales
organization and closing certain offices and warehouses.
As a result of the changes in revenues, operating costs and expenses discussed
above, earnings before interest and taxes were $14.8 million or 25.8% of total
revenues in the first quarter of fiscal 2001 compared to $12.1 million or
19.3% of total revenues in the first quarter of fiscal 2000.
Interest expense decreased to $.4 million in the first quarter of fiscal
2001 from $1.7 million in the first quarter of fiscal 2000. This decrease is
primarily due to a reduction of the Company's loans with various banks from
$79.4 million at August 31, 1999 to $6.1 million at August 31, 2000,
partially offset by higher interest rates.
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 has declined during the last twelve months. However,
during the first quarter of fiscal 2001, purchases of equipment continued to
be made to support some areas of growth for both personal computers and test
and measurement equipment, and to keep the equipment pool technologically
up-to-date. Even with these purchases, bank borrowings are expected to be
completely repaid by the end of the second quarter of fiscal 2001, and cash is
then likely to begin accumulating, unless the Company decides to buy back
additional shares, finance an acquisition, or pursue other opportunities.
During the three months ended August 31, 2000 and August 31, 1999 net cash
provided by operating activities was $25.7 million and $33.4 million,
respectively. The decrease in fiscal 2001 results mostly from lower
depreciation and an increase in accounts receivable. During the three months
ended August 31, 2000 and August 31, 1999 net cash used in investing
activities was $7.6 million and $9.0 million, respectively. This decrease is
primarily attributable to a lower level of payments for equipment purchases,
primarily in the data processing area, and increased proceeds from the sale of
equipment. During the first three months of fiscal 2001 net cash used in
financing activities was $18.6 million, compared to $28.0 million in the first
three months of fiscal 2000, reflecting a decline in repayments of bank
borrowings, partially offset by the repurchase of $3.0 million of the Company
common stock in June 2001.
As of August 31, 2000, the Company has available a revolving line of credit of
$25.0 million, subject to certain borrowing base restrictions, to meet
equipment acquisition needs as well as working capital and general corporate
requirements. The Company had borrowings of $6.1 million under the Credit
Facility at August 31, 2000.
Year 2000 Compliance
Many computer programs and microprocessors were designed and developed without
consideration of the impact of the transition to the year 2000. As a result,
these programs and microprocessors may not be able to differentiate between
the year "1900" and "2000"; the year 2000 may be recognized as the two-digit
number "00". If not corrected, this could have caused difficulties in
obtaining accurate system data and support.
The Company has purchased numerous computer systems since its inception. The
Company's owned software and hardware is substantially Year 2000 compliant.
The costs associated with such compliance were not material to the Company's
liquidity or results of operations. Further, the Company's critical third
party software was generally Year 2000 compliant, with minor issues, and was
capable of functioning after December 31, 1999.
Qualitative And Quantitative Market Risk Disclosures
Although not currently significant, the Company's primary market risk exposure
historically has been interest rate risk, primarily related to its borrowings
under its unsecured revolving credit facility. However, a changing interest
rate environment does not necessarily impact the Company's margins since the
effects of higher or lower borrowing costs may be reflected in the rates on
newly rented and leased assets. The Company attempts to reduce this risk by
utilizing derivative financial instruments, namely interest rate caps and
swaps, pursuant to Company policies. All derivative financial instruments are
for purposes other than trading.
The table below presents the principal (or notional) amounts of the Company's
bank borrowings and derivative financial instruments by expected maturity
dates. The table reflects expected maturities as of August 31, 2000 and does
not reflect changes which could arise after that time. There are no expected
maturities after May 31, 2001. The Company's ultimate realized gain or loss
with respect to interest rate fluctuations will depend on exposures that arise
during the respective period, the Company's hedging strategies at the time, and
actual interest rates.
<TABLE>
<CAPTION>
Year Ended Fair
(in thousands except percentages) May 31, 2001 Value
<S> <C> <C> <C>
Bank Borrowings
Principal amount(a) $ 6,100 $ 6,100
Average interest rate(b) VR%
Interest Rate SWAP
Notional amount(c) $ 25,000 $ 100
Rate to be paid by the Company 5.939%
Rate to be received by the Company 3-month
Libor
</TABLE>
(a) Bank borrowings consist of the Company's unsecured revolving line of
credit, which provided for total available credit of $40.0 million at August
31, 2000. Interest on the line of credit is payable in accordance with the
applicable London Interbank Offering Rate (LIBOR) agreement or quarterly, and
accrues, at the Company's option, either at the LIBOR plus margin (as defined)
or the Base Rate (as defined).
(b) Variable Rate (VR) based on LIBOR plus margin or Base Rate as defined in
the Credit Agreement.
(c) In December 1997, the Company entered into one 3-year floating rate to
fixed rate interest rate swap agreement in the notional amount of $25.0
million.
The Company is also subject to foreign currency rate risk relating to rentals
and leases denominated in Canadian dollars. The Company has determined that
hedging of these assets is not cost effective and instead attempts to minimize
currency exposure risk through working capital management. The Company does not
believe that any foreseeable change in currency rates would have a material
effect on its financial position or results of operations.
<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 12, 2000, the 2000 Annual Meeting of Shareholders of
the Registrant was held. Proxies pursuant to Regulation 14A were solicited in
connection with the meeting. 22,319,913 shares were present in person or by
proxy out of a total of 24,341,611 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 22,152,122
Nancy Y. Bekavac 22,148,848
Daniel Greenberg 22,227,946
Joseph J. Kearns 22,152,122
S. Lee Kling 22,152,122
Michael R. Peevey 22,152,122
Will Richeson, Jr. 22,148,956
William Weitzman 22,151,388
(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. 22,148,943
shares were voted for, 14,761 were voted against, and 120,659 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 12, 2000 /s/ Craig R. Jones
Craig R. Jones
Vice President and
Chief Financial Officer
Page 13
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