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EXCEL - IDEA: XBRL DOCUMENT - ELECTRO RENT CORP | Financial_Report.xls |
EX-31.1 - EX-31.1 - ELECTRO RENT CORP | v58401exv31w1.htm |
EX-32.2 - EX-32.2 - ELECTRO RENT CORP | v58401exv32w2.htm |
EX-32.1 - EX-32.1 - ELECTRO RENT CORP | v58401exv32w1.htm |
EX-31.2 - EX-31.2 - ELECTRO RENT CORP | v58401exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-9061
ELECTRO RENT CORPORATION
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization) |
95-2412961 (I.R.S. Employer Identification No.) |
|
6060 Sepulveda Boulevard, Van Nuys, California (Address of principal executive offices) |
91411-2501 (Zip Code) |
(818) 787-2100
(Issuers telephone number, including area code)
(Issuers 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the registrants common stock as of September 30, 2011 was
23,980,581.
Electro Rent Corporation
Quarterly Report on Form 10-Q
For the Quarterly Period Ended August 31, 2011
TABLE OF CONTENTS
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EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Page 2
Table of Contents
EXPLANATORY NOTE
In this report, unless the context indicates otherwise, the terms Electro Rent, Company, we,
us and our refer to Electro Rent Corporation, a California corporation, and its subsidiaries.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). You can find many (but not all) of these statements by looking for words such as
approximates, believes, expects, anticipates, estimates, intends, plans, would,
may or other similar expressions in this report. We claim the protection of the safe harbor
contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any
forward-looking statements presented in this report, or that we may make orally or in writing from
time to time, are based on the beliefs of, assumptions made by, and information currently available
to, us. Such statements are based on assumptions, and the actual outcome will be affected by known
and unknown risks, trends, uncertainties and factors that are beyond our control. Although we
believe that our assumptions are reasonable, they are not guarantees of future performance, and
some will inevitably prove to be incorrect. As a result, our actual future results may differ from
our expectations, and those differences may be material. We are not undertaking any obligation to
update any forward-looking statements. Accordingly, investors should use caution in relying on
past forward-looking statements, which are based on known results and trends at the time they are
made, to anticipate future results or trends.
Factors that could cause or contribute to these differences include, among others, those risks and
uncertainties discussed under the sections contained in this Form 10-Q entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations, Part I, Item 3.
Quantitative and Qualitative Disclosures About Market Risk, and Part II, Item 1A. Risk Factors
as well as in our Annual Report on Form 10-K for the fiscal year ended May 31, 2011 (including the
Risk Factors discussed in Item 1A in that document), and our other filings with the Securities
and Exchange Commission. The risks included in those documents are not exhaustive, and additional
factors could adversely affect our business and financial performance. We operate in a very
competitive and rapidly changing environment. New risk factors emerge from time to time, and it is
not possible for us to predict all such risk factors, nor can we assess the impact of all such risk
factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements.
Page 3
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
Three Months Ended | ||||||||
August 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Rentals and leases |
$ | 31,309 | $ | 28,787 | ||||
Sales of equipment and other revenues |
27,341 | 22,038 | ||||||
Total revenues |
58,650 | 50,825 | ||||||
Operating expenses: |
||||||||
Depreciation of rental and lease equipment |
12,527 | 11,656 | ||||||
Costs of
revenues other than depreciation of rental and lease equipment |
21,610 | 17,222 | ||||||
Selling, general and administrative expenses |
15,893 | 13,568 | ||||||
Total operating expenses |
50,030 | 42,446 | ||||||
Operating profit |
8,620 | 8,379 | ||||||
Gain on bargain purchase, net of deferred taxes of
$2,092 and $107 |
3,194 | 153 | ||||||
Interest income, net |
99 | 118 | ||||||
Income before income taxes |
11,913 | 8,650 | ||||||
Income tax provision |
3,408 | 3,429 | ||||||
Net income |
$ | 8,505 | $ | 5,221 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.35 | $ | 0.22 | ||||
Diluted |
$ | 0.35 | $ | 0.22 | ||||
Shares used in per share calculation: |
||||||||
Basic |
23,981 | 23,964 | ||||||
Diluted |
24,132 | 24,047 | ||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
Page 4
Table of Contents
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (in thousands, except share numbers)
August 31, | May 31, | |||||||
2011 | 2011 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 23,492 | $ | 41,441 | ||||
Accounts receivable, net of allowance for doubtful
accounts of $514 and $602 |
32,530 | 30,616 | ||||||
Rental and lease equipment, net of accumulated
depreciation of $187,526 and $191,160 |
220,535 | 195,632 | ||||||
Other property, net of accumulated depreciation and
amortization of $17,061 and $16,825 |
13,956 | 14,127 | ||||||
Goodwill |
3,109 | 3,109 | ||||||
Intangibles, net of amortization of $1,180 and $1,151 |
1,185 | 1,214 | ||||||
Other assets |
17,711 | 19,788 | ||||||
$ | 312,518 | $ | 305,927 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Accounts payable |
$ | 6,817 | $ | 8,237 | ||||
Accrued expenses |
9,014 | 10,437 | ||||||
Deferred revenue |
6,791 | 5,874 | ||||||
Deferred tax liability |
45,480 | 41,004 | ||||||
Total liabilities |
68,102 | 65,552 | ||||||
Commitments and contingencies (Note 12) |
||||||||
Shareholders equity: |
||||||||
Preferred stock, $1 par shares authorized
1,000,000, none issued or outstanding |
||||||||
Common stock, no par shares authorized 40,000,000;
issued and outstanding August 31, 2011 - 23,980,581;
May 31, 2011 - 23,980,581 |
35,105 | 34,742 | ||||||
Retained earnings |
209,311 | 205,633 | ||||||
Total shareholders equity |
244,416 | 240,375 | ||||||
$ | 312,518 | $ | 305,927 | |||||
See accompanying notes to condensed consolidated financial statements (unaudited).
Page 5
Table of Contents
ELECTRO RENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
Three Months Ended | ||||||||
August 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 8,505 | $ | 5,221 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
12,835 | 11,952 | ||||||
Put option loss |
| 952 | ||||||
Realized gain on redemption of trading securities |
| (952 | ) | |||||
Remeasurement loss on foreign currency |
66 | 48 | ||||||
Provision for losses on accounts receivable |
6 | 11 | ||||||
Gain on sale of rental and lease equipment |
(2,412 | ) | (2,420 | ) | ||||
Gain on bargain purchase, net of deferred taxes |
(3,194 | ) | (153 | ) | ||||
Stock compensation expense |
326 | 195 | ||||||
Excess tax benefit for share based compensation |
(37 | ) | (14 | ) | ||||
Deferred income taxes |
2,384 | (671 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,434 | ) | (878 | ) | ||||
Other assets |
2,080 | (1,770 | ) | |||||
Accounts payable |
(1,883 | ) | (70 | ) | ||||
Accrued expenses |
(1,417 | ) | 2,988 | |||||
Deferred revenue |
440 | 156 | ||||||
Net cash provided by operating activities |
16,265 | 14,595 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of rental and lease equipment |
5,456 | 6,507 | ||||||
Cash paid for acquisition |
(10,673 | ) | | |||||
Proceeds from acquisition purchase price adjustment |
| 153 | ||||||
Payments for purchase of rental and lease equipment |
(24,130 | ) | (24,272 | ) | ||||
Redemptions of investments, trading |
| 14,275 | ||||||
Payments for purchase of other property |
(108 | ) | (183 | ) | ||||
Net cash used in investing activities |
(29,455 | ) | (3,520 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
| 149 | ||||||
Excess tax benefit for stock options exercised |
37 | 14 | ||||||
Payment of dividends |
(4,796 | ) | (3,594 | ) | ||||
Net cash used in financing activities |
(4,759 | ) | (3,431 | ) | ||||
Net increase in cash and cash equivalents |
(17,949 | ) | 7,644 | |||||
Effect of exchange rate changes on cash |
| (119 | ) | |||||
Cash and cash equivalents at beginning of period |
41,441 | 32,906 | ||||||
Cash and cash equivalents at end of period |
$ | 23,492 | $ | 40,431 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
Page 6
Table of Contents
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Note 1: Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by
Electro Rent Corporation, pursuant to the rules and regulations of the United States Securities and
Exchange Commission (the SEC). The condensed consolidated financial statements include the
accounts of Electro Rent Corporation and its wholly owned subsidiaries, Genstar Rental Electronics,
Inc., Electro Rent, LLC, ER International, Inc., Electro Rent Europe NV, Electro Rent Asia, Inc.,
Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd., and Electro Rent (Tianjin)
Rental Co., Ltd. (collectively we, us, or our) as consolidated with the elimination of all
intercompany transactions.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted pursuant to such SEC rules and regulations. These condensed
consolidated financial statements reflect all adjustments and disclosures that are, in our opinion,
necessary for a fair presentation of our financial position and results of operations for the
interim periods presented. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in our latest Annual
Report on Form 10-K filed with the SEC on August 8, 2011.
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities as well as the disclosures
of contingent assets and liabilities as of the date of these financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates, and results of operations for interim periods are not necessarily indicative of
results for the full year.
Foreign Currency
The U.S. dollar has been determined to be our functional currency. The assets and liabilities of
our foreign subsidiaries are remeasured from their functional currency to U.S. dollars at current
or historic exchange rates, as appropriate. Revenues and expenses are remeasured from any foreign
currencies to U.S. dollars using historic rates or an average monthly rate, as appropriate, for the
month in which the transaction occurred. Remeasurement gains and losses are included in selling,
general and administrative expenses or income taxes, as appropriate. The assets, liabilities,
revenues and expenses of our foreign subsidiaries are individually less than 10% of our respective
consolidated amounts. The euro, Canadian dollar and Chinese yuan are our primary foreign
currencies.
We enter into forward contracts to hedge against unfavorable fluctuations in our monetary assets
and liabilities in our European and Canadian operations. These contracts are designed to minimize
the effect of fluctuations in foreign currencies. Such derivative instruments are not designated
as hedging instruments and, therefore, are recorded at fair value as a current asset or liability,
and any changes in fair value are recorded in our condensed consolidated statements of operations.
The fair value of our foreign exchange forward contracts in the consolidated balance sheets is
shown in the table below:
Consolidated | ||||||||||||
Derivatives Not Designated as | Balance Sheet | August 31, | May 31, | |||||||||
Hedging Instruments | Location | 2011 | 2011 | |||||||||
Foreign exchange forward contracts |
Other assets | $ | 78 | $ | 15 | |||||||
Page 7
Table of Contents
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
The table below provides data about the amount of losses recognized in income for derivative
instruments not designated as hedging instruments:
Three Months | Three Months | |||||||||||
Location of Loss | Ended | Ended | ||||||||||
Derivatives Not Designated as | Recognized in | August 31, | August 31, | |||||||||
Hedging Instruments | Income on Derivatives | 2011 | 2010 | |||||||||
Foreign exchange forward contracts |
Selling, general and administrative expenses | $ | 6 | $ | 138 |
Other Assets
We include demonstration equipment used in connection with our resale activity of $4,520 and $3,894
as of August 31, 2011 and May 31, 2011, respectively, in other assets for a period of up to two
years. Demonstration equipment is recorded at the lower of cost or estimated market value until
the units are sold or transferred to our rental and lease equipment pool. Demonstration equipment
transferred to our rental and lease equipment pool is depreciated over its remaining estimated
useful life.
Other assets consisted of the following:
August 31, | May 31, | |||||||
2011 | 2011 | |||||||
Net investment in sales-type leases |
$ | 7,907 | $ | 7,478 | ||||
Demonstration equipment |
4,520 | 3,894 | ||||||
Supplemental executive retirement plan assets |
2,481 | 2,671 | ||||||
Income taxes receivable |
| 3,066 | ||||||
Prepaid expenses and other |
2,803 | 2,679 | ||||||
$ | 17,711 | $ | 19,788 | |||||
Recent Accounting Pronouncements
In December 2010, the FASB issued an update to its existing guidance for goodwill and other
intangible assets. This guidance modifies testing for reporting units with zero or negative
carrying amounts. For those reporting units, in addition to evaluating whether the carrying amount
of a reporting unit exceeds fair value, an entity must assess whether it is more likely than not
that a goodwill impairment exists. To make that determination, an entity must consider whether
there are any adverse qualitative factors indicating potential impairment. The amendments in this
update are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. Early adoption is not permitted. We do not anticipate that the adoption of this
guidance will have a material impact on our financial condition, results of operations or cash
flows.
In May 2011, the FASB issued guidance to provide a consistent definition of fair value and ensure
that the fair value measurement and disclosure requirements are similar between U.S. generally
accepted accounting principles and International Financial Reporting Standards. The guidance also
changes certain fair value measurement principles and enhances the disclosure requirements
particularly for Level 3 fair value measurements. This guidance is effective for reporting periods
beginning on or after December 15, 2011, with early adoption prohibited. We will be required to
adopt this guidance beginning with our fourth quarter of fiscal 2012. We do not anticipate that
the adoption of this guidance will have a material impact on our financial condition, results of
operations or cash flows.
In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance
eliminates the current option to report other comprehensive income and its components in the
statement of changes in equity. Instead, an entity will be required to present either a continuous
statement of net income and other comprehensive income or in two separate but consecutive
statements. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011. Early adoption of the new guidance is permitted and full
retrospective application is required. We will be required to adopt this guidance beginning with
our first quarter of fiscal 2013. We do not anticipate that the adoption of this guidance will
have a material impact on our financial condition, results of operations or cash flows.
Page 8
Table of Contents
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Note 2: Cash and Cash Equivalents
We consider highly liquid investments with maturities of three months or less at the date of
purchase to be cash equivalents. Cash equivalents consisted primarily of AAA-rated money market
funds in all periods presented.
Note 3: Fair Value Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including
cash equivalents, supplemental executive retirement plan assets and liabilities, and foreign
currency derivatives. The fair value of these financial assets and liabilities was determined
based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value, as follows:
Level 1 Observable inputs, such as quoted prices in active markets for identical assets
or liabilities;
Level 2 Inputs, other than the quoted prices in active markets, that are observable
either directly or through corroboration with observable market data; and
Level 3 Unobservable inputs, for which there is little or no market data for the assets
or liabilities, such as internally-developed valuation models.
Assets and liabilities measured at fair value on a recurring basis were as follows:
At August 31, 2011 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Instruments | Inputs | Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 16,319 | $ | | $ | | $ | 16,319 | ||||||||
Supplemental executive retirement
plan |
2,481 | | | 2,481 | ||||||||||||
Foreign exchange forward contracts |
| 78 | | 78 | ||||||||||||
Total assets measured at fair value |
$ | 18,800 | $ | 78 | $ | | $ | 18,878 | ||||||||
Liabilities |
||||||||||||||||
Supplemental executive retirement
plan |
$ | 2,481 | $ | | $ | | $ | 2,481 | ||||||||
Total liabilities measured at fair
value |
$ | 2,481 | $ | | $ | | $ | 2,481 | ||||||||
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
At May 31, 2011 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Instruments | Inputs | Inputs | Total | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 32,868 | $ | | $ | | $ | 32,868 | ||||||||
Supplemental executive retirement
plan |
2,671 | | | 2,671 | ||||||||||||
Foreign exchange forward contracts |
| 15 | | 15 | ||||||||||||
Total assets measured at fair value |
$ | 35,539 | $ | 15 | $ | | $ | 35,554 | ||||||||
Liabilities |
||||||||||||||||
Supplemental executive retirement
plan |
$ | 2,671 | $ | | $ | | $ | 2,671 | ||||||||
Total liabilities measured at fair
value |
$ | 2,671 | $ | | $ | | $ | 2,671 | ||||||||
The fair value measures for our money market funds and supplemental executive retirement plan asset
and liability were derived from quoted market prices in active markets and are included in Level 1
inputs. Foreign currency forward contracts were valued based on observable market spot and forward
rates as of our reporting date and are included in Level 2 inputs.
The following table presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis, excluding accrued interest components, using significant unobservable inputs
(Level 3):
Three Months Ended | ||||||||
August 31, 2010 | ||||||||
Auction Rate | ||||||||
Put Option | Securities | |||||||
Fair value at beginning of period |
$ | 952 | $ | 13,323 | ||||
Settlements (at par) |
| (14,275 | ) | |||||
Realized gains (losses) included in
interest income, net |
(952 | ) | 952 | |||||
Fair value at end of period |
$ | | $ | | ||||
During the first quarter of fiscal 2011, we sold our remaining Auction Rate Securities (ARS) to
UBS AG (UBS) at par plus accrued interest, for $14,275 in cash when we exercised our put right
(the Put Option) under a November 2008 settlement agreement (Agreement) with UBS. As a result,
we included in earnings a realized gain of $952 attributable to the sale and a realized loss of
$952 attributable to the Put Option. The ARS were long-term debt instruments backed by student
loans, a substantial portion of which was guaranteed by the United States government. The ARS and
Put Option were valued from quotes received from our broker, UBS, which were derived from UBSs
internally developed model. In accordance with accounting guidance, which permits an entity to
elect the fair value option for financial assets and liabilities, we elected to measure the Put
Option at fair value in order to match the changes in the fair value of the ARS.
Note 4: Acquisitions
Equipment Management Technology, Inc.
On August 24, 2011, pursuant to an asset purchase agreement, we completed the purchase of certain
assets and the assumption of specified post-closing liabilities of Equipment Management Technology,
Inc., a Nevada Corporation (EMT), for cash consideration of $10,673. EMT, headquartered in Las
Vegas, Nevada, was a provider of electronic T&M equipment. We acquired EMT in order to facilitate
growth in our test and measurement (T&M) business. EMT had previously filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code in the United States
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Bankruptcy Court for the District of Nevada. The sale was approved by the Bankruptcy Court on
August 11, 2011, and the related sale order was issued on August 12, 2011. At closing, $500 was
deposited into an escrow account for any post-closing adjustments that reduce the purchase price.
We have accounted for the acquisition of EMT as a business combination in accordance with
accounting guidance.
At August 31, 2011, we completed our estimates of the fair value of rental and lease equipment and
deferred revenue. Due to the timing of the acquisition we are still in the process of evaluating
the acquisition for possible intangible assets. We have also recorded a preliminary fair value
related to accounts receivable as final settlement of net accounts receivable will occur 60 days
after closing. We acquired gross accounts receivable of $972, of which an estimated $430 was not
expected to be collected, resulting in a preliminary fair value of $542. Once we have completed
our estimates of fair value of intangible assets and accounts receivable, we will have completed
the purchase accounting for the assets and liabilities in accordance with accounting guidance.
Under accounting guidance, a bargain purchase gain results if the fair value of the purchase
consideration is less than the net fair value of the assets acquired and liabilities assumed. We
recorded a bargain purchase gain of $3,194, net of deferred taxes, related to our acquisition of
EMT. We believe that we were able to negotiate a bargain purchase price as a result of our access
to the liquidity necessary to complete the transaction and EMTs recurring losses and recent
bankruptcy filing.
The following table provides the preliminary fair values of the assets acquired and liabilities
assumed as of the date of acquisition.
Total cash consideration |
$ | 10,673 | ||
Preliminary purchase price allocation: |
||||
Accounts receivable |
542 | |||
Rental and lease equipment |
15,896 | |||
Deferred tax liability |
(2,092 | ) | ||
Deferred revenue |
(479 | ) | ||
Net assets acquired |
13,867 | |||
Bargain purchase gain, net of deferred taxes of $2,092 |
$ | (3,194 | ) | |
The bargain purchase gain is classified separately in our condensed consolidated statements of
operations.
Acquisition-related transaction costs of $55, including $47 for the three months ended August 31,
2011, were accounted for as expenses in the periods in which the costs were incurred and are
included in our selling, general and administrative expenses.
The acquisition of EMT was an asset purchase, and EMTs operations were integrated with ours
immediately after the acquisition date. Revenues and income before income taxes of $91 and $52,
respectively, from the acquired customers were included in our consolidated statements of
operations for the three months ended August 31, 2011.
Supplemental pro forma information reflecting the acquisition of EMT as if it occurred on June 1,
2010 is not practicable because we are not able to obtain reliable historical financial information
for 2010 and 2011, primarily due to a deterioration of the organization and controls leading up to
and following the February 2011 bankruptcy filing.
Telogy, LLC
During fiscal 2011 we recorded additional bargain purchase gain associated with our March 31, 2010
acquisition of Telogy LLC (Telogy) of $342 ($202, net of deferred tax), of which $260 ($153, net
of deferred tax) was recorded during the three months ended August 31, 2010. The increase in the
bargain purchase gain consisted of (i) $260 representing the final determination of assets acquired
and other components of the purchase price in accordance with specific provisions of the APA, and
(ii) $82 resulting from a final determination of fair value of certain assets and liabilities
acquired from Telogy.
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Note 5: Equity Incentive Plan
Our 2005 Equity Incentive Plan (the Equity Incentive Plan) authorizes our Board of Directors to
grant incentive and non-statutory stock option grants, stock appreciation rights, restricted stock
awards, restricted stock units, performance unit awards and performance share awards covering a
maximum of 1,000 shares of our common stock. The Equity Incentive Plan replaced our prior stock
option plans, under which there are no outstanding options. Pursuant to the Equity Incentive Plan,
we have granted incentive and non-statutory options to directors, officers and key employees at
prices not less than 100% of the fair market value on the day of grant. In addition, we have
granted restricted stock and restricted stock units to directors, officers and key employees. The
Equity Incentive Plan provides for a variety of vesting dates with the majority of the outstanding
grants vesting at a rate of one-third per year over a period of three years from the date of grant.
All outstanding options expire in October 2011.
Stock Options
The following table summarizes certain information relative to options for common stock:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Exercise | Term (in | |||||||||||
Options | Price | years) | ||||||||||
Outstanding at May 31, 2011 |
36 | $ | 17.69 | |||||||||
Granted |
| | ||||||||||
Exercised |
| | ||||||||||
Forfeited/canceled |
| | ||||||||||
Outstanding at August 31, 2011 |
36 | $ | 17.69 | 0.1 | ||||||||
Vested and expected to vest at
August 31, 2011 |
36 | $ | 17.69 | 0.1 | ||||||||
Vested and exercisable at August 31, 2011 |
36 | $ | 17.69 | 0.1 | ||||||||
There were no stock options granted or vested during the three months ended August 31, 2011 and
2010. The aggregate intrinsic value of options exercised is calculated as the difference between
the exercise price of the underlying awards and the closing price of our common stock on the Nasdaq
Stock Market on the date of measurement. The aggregate intrinsic value of options exercised during
the three months ended August 31, 2011 and 2010 was $0 and $7, respectively. Shares of newly
issued common stock are issued upon any exercise of stock options.
Restricted Stock Units
Restricted stock units represent the right to receive one share of our common stock, provided that
the vesting conditions are satisfied. The following table represents restricted stock unit
activity for the three months ended August 31, 2011:
Weighted | ||||||||
Average | ||||||||
Grant | ||||||||
Restricted | Date | |||||||
Stock Units | Fair Value | |||||||
Nonvested at May 31, 2011 |
204 | $ | 11.36 | |||||
Granted |
84 | 16.83 | ||||||
Vested |
(78 | ) | 10.86 | |||||
Forfeited/canceled |
| | ||||||
Nonvested at August 31, 2011 |
210 | $ | 13.76 | |||||
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
We granted 84 and 96 restricted stock units during the three months ended August 31, 2011 and 2010,
respectively. As of August 31, 2011, we have unrecognized share-based compensation cost of
approximately $2,567 associated with restricted stock unit awards. This cost is expected to be
recognized over a weighted-average period of approximately 2.2 years.
Accounting for Share Based Payments
Accounting guidance requires all share-based payments to employees, including grants of employee
stock options, restricted stock and restricted stock units, to be recognized as compensation
expense in the consolidated financial statements based on their fair values. Compensation expense
is recognized over the period that an employee provides service in exchange for the award.
We use the Black-Scholes option pricing model to calculate the fair value of any option grant. Our
computation of expected volatility is based on historical volatility. Our computation of expected
term is determined based on historical experience of similar awards, giving consideration to the
contractual terms of the stock-based awards, vesting schedules and expectations of future employee
behavior. The expected term represents the period that our option awards are expected to be
outstanding and was determined based on historical experience of similar awards. The risk-free
interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term
of the option at the date of grant. Forfeitures are estimated at the date of grant based on
historical experience. We use the market price of our common stock on the date of grant to
calculate the fair value of each grant of restricted stock and restricted stock units.
We recorded $326 and $195 of stock-based compensation as part of selling, general and
administrative expenses for the three months ended August 31, 2011 and 2010, respectively.
We receive a tax deduction for certain stock option exercises during the period the options are
exercised, generally for the excess of the fair value of our common stock at the date of exercise
over the exercise price of the options, and dividends paid on vested restricted stock units.
Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess
of the deferred tax asset attributable to stock compensation costs for such options. The total tax
benefit realized from stock option exercises, shares issued and dividend payments for vested
restricted stock units for the three months ended August 31, 2011 and 2010 was $36 and $14,
respectively. Cash received from stock option exercises was $0 and $149 for the three months ended
August 31, 2011 and 2010, respectively.
Note 6: Goodwill and Intangibles
Goodwill represents the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired in a business combination. Intangible assets resulting
from the acquisitions of entities accounted for using the purchase method of accounting are
recorded at the estimated fair value of the assets acquired. Identifiable intangible assets
consist of purchased customer relationships and trade names.
Our goodwill and intangibles at August 31, 2011 are the result of our acquisition of Telogy on
March 31, 2010 and of Rush Computer Rentals, Inc. on January 31, 2006. Our evaluation of
intangible assets, if any, associated with the acquisition of EMT on August 24, 2011 has not yet
been completed.
The changes in carrying amount of goodwill and other intangible assets for the three months ended
August 31, 2011 were as follows:
Balance as of | ||||||||||||
June 1, 2011 (net | Balance as of | |||||||||||
of amortization) | Amortization | August 31, 2011 | ||||||||||
Goodwill |
$ | 3,109 | $ | | $ | 3,109 | ||||||
Trade name |
411 | | 411 | |||||||||
Customer relationships |
803 | (29 | ) | 774 | ||||||||
$ | 4,323 | $ | (29 | ) | $ | 4,294 | ||||||
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Goodwill is not deductible for tax purposes.
We evaluate the recoverability of goodwill and indefinite-lived intangible assets annually as of
May 31, and whenever events or changes in circumstances indicate to us that carrying amount may not
be recoverable. There were no conditions that indicated any impairment of goodwill or identifiable
intangible assets as of May 31, 2011.
Intangible assets with finite useful lives are amortized over their respective estimated useful
lives. The following table provides a summary of our intangible assets:
August 31, 2011 | ||||||||||||||||
Estimated | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
Useful Life | Amount | Amortization | Amount | |||||||||||||
Trade name |
indefinite | $ | 411 | $ | | $ | 411 | |||||||||
Customer relationships |
3-4 years | 1,954 | (1,180 | ) | 774 | |||||||||||
$ | 2,365 | $ | (1,180 | ) | $ | 1,185 | ||||||||||
May 31, 2011 | ||||||||||||||||
Estimated | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
Useful Life | Amount | Amortization | Amount | |||||||||||||
Trade name |
indefinite | $ | 411 | $ | | $ | 411 | |||||||||
Customer relationships |
3-4 years | 1,954 | (1,151 | ) | 803 | |||||||||||
$ | 2,365 | $ | (1,151 | ) | $ | 1,214 | ||||||||||
Amortization expense related to intangible assets was $29 and $54 for the three months ended August
31, 2011 and 2010, respectively.
Amortization expense for customer relationships and non-compete agreements is included in selling,
general and administrative expenses. The following table provides estimated future amortization
expense related to intangible assets as of August 31, 2011:
Future | ||||
Year ending May 31, | Amortization | |||
2012 (remaining) |
$ | 88 | ||
2013 |
118 | |||
2014 |
118 | |||
2015 |
118 | |||
2016 |
118 | |||
Thereafter |
214 | |||
$ | 774 | |||
Note 7: Noncash Investing and Financing Activities
We had accounts payable and other accruals related to acquired rental and lease equipment totaling
$5,308 and $4,860 as of August 31, 2011 and May 31, 2011, respectively, and $6,760 and $6,167 as of
August 31, 2010 and May 31, 2010, respectively, all of which amounts were subsequently paid.
During the three months ended August 31, 2011 and the fiscal year ended May 31, 2011, we
transferred $79 and $520, respectively, of demonstration equipment, included in other assets, to
rental and lease equipment. There were no similar activities for the three months ended August 31,
2010 or the fiscal year ended May 31, 2010. We had no accrual for dividends declared and not yet
paid in accrued expenses and as a reduction of retained earnings as of August 31, 2011 and May 31,
2011, respectively, compared to accruals of $3,596 and $0 as of August 31, 2010 and May 31, 2010,
respectively, all of which amounts were subsequently paid.
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Note 8: Sales-Type Leases
We have certain customer leases providing bargain purchase options, which are accounted for as
sales-type leases. Interest income is recognized over the life of the lease using the effective
interest method.
The initial acceptance of customer finance arrangements is based on an in-depth review of each
customers credit profile, including review of third party credit reports, customer financial
statements and bank verifications. We monitor the credit quality of our sales-type lease portfolio
based on payment activity that drives the finance lease receivable aging. This credit quality is
assessed on a monthly basis. There were no balances due for sales-type receivables beyond 90 days
as of August 31, 2011. Our historical losses on finance lease receivables are insignificant, and
therefore we do not have a specific allowance for credit losses.
The minimum lease payments receivable and the net investment included in other assets for such
leases were as follows:
August 31, | May 31, | |||||||
2011 | 2011 | |||||||
Gross minimum lease payments receivable |
$ | 8,274 | $ | 7,834 | ||||
Less unearned interest |
(367 | ) | (356 | ) | ||||
Net investment in sales-type lease receivables |
$ | 7,907 | $ | 7,478 | ||||
The following table provides estimated future minimum lease payments receivable related to
sales-type leases:
Year ending May 31, | ||||
2012 (remaining) |
$ | 5,231 | ||
2013 |
2,530 | |||
2014 |
512 | |||
2015 |
1 | |||
$ | 8,274 | |||
Note 9: Segment Reporting and Related Disclosures
Accounting guidance establishes reporting standards for an enterprises operating segments and
related disclosures about its products, services, geographic areas and major customers. Operating
segments are defined as components of an enterprise for which separate financial information is
available that is regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. In order to determine our operating segments, we
considered the following: an operating segment is a component of an enterprise (i) that engages in
business activities from which it may earn revenues and incur expenses, (ii) whose operating
results are regularly reviewed by the enterprises chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its performance, and (iii) for which
discrete financial information is available. In accordance with this guidance, we have identified
two operating segments: the rental, lease and sale of T&M equipment and the rental, lease and sale
of data products (DP) equipment.
Although we have separate operating segments for T&M and DP equipment, these two segments are
aggregated into a single reportable segment because they have similar economic characteristics and
qualitative factors. The T&M and DP segments have similar long-term average gross margins, and
both rent, lease and sell electronic equipment to large corporations, purchase directly from major
manufacturers, configure and calibrate the equipment, and ship directly to customers.
Our equipment pool, based on acquisition cost, consisted of $367,564 of T&M equipment and $40,497
of DP equipment at August 31, 2011 and $347,138 of T&M equipment and $39,654 of DP equipment at May
31, 2011.
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Revenues for these product groups were as follows for the three months ended August 31, 2011 and
2010:
T&M | DP | Total | ||||||||||
2011 |
||||||||||||
Rentals and leases |
$ | 26,602 | $ | 4,707 | $ | 31,309 | ||||||
Sales of equipment and other revenues |
26,716 | 625 | 27,341 | |||||||||
$ | 53,318 | $ | 5,332 | $ | 58,650 | |||||||
2010 |
||||||||||||
Rentals and leases |
$ | 24,037 | $ | 4,750 | $ | 28,787 | ||||||
Sales of equipment and other revenues |
21,370 | 668 | 22,038 | |||||||||
$ | 45,407 | $ | 5,418 | $ | 50,825 | |||||||
No single customer accounted for more than 10% of total revenues during the three months ended
August 31, 2011 and 2010.
Selected country information is presented below:
Three Months Ended | ||||||||
August 31, | ||||||||
2011 | 2010 | |||||||
Revenues: (1) |
||||||||
U.S. |
$ | 50,087 | $ | 45,124 | ||||
Other (2) |
8,563 | 5,701 | ||||||
Total |
$ | 58,650 | $ | 50,825 | ||||
As of | ||||||||
August 31, 2011 | May 31, 2011 | |||||||
Net Long-Lived Assets: (3) |
||||||||
U.S. |
$ | 203,022 | $ | 180,591 | ||||
Other (2) |
35,763 | 33,491 | ||||||
Total |
$ | 238,785 | $ | 214,082 | ||||
(1) | Revenues by country are based on the location of shipping destination, and not whether the order originates in the United States parent or a foreign subsidiary. | |
(2) | Other consists of foreign countries that each individually account for less than 10% of the total revenues or assets. | |
(3) | Net long-lived assets include rental and lease equipment, other property, goodwill and intangibles, net of accumulated depreciation and amortization. |
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Note 10: Computation of Earnings Per Share
The following is a reconciliation of the denominator used in the computation of basic and diluted
earnings per share for the three months ended August 31, 2011 and 2010:
Three Months Ended | ||||||||
August 31, | ||||||||
2011 | 2010 | |||||||
Denominator: |
||||||||
Denominator for basic earnings per share -
weighted average common shares outstanding |
23,981 | 23,964 | ||||||
Effect of dilutive options and restricted stock (1) |
151 | 83 | ||||||
Diluted shares used in per share calculation |
24,132 | 24,047 | ||||||
Net income |
$ | 8,505 | $ | 5,221 | ||||
Earnings per share: |
||||||||
Basic |
$ | 0.35 | $ | 0.22 | ||||
Diluted |
$ | 0.35 | $ | 0.22 |
(1) | Excludes 36 options outstanding during both the three months ended August 31, 2011 and 2010, for which the exercise price exceeded the average market price of our common stock during that period. |
Note 11: Income Taxes
We recognize a liability or asset for the deferred tax consequences of temporary differences
between the tax basis of assets and liabilities and their reported amounts in the financial
statements. These temporary differences will result in taxable or deductible amounts in future
years when reported amounts of the assets or liabilities are recovered or settled. The deferred
tax assets are periodically reviewed for recoverability.
On June 1, 2007, we adopted new accounting guidance which establishes a single model to address the
accounting for uncertain tax positions. Specifically, it prescribes a recognition threshold that a
tax position is required to meet before being recognized in the financial statements and provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition issues.
We recognize the tax impact from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax impact recognized in the financial statements from such a position
is measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. We recognize interest, penalties and foreign currency gains and losses
with respect to uncertain tax positions as components of our income tax provision. Accrued
interest and penalties are included within accrued expenses in the consolidated balance sheet.
Significant judgment is required in the identification of uncertain tax positions and in the
estimation of penalties and interest on uncertain tax positions. During the second quarter of
fiscal 2011 we effectively settled our remaining uncertain tax positions, and derecognized $4,515
of previously recognized uncertain tax positions, and the related deferred tax asset, and $1,396
for interest and penalties previously recognized.
We are subject to taxation in the U.S., as well as various states and foreign jurisdictions. We
have substantially settled all income tax matters for the United States federal jurisdiction for
years through fiscal 2009. Major state jurisdictions have been examined through fiscal years 2004
and 2005, and foreign jurisdictions have not been examined for their respective maximum statutory
periods.
There were no unrecognized tax benefits for the three months ended August 31, 2011.
Note 12: Commitments and Contingencies
We purchase substantial amounts of rental equipment from numerous vendors. As a result, we have
occasionally been included as a member of the plaintiff class in class action lawsuits related to
product warranties or price adjustments.
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ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
Settlements of such claims can result in distributions of cash or product coupons that can be
redeemed, sold or used to purchase new equipment. We recognize any benefits from such settlements
when all contingencies have expired, to the extent either cash has been received and/or realization
of value from any coupon is assured.
We are subject to legal proceedings and business disputes involving ordinary routine legal
proceedings and claims incidental to our business. The ultimate legal and financial liability with
respect to such matters generally cannot be estimated with certainty and requires the use of
estimates in recording liabilities for potential litigation settlements. Estimates for losses from
litigation are made after consultation with outside counsel. If estimates of potential losses
increase or the related facts and circumstances change in the future, we may be required to record
either more or less litigation expense. We are not involved in any pending or threatened legal
proceedings, other than ordinary routine legal proceedings and claims incidental to our business,
that we believe could reasonably be expected to have a material adverse effect on our financial
condition, results of operations or cash flows.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion addresses our financial condition as of August 31, 2011 and May 31, 2011,
the results of our operations for the three months ended August 31, 2011 and 2010, respectively,
and cash flows for the three month period ended August 31, 2011 and 2010. This discussion should
be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 and the Risk Factors in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended May 31, 2011, to which you are directed for additional information.
Overview
We are one of the largest global organizations devoted to the rental, lease and sale of new and
used electronic test and measurement (T&M) equipment. We purchase that equipment from leading
manufacturers such as Agilent Technologies, Inc. (Agilent) and Tektronix primarily for use by our
customers in the aerospace, defense, telecommunications, electronics, industrial and semiconductor
industries. Although it represented only approximately 8% of our revenues in fiscal 2011 and 9% of
our revenues for the three months ended August 31, 2011, we believe our DP division is one of the
largest rental businesses in the United States for personal computers and servers from
manufacturers including Dell, HP/Compaq, IBM and Toshiba. We have recently expanded our efforts in
the rental, lease and sale of industrial equipment such as electrical test equipment and inspection
equipment. Our resale agreement with Agilent, which commenced in fiscal 2010, gives us the
exclusive right to sell Agilents more complex T&M equipment to small and medium size customers
(who previously purchased directly from Agilent) in the United States and Canada. Since entering
into the resale agreement with Agilent, we have expanded our sales force to support our sales of
Agilents T&M equipment and have cross trained our new resale organization and existing T&M sales
force to provide both new and existing customers a complete product offering, including rental,
lease and sales of new and used equipment.
On March 31, 2010, we completed the acquisition of certain assets (including accounts receivable
and rental equipment but excluding certain designated assets) and select liabilities of Telogy, LLC
(Telogy) for $24.7 million in cash, subject to post-closing adjustments. The purchase price was
reduced by $0.3 million in fiscal 2011 reflecting the final determination of assets acquired and
other components of the purchase price in accordance with specific provisions of the asset purchase
agreement with Telogy. Telogy, headquartered in Union City, California, was a leading provider of
electronic T&M equipment in North America.
On August 24, 2011, we completed the purchase of certain assets (including accounts receivable and
rental equipment but excluding certain designated assets) and the assumption of specified
post-closing liabilities of Equipment Management Technology, Inc., a Nevada Corporation (EMT),
for $10.7 million in cash, of which $0.5 million was deposited into an escrow account for any
post-closing adjustments. EMT had previously filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada. The
sale was approved by the Bankruptcy Court on August 11, 2011, and the related sale order was issued
on August 12, 2011. EMT, headquartered in Las Vegas, Nevada, was a provider of electronic T&M
equipment in the U.S. We accounted for the acquisitions under Accounting Standards Codification
(ASC) 805, Business Combinations. (See Note 4 to the condensed consolidated financial statements
(unaudited) included in this Form 10-Q.)
In recent years, our financial results were impacted by competitive pressure on rental rates due in
large part to the recession in the U.S. and our major international markets. During fiscal 2011
and the first three months of fiscal 2012, we experienced a modest improvement in our T&M and DP
rental rates and a significant increase in our equipment on rent, in part due to our recent
acquisitions, while maintaining a high utilization rate, in particular in our North American and
European operations. In addition, our rental revenues have benefited from our expanded sales force
and integration and cross training of our new resale organization and existing T&M sales force. As
a result of these continued improvements, and sales of T&M equipment in connection with our Agilent
resale agreement, we experienced strong growth in revenues for fiscal 2011 and the first three
months of fiscal 2012. For the three months ended August 31, 2011, compared to the three months
ended August 31, 2010, our operating profit modestly improved reflecting our significant investment
in broadening and strengthening our sales organization in support of increased sales and rental
demand and to better focus on future growth opportunities. Despite our growth, our customers and
competitors continue to be affected by the recent recession and ongoing uncertainty in the U.S. and
global economy, resulting in more stringent credit requirements and reduced access to capital. We
must continue to be focused on remaining profitable in the current conditions, as well as being
prepared for the possibility that recessionary trends may continue in future periods.
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For the three months ended August 31, 2011, 85% of our rental and lease revenues were derived from
T&M equipment, compared to 83% for the prior year period. We have experienced growth in our T&M
rental revenues, due to increased rental activity, a modest increase in rates, and the integration
of our new resale organization and existing T&M sales force. Our DP rental revenues also increased
slightly during the three months ended August 31, 2011.
For the first three months of fiscal 2012, rental revenues were 91% of our rental and lease
revenues, compared to 89% for the first three months of fiscal 2011. The increase is the result of
an increase in our T&M and DP rental activity, while our lease revenues declined, particularly in
our DP segment.
To maximize our overall profit from the rental, leasing, and sales of equipment, we manage our
equipment pool on an on-going basis by controlling the timing, pricing and mix of our purchases and
sales of equipment. We acquire new and used equipment to meet current technological standards and
current and anticipated customer demand, and we sell our used equipment where we believe that is
the most lucrative option. We employ a complex equipment management strategy and our proprietary
PERFECT software to adjust our inventory and pricing on a dynamic basis in order to maximize
equipment availability, utilization and profitability. We manage each specific equipment class
based on a separate assessment of that equipments historical and projected life cycle and numerous
other factors, including the U.S. and global economy, interest rates and new product launches. If
we do not accurately predict market trends, or if demand for the equipment we supply declines, we
can be left with inventory that we are unable to rent or sell for a profit. We assess the carrying
value of the equipment pool on a quarterly basis or more frequently when factors indicating
potential impairment are present.
Profitability and Key Business Trends
We generally measure our overall level of profitability with the following metrics:
| Net income per diluted common share (EPS); | ||
| Net income as a percentage of average assets (annualized); and | ||
| Net income as a percentage of average equity (annualized). |
Comparing the first three months of fiscal 2012 to the first three months of fiscal 2011, our
revenues increased by 15.4% from $50.8 million to $58.7 million, our operating profit increased
2.9% from $8.4 million to $8.6 million and our net income increased by 62.9% from $5.2 million to
$8.5 million.
Our rental and lease revenues increased 8.8% from $28.8 million to $31.3 million, while our T&M
sales activity increased 25.0% from $21.4 million to $26.7 million. Our rental revenues have grown
as a result of increased rental activity and rental rates in our North American and European
operations, as well as the integration of our new resale organization and existing T&M sales force.
Our sales revenues have increased due to continued growth in new equipment sales in connection
with our Agilent resale agreement and an increase in our finance leases.
Some of our key profitability measurements are presented below for the three months ended August
31, 2011 and 2010:
Fiscal 2012 | Fiscal 2011 | |||||||
Net income per diluted common share (EPS) |
$ | 0.35 | $ | 0.22 | ||||
Net income as a percentage of average assets |
11.0 | % | 7.5 | % | ||||
Net income as a percentage of average equity |
14.3 | % | 9.3 | % | ||||
Our net income includes bargain purchase gains, net of deferred taxes, of $3.2 million and $0.2
million for the three months ended August 31, 2011 and 2010, respectively, as a result of our
recent acquisitions of EMT and Telogy, respectively. Our operating profit modestly improved, as
growth in our rental revenues and sales of new equipment were offset by an increase in depreciation
expense of $0.9 million, or 7.5%, as we have invested in additional rental equipment to support our
growth, and an increase in selling, general and administrative expenses of $2.3 million, or 17.1%,
primarily related to the broadening and strengthening of our sales organization in support of our
Agilent resale agreement, higher rental demand, and future growth opportunities.
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The average amount of our equipment on rent, based on acquisition cost, increased 9.8% to $221.9
million at August 31, 2011 from $202.2 million at August 31, 2010, in part due to the acquisition
of EMT during the three months ended August 31, 2011. Acquisition cost of equipment on lease
increased 0.1% to $29.2 million at August 31, 2011 from $29.1 million at August 31, 2010.
Average rental rates for our T&M and DP segments increased by 3.1% for the first quarter of fiscal
2012 compared to the first quarter of fiscal 2011, while average lease rates declined by 6.7% for
the same period. Average utilization for our T&M equipment pool, based on average acquisition cost
of equipment on rent and lease compared to the total average equipment pool, decreased to 68.1% for
the first quarter of fiscal 2012 from 69.9% for the first quarter of fiscal 2011. The average
utilization of our DP equipment pool, based on the same method of calculation, decreased to 43.2%
from 48.4% over the same period.
Results of Operations
Comparison of Three Months Ended August 31, 2011 and August 31, 2010
Revenues
Total revenues for the three months ended August 31, 2011 and 2010 were $58.7 million and $50.8
million, respectively. The 15.4% increase in total revenues was due to an 8.8% increase in rental
and lease revenues and a 24.1% increase in sales of equipment and other revenues.
Rental and lease revenues for the three months ended August 31, 2011 were $31.3 million, compared
to $28.8 million for the same period of the prior fiscal year. This increase reflects an increase
in our T&M rental activity and rental rates in our North American and European operations, due to
improved market conditions and the integration of our new resale organization and existing T&M
sales force, providing additional rental opportunities to an expanding customer base. This
increase was offset by a decline in our lease revenues, due to a decrease in demand, primarily in
our DP business.
Sales of equipment and other revenues increased to $27.3 million for the first quarter of fiscal
2012 from $22.0 million in the prior year quarter. The increase is due to an increase in our sales
of new T&M equipment through our Agilent resale agreement and increased finance lease activity,
partially offset by a decline in the sales of used equipment. Our unfilled orders for T&M
equipment relating to our resale agreement were $14.6 million at August 31, 2011.
Operating Expenses
Depreciation of rental and lease equipment increased in the first quarter of fiscal 2012 to $12.5
million, or 40.0% of rental and lease revenues, from $11.7 million, or 40.5% of rental and lease
revenues, in the first quarter of fiscal 2011. The increased depreciation expense in fiscal 2012
was due to a higher average rental and lease equipment pool. The decreased ratio, as a percentage
of rental and lease revenues, was due to higher average rental rates for fiscal 2012.
Costs of revenues other than depreciation increased 25.5% to $21.6 million in the first quarter of
fiscal 2012 from $17.2 million in the same period of fiscal 2011. Costs of revenues other than
depreciation primarily includes the cost of equipment sales, which increased as a percentage of
equipment sales to 77.5% in the first quarter of fiscal 2012 from 76.7% in the first quarter of
fiscal 2011. This increase is due to a decrease in used equipment sales and an increase in sales
of new T&M equipment through our Agilent resale agreement, which generally carry a lower margin
than used equipment sales. Our sales margin is expected to continue to decline as a result of
anticipated growth in connection with our resale agreement. Our sales margin is also impacted by
competition, the global recession, and customer requirements and funding.
Selling, general and administrative expenses increased 17.1% to $15.9 million in the first quarter
of fiscal 2012 compared to $13.6 million in the first quarter of fiscal 2011. As a percentage of
total revenues, selling, general and administrative expenses increased to 27.1% in the first
quarter of fiscal 2012 from 26.7% in the first quarter of fiscal 2011. Our selling, general and
administrative expenses increased primarily due to the broadening and strengthening of our sales
organization in support of our Agilent resale agreement, higher rental demand, and future growth
opportunities.
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Gain on Bargain Purchase
Gain on bargain purchase, net of deferred tax, of $3.2 million for fiscal 2012 and $0.2 million for
fiscal 2011, related to our recent acquisitions of EMT and Telogy, respectively, resulting from the
excess of the net fair value of the assets acquired and liabilities assumed over the respective
purchase price. A majority of the Telogy bargain purchase gain was recorded in fiscal 2010, the
year of acquisition. We believe that we were able to negotiate a bargain purchase price as a
result of our access to the liquidity necessary to complete the transactions, and the recurring
losses and recent bankruptcy filings of both EMT and Telogy.
Interest Income, Net
Interest income, net, of $0.1 million for the first quarter of fiscal 2012 and 2011, respectively,
primarily reflects interest on our sales-type leases, which modestly decreased. Due to
historically low interest rates on our money market funds, fluctuations in our cash balance
insignificantly impact our interest income. During the first quarter of fiscal 2011, interest
income, net, included offsetting gains and losses on certain Auction Rate Securities (ARS) that
we held and the related put option, with no net impact on our net income. The sale of the ARS is
discussed, above, in Note 3 to our financial statements and, below, under the Liquidity and
Capital ResourcesCash and Cash Equivalents heading.
Income Tax Provision
Our effective tax rate was 28.6% in the first quarter of fiscal 2012, compared to 39.6% in the
first quarter of fiscal 2011. The decrease is due to an increase in our bargain purchase gain, net
of deferred taxes, of $3.2 million for the three months ended August 31, 2011 compared to the prior
year period, as a result of our purchase of EMT on August 24, 2011. Bargain purchase gains are
recorded net of deferred taxes, and are treated as permanent differences, resulting in a lower
effective tax rate in the period recorded.
Liquidity and Capital Resources
Capital Expenditures
Our primary capital requirements have been purchases of rental and lease equipment. We generally
purchase equipment throughout the year to replace equipment that has been sold and to maintain
adequate levels of rental equipment to meet existing and expected customer demands. To meet T&M
rental demand, support areas of potential growth for both T&M and DP equipment and to keep our
equipment pool technologically up-to-date, we made payments for purchases of $24.1 million of
rental and lease equipment during the first three months of fiscal 2012 compared to $24.3 million
during the first quarter of fiscal 2011.
Dividends
During the first quarter of fiscal 2012, we paid dividends of $0.20 per common share or $0.80 per
annum, amounting to an aggregate of $4.8 million. In the first quarter of fiscal 2011, we paid
dividends of $0.15 per common share or $0.60 per annum, amounting to an aggregate of $3.6 million.
We expect to continue paying a quarterly dividend in future quarters, although the amount and
timing of dividends, if any, will be made at the discretion of our board of directors in each
quarter, subject to compliance with applicable law.
Cash and Cash Equivalents
Despite the $71.8 million in cash we have returned to our shareholders since the beginning of
fiscal 2009, and the $35.4 million we paid in connection with the recent acquisitions of Telogy and
EMT, our cash and cash equivalents balance was $23.5 million at August 31, 2011. In addition, we
have a $10.0 million unused line of credit with a bank. We expect that the level of our cash and
cash equivalents may decrease as we pay dividends in future quarters, or if we decide to buy back
our common stock, increase equipment purchases in response to demand, finance another acquisition,
or pursue other opportunities. We primarily invest our cash balance in money market funds and
corporate and government bond funds.
On November 6, 2008, we accepted an offer from UBS AG (UBS) providing us with rights related to
our ARS (the Rights). The Rights permitted us to require UBS to purchase our ARS at par value,
defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid
dividends or interest, at any time between June 30, 2010
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and July 2, 2012. During the first quarter of fiscal 2011, UBS purchased our remaining ARS of
$14.3 million at par value.
Cash Flows and Credit Facilities
During the first three months of fiscal 2012 and fiscal 2011, net cash provided by operating
activities was $16.3 million and $14.6 million, respectively. The increase in operating cash flow
was primarily attributable to a reduction in other assets due to a tax refund of approximately $2.5
million and an increase in deferred taxes in the first quarter of fiscal 2012, offset by changes in
working capital in the first quarter of fiscal 2012 as compared to fiscal 2011.
During the first three months of fiscal 2012 and 2011, net cash used in investing activities was
$29.5 million and $3.5 million, respectively. The increase in cash used in investing activities
for the first quarter of fiscal 2012 was due, in part, to the cash paid for the acquisition of EMT
of $10.7 million, and a decrease in the proceeds from sale of rental and lease equipment to $5.5
million for fiscal 2012 compared to $6.5 million for the first quarter of fiscal 2011. There were
no redemptions of investments, trading, during the first quarter of fiscal 2012 compared to $14.3
million for the same period of fiscal 2011. Payments for purchase of rental and lease equipment
were consistent at $24.1 million for the three months ended August 31, 2011 compared to $24.3
million for the three months ended August 31, 2010.
Net cash flows used in financing activities were $4.8 million and $3.4 million for the first
quarters of fiscal 2012 and 2011, respectively. These funds used were primarily composed of
payments for dividends of $4.8 million and $3.6 million for the first three months of fiscal 2012
and 2011, respectively.
We have a $10.0 million revolving line of credit with an institutional lender, subject to certain
restrictions, to meet equipment acquisition needs as well as working capital and general corporate
requirements. We had no bank borrowings outstanding or off balance sheet financing arrangements at
August 31, 2011.
We believe that cash and cash equivalents, cash flows from operating activities, proceeds from the
sale of equipment and our borrowing capacity will be sufficient to fund our operations for at least
the next twelve months.
Contractual Obligations
Our contractual obligations have not changed materially from those included in our Annual Report on
Form 10-K for the fiscal year ended May 31, 2011.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (generally accepted accounting
principles) requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the 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.
On a regular basis, we review these estimates, including those related to asset lives and
depreciation methods, impairment of long-lived assets including rental and lease equipment,
goodwill and definite lived intangible assets, allowance for doubtful accounts and income taxes,
and adjust them as appropriate. These estimates are based on our historical experience and on
various other assumptions we believe to be reasonable under the circumstances.
These determinations, even though inherently subjective and subject to change, affect the reported
amounts of our assets, liabilities and expenses. While we believe that our estimates are based on
reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates
and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely
differ from our accruals, and those differencespositive or negativecould be material.
We identified certain critical accounting policies that affect certain of our more significant
estimates and assumptions used in preparing our consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2011. We have not made any material changes
to these policies as previously disclosed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the first three months of fiscal 2012, there were no material changes in the information
regarding market risk contained in our Annual Report on Form 10-K for the fiscal year ended May 31,
2011.
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Item 4. Controls and Procedures.
As of August 31, 2011, the end of the period covered by this report, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report were effective.
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f)
of the Exchange Act) that occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect
that our disclosure controls and procedures or our internal controls over financial reporting will
prevent all error and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been detected.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business, including claims of alleged infringement, misuse or
misappropriation of intellectual property rights of third parties. As of the date of this report,
we are not a party to any litigation which we believe would have a material adverse effect on our
business operations or financial condition.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the
discussion of various risks and uncertainties contained in Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K for the fiscal year ended May 31, 2011. We believe those risk factors
are the most relevant to our business and could cause our results to differ materially from the
forward-looking statements made by us. However, those are not the only risk factors that we face.
Additional risks that we do not consider material, or of which we are not currently aware, may also
have an adverse impact on us. Our business, financial condition, and results of operations could be
seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that
event, the market price for our common stock could decline, and our shareholders may lose all or
part of their investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
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Item 6. Exhibits.
Exhibit No. | Document Description | Incorporation by Reference | ||
10.22
|
Fourth amendment to Commercial Credit Agreement dated as of September 28, 2011 between the Company and Union Bank of California, N.A. | Incorporated by reference from Registrants Current Report on Form 8-K filed September 30, 2011. | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith. | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith. | ||
32.1
|
Section 1350 Certification by Chief Executive Officer | Filed herewith. | ||
32.2
|
Section 1350 Certification by Chief Financial Officer | Filed herewith. | ||
101.INS*
|
XBRL Instance Document. | |||
101.SCH*
|
XBRL Taxonomy Extension Schema Document. | |||
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document. | |||
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document. | |||
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
(* = | furnished herewith and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended) |
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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 |
||||
Date: October 6, 2011 | /s/ Craig R. Jones | |||
Craig R. Jones | ||||
Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and duly authorized to sign this report on behalf of the company) | ||||
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