Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ELRC > SEC Filings for ELRC > Form 10-K on 12-Aug-2014All Recent SEC Filings

Show all filings for ELECTRO RENT CORP

Form 10-K for ELECTRO RENT CORP


12-Aug-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto and the other financial and statistical information appearing elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We are one of the largest global organizations devoted to the rental, lease and sale of new and used electronic T&M equipment. We purchase that equipment from leading manufacturers such as Keysight, Anritsu, and Tektronix primarily for use by our customers in the aerospace, defense, telecommunications, electronics, industrial and semiconductor industries.
In addition, although it represented only approximately 8%, 7% and 7% of our revenues in fiscal 2014, 2013 and 2012, respectively, 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, Toshiba and Apple.
In fiscal 2010, we became a reseller for Agilent, the largest T&M equipment manufacturer in North America. On May 29, 2014, we entered into a new agreement with Agilent, pursuant to which we were appointed as a reseller for certain new and premium used T&M products and services in the United States and Canada. This agreement replaced and superseded the previous agreement dated December 1, 2009, which expired according to its terms on May 31, 2014. Agilent has, effective August 1, 2014, assigned our reseller agreement to its wholly-owned subsidiary, Keysight, in connection with the planned spin-off by Agilent of Keysight into a separate publicly traded company, which Agilent has announced it expects to complete by November


Table of Contents

2014. Our reseller agreement with Keysight provides us with the exclusive right to sell Keysight's more complex T&M equipment to small and medium size customers (who previously purchased directly from Agilent/Keysight).
We do not currently have reseller agreements with any other manufacturers for equipment similar to that included in our Keysight reseller agreement. In addition, we sell used equipment from a variety of manufacturers that was previously in our rental and lease pool.
We have a focused sales strategy, using a direct sales force to meet our customers' needs in our T&M equipment rental, lease and sales business. We have a large technical sales force that consists primarily of field engineers and applications engineers, each of whom specializes in all the products and services offered by our company. Our sales force is usually assigned to specific territories, and identifies potential customers through coordinated efforts with our marketing organization. Our marketing organization is staffed by professionals with many years of industry-related experience. As our customers have a wide range of requirements for equipment, our sales force is able to leverage our extensive knowledge of the test and measurement equipment environment to determine the right product to rent, lease or sell to the customer to meet the customer's specific needs.
Our sales force also specializes in configuring new Keysight equipment to sell to our customers that is tailored to the customer's need. These configurations typically start with a base model, which is frequently upgraded through an extensive list of options in order to perform the customer's specific test or measurement. Once the configuration is determined, it serves as the basis for our orders to Keysight, who builds the product accordingly. We order equipment from Keysight once the customer has placed an order with us. Equipment is typically shipped directly to the customer by Keysight at our request. Occasionally, equipment is shipped to our warehouse prior to delivery to the customer. Inventory held for sale is immaterial and is therefore included in other assets in our consolidated balance sheets. Each order and sales invoice is subject to our standard sales terms and conditions, which include provisions covering equipment delivery delays and warranty services.
On August 24, 2011, we completed the acquisition of certain assets (including accounts receivable and rental equipment but excluding certain designated assets) and the assumption of specified post-closing liabilities of EMT, for $10.7 million in cash, of which $0.5 million was deposited into an escrow account for any post-closing adjustments. The purchase price was reduced by $0.3 million reflecting the final determination of the post-closing adjustment of the purchase price in accordance with the asset purchase agreement with EMT. (See Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K).
In recent years, our financial results have been impacted by competitive pressure on rental rates due in large part to the recession and subsequent weakness in the U.S. economy and our major international markets. During fiscal 2013, our revenues were flat compared to fiscal 2012 as growth in our rental and leasing business and increased sales of used equipment, in part due to a large buyout of used equipment by a customer in the third fiscal quarter of 2013, was offset by a decline in sales of new equipment. Our operating profit increased modestly for fiscal 2013 as compared to fiscal 2012, as growth in our higher margin rental and lease revenues and used equipment sales offset declines in our sales of new equipment, which typically have lower operating margins. During fiscal 2014, our revenues declined slightly and our operating profit declined moderately as compared to fiscal 2013, primarily due to a decline in our new equipment sales revenue, partially offset by growth in our higher margin rental and lease revenues. Our new equipment sales continue to be affected by delays in our customers' procurement decisions, resulting in decreased demand, particularly in the aerospace and defense sector due to uncertainty regarding U.S. government defense spending. We have also seen a softening in the telecommunications and semiconductor manufacturing sectors. We experienced an increase in our selling, general and administrative expenses as a result of our infrastructure investment which began in fiscal 2011 and continued throughout fiscal 2012, 2013 and 2014 in support of our continued investment in our oversees operations, the strengthening of our IT and financial infrastructure and the expansion of our sales and marketing organization in support of future opportunities.
Economic uncertainty continues to impact certain industries that we serve. We will continue to focus on remaining profitable in the current conditions, as well as being prepared for the possibility that recessionary trends may return in future periods.
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 equipment pool and pricing on a dynamic basis in order to maximize equipment availability, utilization and profitability. If we do not accurately predict market trends, or if demand for the equipment we supply declines, we can be left with equipment that we are unable to rent or sell for a profit. We assess the carrying value of the equipment pool on an annual basis or more frequently when factors indicating potential impairment are present.


Table of Contents

We have revenues, expenses, assets and liabilities in foreign currencies, primarily the euro, the Canadian dollar and the Chinese yuan, due to our foreign operations. We enter into forward contracts to hedge against unfavorable currency fluctuations in our monetary assets and liabilities in our European and Canadian operations. Our exposure to fluctuations in the Chinese yuan is not significant. These contracts are designed to minimize the effect of fluctuations in foreign currencies. As a result of these forward contracts, as well as the relative stability of these foreign currencies, the impact on our operating results from foreign currency fluctuations has been insignificant. See "Item 7A-Quantitative and Qualitative Disclosures about Market Risk-Changes in Foreign Currencies" for additional information about our exposure to foreign currency exchange risk.
Profitability and Key Business Trends
Comparing fiscal 2014 to fiscal 2013, our revenues decreased by 3.1% from $248.7 million to $241.1 million, our operating profit decreased 12.5% from $36.7 million to $32.1 million and our net income decreased by 10.3% from $22.8 million to $20.4 million.
Our rental and lease revenues increased by 0.6%, from $136.6 million for fiscal 2013 to $137.4 million for fiscal 2014. For fiscal 2014 and 2013, 88% of our rental and lease revenues were derived from T&M equipment. Our T&M rental revenues decreased $0.1 million due to a decrease in demand of $2.2 million offset by an increase in rental rates of $2.1 million. Our T&M lease revenues decreased $0.1 million due to a decrease in lease rates of $0.4 million offset by an increase in demand of $0.3 million. Rental and lease revenues in our DP segment increased $0.6 million and $0.4 million, respectively, due to an increase in rental and lease rates.
Our sales of equipment and other revenues decreased 7.5%, from $112.1 million for fiscal 2013 to $103.7 million for fiscal 2014. This decrease was primarily due to a decline in new equipment sales, which continue to be affected by delays in our customers' procurement decisions, resulting in decreased demand, particularly in the aerospace and defense sector due to uncertainty regarding U.S. government defense spending. We have also seen a softening in the telecommunications and semiconductor manufacturing sectors.
For fiscal 2014, our operating profit decreased 12.5% compared to fiscal 2013. Our rental and lease business contributed an additional $0.1 million in operating profit resulting from a) a $0.8 million, or 0.6%, increase in rental and lease revenues, b) an offsetting increase in depreciation expense of $0.2 million, or 0.4%, due to a higher average rental equipment pool, and c) an offsetting increase in our costs of rentals and leases, excluding depreciation, of $0.5 million, or 2.8%. Sales of equipment and other revenues decreased $8.4 million, or 7.5%, resulting in a decline of $2.3 million in operating profit. Although our higher margin used equipment sales contributed an additional $1.7 million in revenue, this was offset by a $9.1 million decline in revenue from sales of our lower margin new equipment. The remaining decrease in sales of equipment and other revenues is attributable to a $1.0 million decrease in other revenue. Our selling, general and administrative expenses increased by 4.2% from $56.5 million in fiscal 2013 to $58.9 million in fiscal 2014, primarily due to our continued investment in our oversees operations, the strengthening of our IT and financial infrastructure and the expansion of our sales and marketing organization in support of future opportunities. Our net income for fiscal 2012 included a bargain purchase gain, net of deferred taxes, of $3.4 million as a result of our acquisition of EMT.
Some of our key profitability measurements are presented below:

                                              Fiscal 2014     Fiscal 2013     Fiscal 2012
Net income per diluted common share (EPS)    $      0.84     $      0.94     $      1.07
Net income as a percentage of average assets         6.5 %           7.0 %           8.1 %
Net income as a percentage of average equity         8.8 %           9.6 %          10.7 %

Our average acquisition cost of equipment for rent and lease in our equipment pool is presented below:

Average acquisition cost of       Fiscal 2014 vs. Fiscal 2013              Fiscal 2013 vs. Fiscal 2012
equipment (in millions)          2014          2013        Change         2013           2012       Change
On rent                      $    238.6     $  245.5        (2.8 )%   $     245.5     $  234.1         4.9 %
On lease                     $     37.2     $   35.0         6.3  %   $      35.0     $   31.7        10.4 %

The decrease in our average equipment on rent is due to a decline in demand in our T&M North American operations, in particular in the aerospace and defense sector, partially offset by increased demand in our T&M foreign operations. Our average equipment on lease increased due to higher demand in North American operations.


Table of Contents

Average rental rates increased by 2.8% in fiscal 2014 as compared to fiscal 2013 and 2.7% as compared to fiscal 2012. Our average lease rates decreased by 0.8% in fiscal 2014 as compared to fiscal 2013, and 3.4% as compared to fiscal 2012. The increase in rental rates is the result of growth in industries where we realize higher rental rates.
Average utilization for our T&M equipment pool, calculated based on average acquisition cost of equipment on rent and lease compared to the average total equipment pool, decreased to 64.9% for fiscal 2014, compared to 66.9% for fiscal 2013 and 67.7% for fiscal 2012. The average utilization of our DP equipment pool, based on the same method of calculation, was 35.7% for fiscal 2014, compared to 35.6% for fiscal 2013 and 38.1% for fiscal 2012. Our utilization rate fluctuates frequently, and is impacted by new equipment purchases in support of existing and potential business, and sales of used equipment. As of May 31, 2014, we had a sales order backlog for new T&M equipment of $10.7 million, compared to $7.6 million as of May 31, 2013 and $8.4 million as of May 31, 2012. The increase in backlog is primarily due to longer manufacturing lead times on certain products as well as an increase in demand.
RESULTS OF OPERATIONS
Fiscal 2014 Compared with Fiscal 2013
Total Revenues: Total revenues for fiscal 2014 and 2013 were $241.1 million and $248.7 million, respectively. The 3.1% decrease in total revenues was due to a 7.5% decrease in sales of equipment and other revenues offset by a 0.6% increase in rental and lease revenues.
Rental and lease revenues for fiscal 2014 were $137.4 million, compared to $136.6 million for the prior fiscal year. This increase is due to an increase in rental rates in our T&M and DP segments, due to our growth in industries where we realize higher rental rates, and increased demand in our Chinese and European operations. This increase was offset, in part, by a decrease in demand in our North American operations due to softening in the aerospace and defense and semiconductor industries. Our lease revenues increased primarily due to higher demand for T&M equipment, while our DP lease revenues increased slightly. Sales of equipment and other revenues decreased to $103.7 million for fiscal 2014 from $112.1 million in the prior year. Sales of used equipment, including finance leases, increased to $32.8 million for fiscal 2014, compared to $31.0 million for fiscal 2013 while sales of new equipment decreased to $65.8 million for fiscal 2014 compared to $74.9 million for fiscal 2013. Our new equipment sales continue to be affected by delays in our customers' procurement decisions, resulting in decreased demand, particularly in the aerospace and defense sector due to uncertainty regarding U.S. government defense spending. We have also seen a softening in the telecommunications and semiconductor manufacturing sectors. Operating expenses
Depreciation of Rental and Lease Equipment: Depreciation of rental and lease equipment remained relatively consistent at $57.0 million, or 41.5% of rental and lease revenues in fiscal 2014 compared to $56.8 million, or 41.6% of rental and lease revenues in fiscal 2013. The depreciation ratio stayed consistent due to increases in our rental rates of our DP equipment offset by decreases in our lease and utilization rates of our T&M equipment.
Costs of Rentals and Leases, Excluding Depreciation: Costs of rentals and leases, excluding depreciation, which primarily includes labor related costs of our operations personnel, supplies, repairs, and insurance and warehousing costs associated with our rental and lease equipment, increased to $18.3 million for fiscal 2014 compared to $17.8 million for fiscal 2013, primarily due to higher labor related costs to support growth in our rental and lease business. This expense is not expected to significantly fluctuate from period to period, as only moderate changes are required from time to time to handle changes in rental and lease activity.
Costs of Sales of Equipment and Other Revenues: Costs of sales of equipment and other revenues, which primarily include the costs of equipment sales, decreased to $74.8 million for fiscal 2014 from $80.9 million in fiscal 2013. Costs of sales of equipment and other revenues as a percentage of sales of equipment and other revenues remained flat at 72.1% in fiscal 2014 and fiscal 2013. Our sales margin percentage is expected to fluctuate depending on the mix of used and new equipment sales. Our sales margin is also impacted by competition, economic uncertainty, changes in U.S. governmental policies, and customer requirements and funding.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased 4.2% to $58.9 million in fiscal 2014 compared to $56.5 million in fiscal 2013. As a percentage of total revenues, selling, general and administrative expenses increased modestly to 24.4% in fiscal 2014 from 22.7% in fiscal 2013. The increase in selling, general, and administrative reflects our continued investment in our oversees operations, the strengthening of our IT and financial infrastructure and the expansion of our sales and marketing organization in support of future opportunities.


Table of Contents

Income Tax Provision: Our effective tax rate was 37.3% for fiscal 2014, compared to 38.7% for fiscal 2013. The decrease for fiscal 2014 is due to more income being apportioned to states with lower tax rates resulting in a lower effective state rate as well as the recognition of certain Belgian tax credits which had no impact in fiscal 2013.
Fiscal 2013 Compared with Fiscal 2012
Total Revenues: Total revenues for fiscal 2013 and 2012 were $248.7 million and $248.6 million, respectively. The 0.1% increase in total revenues was due to a 5.3% increase in rental and lease revenues offset by a 5.6% decrease in sales of equipment and other revenues.
Rental and lease revenues for fiscal 2013 were $136.6 million, compared to $129.7 million for the prior fiscal year. This increase was due to an increase in T&M rental and lease demand, in particular in our North American operations, due in part to the acquisition of EMT, and the integration of our resale organization and T&M sales force, which began in the first quarter of fiscal 2012, providing additional rental opportunities to an expanding customer base, and higher demand from our customers in lieu of new equipment purchases. This increase was partially offset by a decline in rental and lease revenues in our DP business, due to a decrease in demand.
Sales of equipment and other revenues decreased to $112.1 million for fiscal 2013 from $118.8 million in the prior year. Sales of used equipment, including finance leases, increased to $31.0 million for fiscal 2013, compared to $24.9 million for fiscal 2012, in part due to a large buyout by a customer in the third quarter of fiscal 2013, while sales of new equipment decreased to $75.0 million for fiscal 2013 compared to $88.4 million for fiscal 2012, as our customers that traditionally purchase new equipment delayed procurement decisions due to changes in the U.S. national budgetary policy and uncertainty in the global economy.
Operating expenses
Depreciation of Rental and Lease Equipment: Depreciation of rental and lease equipment increased in fiscal 2013 to $56.8 million, or 41.6% of rental and lease revenues, from $53.7 million, or 41.4% of rental and lease revenues, in fiscal 2012. The increased depreciation expense in fiscal 2013 was due to a higher average rental and lease equipment pool. The depreciation ratio, as a percentage of rental and lease revenues, marginally increased due to a moderate decline in utilization rates while rental rates were flat.
Costs of Rentals and Leases, Excluding Depreciation: Costs of rentals and leases, excluding depreciation, which primarily include labor related costs of our operations personnel, supplies, repairs, and insurance and warehousing costs associated with our rental and lease equipment, increased to $17.8 million for fiscal 2013 compared to $17.3 million for fiscal 2012, primarily due to higher labor related costs to support growth in our rental and lease business. This expense is not expected to significantly fluctuate from period to period, as only moderate changes are required from time to time to handle changes in rental and lease activity.
Costs of Sales of Equipment and Other Revenues: Costs of sales of equipment and other revenues, which primarily include the costs of equipment sales, decreased to $80.9 million for fiscal 2013 from $88.2 million in fiscal 2012. Costs of sales of equipment and other revenues decreased as a percentage of sales of equipment and other revenues to 76.3% in fiscal 2013 from 77.8% in fiscal 2012. This decrease is due to a decline in sales of new T&M equipment, which generally carry a lower margin than used equipment sales, while higher margin used equipment sales increased. Our sales margin percentage is expected to fluctuate depending on the mix of used and new equipment sales. Our sales margin is also impacted by competition, economic uncertainty, changes in U.S. governmental policies, and customer requirements and funding.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased 6.2% to $56.5 million in fiscal 2013 compared to $53.3 million in fiscal 2012. As a percentage of total revenues, selling, general and administrative expenses increased modestly to 22.7% in fiscal 2013 from 21.4% in fiscal 2012. Our selling, general and administrative expenses increased primarily due to the broadening and strengthening of our sales and sales support organizations, as well as our administrative infrastructure, necessary to support our sales and rental demand and to better focus on future growth opportunities.
Gain on Bargain Purchase: We recorded a gain on bargain purchase, net of deferred taxes, of $3.4 million during fiscal 2012 related to our acquisition of EMT. The gain on bargain purchase, net of deferred taxes, resulted from the excess of the net fair value of the assets acquired and liabilities assumed in the EMT acquisition, over the respective purchase price. 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 the recurring losses and bankruptcy filing of EMT.
Income Tax Provision: Our effective tax rate was 38.7% for fiscal 2013, compared to 35.6% for fiscal 2012. The increase for fiscal 2013 is due to a bargain purchase gain, net of deferred taxes, of $3.4 million for fiscal 2012, related to our purchase of


Table of Contents

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
We have three principal sources of liquidity: cash flows provided by our operating activities, proceeds from the sale of equipment from our portfolio, and external funds that historically have been provided by bank borrowings. 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. Cash and Cash Equivalents. The balance of our cash and cash equivalents was $5.9 million at May 31, 2014, a decrease of $4.5 million from May 31, 2013, in part because we chose to borrow less, with bank borrowings declining to $0 as of May 31, 2014 from $10.0 million as of May 31, 2013. Outside of our normal operations and equipment purchases, we use our cash to pay dividends to shareholders and to take advantage of strategic acquisitions and new customer opportunities. We expect that the level of our cash needs may increase if we increase equipment purchases in response to demand, finance an acquisition, or pursue other opportunities. We do not intend to repatriate the funds from our foreign operations as we consider these earnings to be invested indefinitely. Given our growth record achieved since fiscal 2000, and our available line of credit under which we have $25.0 million remaining that we may borrow as of May 31, 2014, we believe that we have ample access to borrowing capacity and that our cash flows from operations and ability to borrow will allow us to continue funding our current and future growth. We may, however, seek to expand our borrowing capacity in order to ensure sufficient resources to quickly respond to strategic growth opportunities.
Cash Flows. During fiscal 2014, 2013, and 2012 net cash provided by operating activities was $49.2 million, $68.9 million and $69.9 million, respectively. Operating cash flow for fiscal 2014 decreased as compared to fiscal 2013 primarily due to income taxes paid of $23.8 million in fiscal 2014 as compared to $15.6 million in fiscal 2013, a decline in net income and a decrease in working capital. Operating cash flow for fiscal 2013 was comparable to fiscal 2012 as an improvement in our working capital and an increase in income, after giving effect to non-cash items, was offset by tax payments of $15.6 million for fiscal 2013, compared to a tax refund, net of taxes paid, of $0.5 million for fiscal 2012.
During fiscal 2014, 2013 and 2012, net cash used in investing activities was $23.8 million, $34.1 million and $82.9 million, respectively. The decline in cash used in investing activities for fiscal 2014 was due, in part, to a decrease in payments for purchases of rental and lease equipment to $58.7 million from $64.1 million and $96.7 million for fiscal 2013 and 2012, respectively. Payments for purchase of other property also decreased to $0.4 million in fiscal 2014 from $1.1 million in fiscal 2013 and $0.9 million in fiscal 2012. Proceeds from sale of rental and lease equipment were $35.2 million for fiscal 2014 compared to $31.1 million for fiscal 2013 and $25.0 million for fiscal 2012. Fiscal 2012 includes cash paid for the acquisition of EMT of $10.3 million.
During fiscal 2014, 2013 and 2012, net cash flows used in financing activities were $29.5 million, $33.6 million and $19.3 million, respectively. These funds used were primarily composed of borrowings and payments under the bank's line of credit of $56.0 million and $66.0 million in fiscal 2014, $63.5 million and $53.5 million in fiscal 2013 and $3.3 million and $3.3 million in fiscal 2012, respectively. We also paid dividends of $19.7 million for fiscal 2014, $43.8 million for fiscal 2013 and $19.4 million for fiscal 2012.
As the following table illustrates, aggregate cash flows from operating activities and proceeds from the sale of equipment have provided 127% of the funds required for equipment purchased for the three years ended May 31, 2014, excluding equipment purchased in connection with acquisitions.

                                              Fiscal
. . .
  Add ELRC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ELRC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.