NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts 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, 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 well as 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, consisting of only normal recurring 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 14, 2013.
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 to be expected for the full year.
Revenue Recognition
We generate
revenues primarily through the rental and leasing of test and measurement equipment (T&M) and personal-computer related data products equipment (DP) and through the sale of new and used equipment. Rental revenues comprise
short term agreements that can be daily, weekly or monthly. Rental revenues are recognized in the month they are due on the accrual basis of accounting. Our operating lease agreements have varying terms, typically one to three years. Upon lease
termination, customers have the option to renew the lease term, purchase the equipment at fair market value, or continue to rent on a month-to-month basis. Our operating leases do not provide for contingent rentals. Revenues related to operating
leases are recognized on a straight-line basis over the term of the lease. Negotiated lease early-termination charges are recognized upon receipt. Rentals and leases are primarily billed to customers in advance, and unearned billings are recorded as
deferred revenue.
We enter into finance leases as lessor for some of our equipment. Our finance lease agreements contain bargain purchase
options and are accounted for as sale-type leases. Revenues from finance leases, which are recorded at the present value of the aggregate future lease payments, are included in sales of equipment and other revenues in our consolidated statements of
operations. Unearned interest is recognized over the life of the finance lease term using the effective interest method. Our finance lease terms vary, and are typically one to three years. The net investment in finance leases, which represents the
receivables due from lessees, net of unearned interest, is included in other assets in our condensed consolidated balance sheets. Historically, we have not required security deposits based on our assessed credit risk within our customer bases.
Initial direct costs for operating and finance leases are insignificant.
Sales of new equipment through our resale channel are recognized in the period in which the equipment is delivered and risk of loss passes to the customer, while sales of used equipment from our rental
and lease equipment pool are recognized in the period in which the equipment is shipped and risk of loss is passed to the customer. In the case of equipment sold to customers that is already on rent or lease to the same party, revenue is recognized
at the agreed-upon date when the rent or lease term ends and the risk of loss passes to the customer.
In accordance with accounting guidance,
we are acting as the principal with respect to sales of new equipment through our Agilent resale agreement, based on several factors, including: (1) We act as the primary obligor by working directly with our customers to define their needs,
providing them with options to satisfy such needs, contracting directly with the customer, and, to the extent required, providing customers with instruction on the use of the product and additional technical support once the product is received by
the customer. The product manufacturer is not a party
Page 7
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
to our customer sales agreements, nor is it referenced in the agreements, and therefore has no
obligation to our customers with the exception of the manufacturers standard warranty on the product. (2) We bear back-end risk of inventory loss with respect to any product return from the customer as the original manufacturer is not
required to accept returns of equipment from us. We also bear front-end risk of inventory loss in those cases where we acquire products for resale into our inventory prior to shipment to customers. (3) We have full discretion in setting pricing
terms with our customers and negotiate all such terms ourselves. (4) We assume all credit risk. Accordingly, sales of new equipment through our resale channel are recorded in sales of equipment and other revenues and the related equipment costs
are recorded in costs of sales of equipment and other revenues in our consolidated statements of operations.
Other revenues, consisting
primarily of billings to customers for delivery and repairs, are recognized in the period in which the respective services are performed.
Operating expenses
Costs of rentals and
leases, excluding depreciation, primarily include labor related costs of our operations personnel, supplies, repairs, insurance and warehousing costs associated with our rental and lease equipment, relating to our rental and lease revenues.
Costs of sales of equipment and other revenues primarily include the cost of new equipment and the carrying value of used equipment sold.
Selling, general and administrative (SG&A) expenses include sales and advertising costs, payroll and related benefit costs,
insurance expenses, property taxes on our property and rental and lease equipment, legal and professional fees, and administrative overhead. Advertising costs are expensed as incurred. Total advertising expenses were $225 and $233 respectively, for
the three months ended August 31, 2013 and 2012. SG&A expenses also include shipping and handling costs of $930 and $971 respectively, for the three months ended August 31, 2013 and 2012.
Foreign Currency
The U.S. dollar has
been determined to be the functional currency of all foreign subsidiaries. The assets and liabilities of our foreign subsidiaries are remeasured from their local 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 or average monthly exchange rates, 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. Remeasurement gains and losses have not been significant.
We enter into forward
contracts to hedge against unfavorable currency 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:
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Consolidated Balance Sheet Location
|
|
August 31,
2013
|
|
|
May 31,
2013
|
|
Foreign exchange forward contracts
|
|
Other assets
|
|
$
|
85
|
|
|
$
|
114
|
|
Page 8
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts 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:
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Loss Recognized in Income on Derivatives
|
|
Three
Months
Ended
August
31,
2013
|
|
|
Three
Months
Ended
August
31,
2012
|
|
Foreign exchange forward contracts
|
|
Selling, general and administrative expenses
|
|
$
|
(87
|
)
|
|
$
|
(188
|
)
|
Other Assets
We include demonstration equipment used in connection with our resale activity of $4,878 and $6,057 as of August 31, 2013 and May 31, 2013, 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. We have a Supplemental Executive Retirement Plan (SERP) that provides for automatic deferral of contributions in excess of the maximum amount permitted under the 401(k) for our
executives who choose to participate. The SERP is a non-qualified deferred compensation program. We have the option to match contributions of participants at a rate we determine each year.
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
August 31,
2013
|
|
|
May 31,
2013
|
|
Net investment in sales-type leases
|
|
$
|
8,942
|
|
|
$
|
9,437
|
|
Demonstration equipment
|
|
|
4,878
|
|
|
|
6,057
|
|
SERP
|
|
|
2,919
|
|
|
|
2,947
|
|
Prepaid expenses and other
|
|
|
4,622
|
|
|
|
2,905
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,361
|
|
|
$
|
21,346
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In February 2013, the FASB issued guidance on reporting the effect of significant reclassifications out of accumulated other comprehensive income. If the amount being reclassified is required under GAAP
to be reclassified in its entirety to net income, an entity is required to report the effect of these reclassifications on the respective line items in net income. For other amounts that are not required under GAAP to be reclassified in their
entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods
beginning after December 15, 2013. The new guidance affects disclosures only, and will not impact our consolidated financial position, results of operations or cash flows.
Other Comprehensive Income
Comprehensive income is equivalent to net income for all
periods presented.
Reclassifications
We have expanded the presentation of our costs of revenues to separately present costs associated with each of the revenue streams presented in the condensed consolidated statements of operations, to
comply with the applicable income statement disclosure requirements for public companies. Accordingly, the previously reported statement of operations line item captioned costs of revenues other than depreciation of rental and lease
equipment has been replaced with separate line items for costs of rentals and leases, excluding depreciation and costs of sales of equipment and other revenues.
Page 9
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
Further, in order to more closely align activity related to our rental and lease operations, including
revenues and the expenses associated with providing those revenues, we have reclassified certain expenses previously included in selling, general and administrative expenses to costs of rentals and leases, excluding depreciation, which resulted in a
reduction to previously reported selling, general and administrative expenses of $2,845 for the three months ended August 31, 2012. These reclassified costs primarily include direct expenses of supporting our rental and lease operations,
including labor related costs of our operations personnel, supplies, repairs, and insurance and warehousing costs associated with our rental and lease equipment.
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 at fair value on a recurring basis, including cash equivalents, SERP assets, and foreign currency
derivatives. The fair value of financial assets can be 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;
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,
such as those that may be used with internally-developed valuation models.
Our assets measured at fair value on a recurring basis were
determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2013
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14
|
|
SERP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
Mutual funds
|
|
|
2,806
|
|
|
|
|
|
|
|
|
|
|
|
2,806
|
|
Foreign exchange forward contracts
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
2,933
|
|
|
$
|
85
|
|
|
$
|
|
|
|
$
|
3,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 10
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2013
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Balance
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14
|
|
SERP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
Mutual funds
|
|
|
2,834
|
|
|
|
|
|
|
|
|
|
|
|
2,834
|
|
Foreign exchange forward contracts
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
2,961
|
|
|
$
|
114
|
|
|
$
|
|
|
|
$
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value measures for our money market funds and SERP asset, which include money market and mutual funds, 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.
Note 4: 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. All outstanding options
expired in October 2011.
Restricted Stock Units
A restricted stock unit represents 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, 2013:
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Nonvested at June 1, 2013
|
|
|
154
|
|
|
$
|
16.13
|
|
Granted
|
|
|
54
|
|
|
|
18.20
|
|
Vested
|
|
|
(88
|
)
|
|
|
15.48
|
|
Forfeited/canceled
|
|
|
(1
|
)
|
|
|
12.30
|
|
|
|
|
|
|
|
|
|
|
Nonvested at August 31, 2013
|
|
|
119
|
|
|
$
|
17.55
|
|
|
|
|
|
|
|
|
|
|
We granted 54 restricted stock units during the three months ended August 31, 2013, and 59 restricted stock units
during the three months ended August 31, 2012. Under the terms of our RSU agreements, unvested RSU awards contain forfeitable rights to dividends. Because the dividends are forfeitable, they are defined as non-participating securities. As of
August 31, 2013, we have unrecognized share-based compensation cost of approximately $1,939 associated with restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of approximately 2.2 years.
Page 11
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
We had 334 and 244 vested restricted stock units as of August 31, 2013 and 2012, respectively, which receive dividends following vesting and are convertible to common shares five years after
the grant date.
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, approximately 3 years.
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 $344 and $289 of stock-based compensation
as part of selling, general and administrative expenses for the three months ended August 31, 2013 and 2012, respectively.
We receive a
tax deduction, included as an excess tax benefit, for dividends paid on vested restricted stock units where the underlying shares have not been issued. Excess tax benefits are realized tax benefits from tax deductions for such dividends. The total
excess tax benefit realized from dividend payments for vested restricted stock units for the three months ended August 31, 2013 and 2012 was $96 and $90, respectively.
Note 5: 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.
The changes in carrying amount of goodwill and other intangible assets for the
three months ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 1,
2013
(net of amortization)
|
|
|
Additions
|
|
|
Amortization
|
|
|
Balance as of
August 31,
2013
|
|
Goodwill
|
|
$
|
3,109
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,109
|
|
Trade name
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
Customer relationships
|
|
|
626
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,146
|
|
|
$
|
|
|
|
$
|
(41
|
)
|
|
$
|
4,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the carrying amount may
not be recoverable. There were no conditions that indicated any impairment of goodwill or identifiable intangible assets as of August 31, 2013 and May 31, 2013.
Page 12
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
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, 2013
|
|
|
|
Estimated
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade name
|
|
|
|
|
|
$
|
411
|
|
|
$
|
|
|
|
$
|
411
|
|
Customer relationships
|
|
|
3-8 years
|
|
|
|
2,094
|
|
|
|
(1,509
|
)
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,505
|
|
|
$
|
(1,509
|
)
|
|
$
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2013
|
|
|
|
Estimated
Useful Life
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Trade name
|
|
|
|
|
|
$
|
411
|
|
|
$
|
|
|
|
$
|
411
|
|
Customer relationships
|
|
|
3-8 years
|
|
|
|
2,094
|
|
|
|
(1,468
|
)
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,505
|
|
|
$
|
(1,468
|
)
|
|
$
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $41 for the three months ended August 31, 2013 and 2012,
respectively.
Amortization expense for customer relationships is included in selling, general and administrative expenses. The following
table provides estimated future amortization expense related to intangible assets as of August 31, 2013:
|
|
|
|
|
Year ending May 31,
|
|
Future
Amortization
|
|
2014 (remaining)
|
|
$
|
123
|
|
2015
|
|
|
129
|
|
2016
|
|
|
118
|
|
2017
|
|
|
118
|
|
2018
|
|
|
97
|
|
|
|
|
|
|
|
|
$
|
585
|
|
|
|
|
|
|
Note 6: Borrowings
On November 29, 2012, we entered into a sixth amendment to our commercial credit agreement (Credit Agreement
Amendment) with Union Bank, N.A. (Union Bank). The Credit Agreement Amendment amends the commercial credit agreement dated September 29, 2008 (the Commercial Credit Agreement), pursuant to which Union Bank provides
us with a revolving line of credit. The Credit Agreement Amendment (i) increased the permitted maximum aggregate outstanding principal amount under the Commercial Credit Agreement from $25,000 to $50,000; (ii) extended the term and
maturity date of the Commercial Credit Agreement from October 1, 2015 to November 30, 2015; (iii) deleted the quick ratio financial covenant; (iv) amended the amounts and payment dates of the annual commitment fees such that we
agree to pay a $25 commitment fee on November 30, 2012, a $50 commitment fee on November 30, 2013 and a $50 commitment fee on November 30, 2014; (v) amended the minimum tangible net worth financial covenant; and
(vi) replaced the positive net earnings financial covenant with an earnings before interest, taxes, depreciation and amortization financial covenant. We are in compliance with all loan covenants at August 31, 2013.
At August 31, 2013, we had $5,000 of borrowings outstanding under the Commercial Credit Agreement, compared to $10,000 at May 31, 2013. The
weighted average interest rate under the line of credit was approximately 1.9% and 2.3% as of August 31, 2013 and May 31, 2013, respectively.
Page 13
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
Note 7: Supplemental Cash Flow Information
Non-Cash Investing and Financing Activities
We had rental equipment purchases, not yet paid for, totaling $3,332 and $3,448 as of August 31, 2013 and 2012, respectively. We had sales of used equipment, not yet collected, of $9,453 and $11,313
as of August 31, 2013 and 2012, respectively, included in accounts receivable and net investment in sales-type leases classified in other assets. During the three months ended August 31, 2013 and 2012, we transferred $1,388 and $1,623,
respectively, of demonstration equipment, included in other assets, to rental and lease equipment. As of August 31, 2013 and 2012, we recorded $4,986 and $123, respectively, of dividends declared and not yet paid as accrued expenses and a
reduction of retained earnings.
Supplemental Disclosures of Cash Paid
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2013
|
|
|
2012
|
|
Interest
|
|
$
|
37
|
|
|
$
|
1
|
|
Income taxes
|
|
$
|
2,891
|
|
|
$
|
609
|
|
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. 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,
2013
|
|
|
May 31,
2013
|
|
Gross minimum lease payments receivable
|
|
$
|
9,332
|
|
|
$
|
9,862
|
|
Less unearned interest
|
|
|
(390
|
)
|
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in sales-type lease receivables
|
|
$
|
8,942
|
|
|
$
|
9,437
|
|
|
|
|
|
|
|
|
|
|
The following table provides estimated future minimum lease payments receivable related to sales-type leases:
|
|
|
|
|
Year ending May 31,
|
|
|
|
2014 (remaining)
|
|
$
|
887
|
|
2015
|
|
|
5,588
|
|
2016
|
|
|
2,083
|
|
2017
|
|
|
769
|
|
2018
|
|
|
5
|
|
|
|
|
|
|
|
|
$
|
9,332
|
|
|
|
|
|
|
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
Page 14
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
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 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. Additionally, DP segment revenues are less than 10% of total company revenues,
and are not considered material.
Our equipment pool, based on acquisition cost, consisted of $427,528 of T&M equipment and $37,492 of DP
equipment at August 31, 2013 and $423,306 of T&M equipment and $35,947 of DP equipment at May 31, 2013.
Revenues for these
product groups were as follows for the three months ended August 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T&M
|
|
|
DP
|
|
|
Total
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and leases
|
|
$
|
30,820
|
|
|
$
|
4,837
|
|
|
$
|
35,657
|
|
Sales of equipment and other revenues
|
|
|
23,850
|
|
|
|
661
|
|
|
|
24,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,670
|
|
|
$
|
5,498
|
|
|
|
60,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals and leases
|
|
$
|
29,605
|
|
|
$
|
4,060
|
|
|
$
|
33,665
|
|
Sales of equipment and other revenues
|
|
|
24,147
|
|
|
|
689
|
|
|
|
24,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,752
|
|
|
$
|
4,749
|
|
|
$
|
58,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No single customer accounted for more than 10% of total revenues during the three months ended August 31, 2013 and
2012, respectively.
Selected country information is presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenues: (1)
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
50,225
|
|
|
$
|
49,114
|
|
Other (2)
|
|
|
9,943
|
|
|
|
9,387
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,168
|
|
|
$
|
58,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
August 31,
2013
|
|
|
May 31,
2013
|
|
Net Long-Lived Assets: (3)
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
202,858
|
|
|
$
|
198,956
|
|
Other (2)
|
|
|
44,588
|
|
|
|
49,726
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
247,446
|
|
|
$
|
248,682
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Page 15
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
(2)
|
Other consists of foreign countries. Each foreign country individually accounts for less than 10% of the total revenues and long-lived assets.
|
(3)
|
Net long-lived assets include rental and lease equipment and other property, net of accumulated depreciation and amortization.
|
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, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August 31,
|
|
|
|
2013
|
|
|
2012
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average common shares outstanding (including shares issuable for vested
restricted stock units)
|
|
|
24,291
|
|
|
|
23,993
|
|
Effect of unvested restricted stock units
|
|
|
37
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Diluted shares used in per share calculation
|
|
|
24,328
|
|
|
|
24,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,697
|
|
|
$
|
5,085
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
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.
Accounting guidance for uncertain tax positions 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.
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.
Note 12: Commitments and Contingencies
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 or
Page 16
ELECTRO RENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
awards against us. 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 that we believe could reasonably be expected to have a material adverse effect on our financial
condition, results of operations or cash flows.
Page 17