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Electro Rent Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: October 6, 2011 04:52PM

Electro Rent Corp. (ELRC) filed Quarterly Report for the period ended 2011-08-31. Electro Rent Corp. has a market cap of $342.3 million; its shares were traded at around $14.27 with a P/E ratio of 14.4 and P/S ratio of 1.5. The dividend yield of Electro Rent Corp. stocks is 5.5%. Electro Rent Corp. had an annual average earning growth of 2.8% over the past 10 years.



Highlight of Business Operations:

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. Page 21

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 Resources—Cash 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 Page 22

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 differences—positive or negative—could 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.

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.

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.

Read the The complete Report



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