Item 1. Financial Statements.
ELECTRO RENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
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|
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|
|
|
|
|
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|
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|
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Three Months Ended
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Nine Months Ended
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|
February 29, 2016
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|
February 28, 2015
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|
February 29, 2016
|
|
February 28, 2015
|
Revenues:
|
|
|
|
|
|
|
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Rentals and leases
|
$
|
29,173
|
|
|
$
|
30,252
|
|
|
$
|
93,649
|
|
|
$
|
97,610
|
|
Sales of equipment and other revenues
|
10,325
|
|
|
26,090
|
|
|
42,502
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|
|
80,306
|
|
Total revenues
|
39,498
|
|
|
56,342
|
|
|
136,151
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|
|
177,916
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Depreciation of rental and lease equipment
|
13,744
|
|
|
13,844
|
|
|
42,685
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|
|
42,429
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Costs of rentals and leases, excluding depreciation
|
4,108
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|
|
4,544
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|
|
13,295
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|
|
13,665
|
|
Costs of sales of equipment and other revenues
|
6,474
|
|
|
19,598
|
|
|
28,154
|
|
|
60,161
|
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Selling, general and administrative expenses
|
13,460
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|
|
14,692
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|
|
42,662
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|
|
44,311
|
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Total operating expenses
|
37,786
|
|
|
52,678
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|
|
126,796
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|
|
160,566
|
|
Operating profit
|
1,712
|
|
|
3,664
|
|
|
9,355
|
|
|
17,350
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|
Interest income/(expense), net
|
(221
|
)
|
|
82
|
|
|
(385
|
)
|
|
264
|
|
Other income
|
1
|
|
|
—
|
|
|
14
|
|
|
1,390
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|
Income before income taxes
|
1,492
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3,746
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|
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8,984
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|
19,004
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Income tax provision
|
483
|
|
|
1,321
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|
3,315
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|
|
7,013
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Net income
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$
|
1,009
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|
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$
|
2,425
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|
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$
|
5,669
|
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$
|
11,991
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Earnings per share:
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Basic
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$
|
0.04
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$
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0.10
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$
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0.23
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$
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0.49
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Diluted
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$
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0.04
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$
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0.10
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$
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0.23
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$
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0.49
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Shares used in per share calculation:
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Basic
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24,426
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24,377
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24,413
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24,355
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Diluted
|
24,440
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24,377
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24,422
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|
24,355
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Cash dividend declared per share
|
$
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0.13
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|
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$
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0.20
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|
|
$
|
0.38
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|
|
$
|
0.60
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|
See accompanying notes to consolidated financial statements (unaudited).
ELECTRO RENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (in thousands, except share numbers)
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February 29, 2016
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|
May 31, 2015
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Assets
|
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Cash
|
$
|
18,234
|
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$
|
4,064
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Accounts receivable, net of allowance for doubtful accounts of $439 and $604
|
22,471
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33,863
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Rental and lease equipment, net of accumulated depreciation of $234,297 and $241,116
|
207,669
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231,671
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Other property, net of accumulated depreciation and amortization of $17,475 and $16,749
|
12,483
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13,120
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Goodwill
|
3,109
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3,109
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Intangibles, net of accumulated amortization of $1,849 and $1,761
|
656
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|
|
744
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Other assets
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22,547
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13,743
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$
|
287,169
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$
|
300,314
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Liabilities and Shareholders' Equity
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Liabilities:
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|
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Bank borrowings
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$
|
—
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$
|
2,387
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Accounts payable
|
4,821
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|
8,234
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Accrued expenses
|
13,204
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|
18,487
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Deferred revenue
|
5,395
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|
|
5,576
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Deferred tax liability
|
38,650
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|
37,652
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Total liabilities
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62,070
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|
72,336
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Commitments and contingencies (Note 11)
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Shareholders’ equity:
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Preferred stock, $1 par - shares authorized 1,000,000, none issued
|
—
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—
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|
Common stock, no par - shares authorized 40,000,000; issued and outstanding February 29, 2016 - 24,195,408; May 31, 2015 - 24,108,176
|
41,118
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|
|
40,440
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Retained earnings
|
183,981
|
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|
187,538
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Total shareholders’ equity
|
225,099
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|
|
227,978
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$
|
287,169
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|
|
$
|
300,314
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See accompanying notes to consolidated financial statements (unaudited).
ELECTRO RENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
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Nine Months Ended
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|
February 29, 2016
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|
February 28, 2015
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Cash flows from operating activities:
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Net income
|
$
|
5,669
|
|
|
$
|
11,991
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|
Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
|
43,616
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43,233
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Rental and lease equipment impairment
|
443
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|
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—
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Remeasurement (gain)/loss on foreign currency
|
312
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(65
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)
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Provision for losses on accounts receivable
|
402
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|
394
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Gain on sale of rental and lease equipment
|
(9,459
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)
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|
(10,108
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)
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Stock compensation expense
|
1,016
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|
|
968
|
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Excess tax benefit for share-based compensation
|
(87
|
)
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(348
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)
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Deferred income taxes
|
998
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|
2,447
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Change in operating assets and liabilities:
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Accounts receivable
|
9,847
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|
908
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Other assets
|
(9,992
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)
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|
(9,770
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)
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Accounts payable
|
(1,161
|
)
|
|
406
|
|
Accrued expenses
|
(5,257
|
)
|
|
735
|
|
Deferred revenue
|
(150
|
)
|
|
(1,295
|
)
|
Net cash provided by operating activities
|
36,197
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|
|
39,496
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|
Cash flows from investing activities:
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|
|
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Proceeds from sale of rental and lease equipment
|
26,106
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|
|
26,610
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|
Payments for purchase of rental and lease equipment
|
(36,028
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)
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|
(48,674
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)
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Payments for purchase of other property
|
(206
|
)
|
|
(899
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)
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Net cash used in investing activities
|
(10,128
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)
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|
(22,963
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)
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Cash flows from financing activities:
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|
|
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Borrowings under bank line of credit
|
10,407
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|
35,823
|
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Payments under bank line of credit
|
(12,794
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)
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|
(35,823
|
)
|
Minimum tax withholdings on share-based compensation
|
(298
|
)
|
|
(445
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)
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Excess tax benefit for share-based compensation
|
87
|
|
|
348
|
|
Payment of dividends
|
(9,269
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)
|
|
(14,782
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)
|
Net cash used in financing activities
|
(11,867
|
)
|
|
(14,879
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)
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Effect of exchange rate changes on cash
|
(32
|
)
|
|
533
|
|
Net increase in cash
|
14,170
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|
|
2,187
|
|
Cash at beginning of period
|
4,064
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|
|
5,946
|
|
Cash at end of period
|
$
|
18,234
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|
|
$
|
8,133
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|
|
|
|
|
Interest paid, during the period
|
$
|
60
|
|
|
$
|
20
|
|
Income taxes paid, during the period
|
$
|
10,883
|
|
|
$
|
7,999
|
|
Dividends accrued during the period, not yet paid
|
$
|
112
|
|
|
$
|
128
|
|
Rental equipment acquisitions, not yet paid
|
$
|
2,187
|
|
|
$
|
4,564
|
|
Used equipment sales in accounts receivable and other assets, not yet collected
|
$
|
5,445
|
|
|
$
|
6,936
|
|
Transfers from other assets to rental and lease equipment
|
$
|
112
|
|
|
$
|
3,011
|
|
See accompanying notes to consolidated financial statements (unaudited).
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
Note 1: Basis of Presentation
The unaudited 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 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. and Electro Rent (Beijing) Test and Measurement Equipment Rental Co., Ltd. (collectively “we”, “us”, or “our”). All intercompany balances and transactions have been eliminated in consolidation.
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 omitted pursuant to such SEC rules and regulations. These unaudited 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 unaudited 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 13, 2015
.
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. We lease equipment under both operating and finance lease agreements.
Our operating lease agreements have varying terms, typically
one
to
three
years. Upon lease termination, customers have an 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, net of unearned interest, 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 consolidated balance sheets. Historically, we have not required security deposits based on our assessed credit risk within our customer base.
Initial direct costs for operating and finance leases are insignificant.
Sales of new equipment 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 passes to the customer. In the case of equipment sold to customers that is already on rent or on 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.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
The amount of revenue recognized for sales of new equipment depends on whether we sell as principal or as agent for the original equipment manufacturer. Prior to
May 31, 2015
, our sales of new equipment were derived primarily from the reseller agreement with Keysight Technologies, Inc. In fiscal 2016, we entered into reseller agreements with other T&M equipment manufacturers, including Anritsu, Inc. ("Anritsu") and Rohde & Schwarz Gmbh & Co. KG ("Rohde & Schwarz"). Under the terms of these agreements we act as the principal with respect to sales of new equipment, 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 original equipment manufacturer is not a party 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 manufacturer’s 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 equipment manufacturer is not required to accept returns of equipment from us. Under the reseller agreement with Keysight, we also bore front-end risk of inventory loss in those cases where we acquired products for resale into our equipment pool prior to shipment to customers;
(3) We have full discretion in setting pricing terms with our customers and negotiate all such terms ourselves; and
(4) We assume all credit risk.
In situations where we act as principal, the gross sales of new equipment are recorded in sales of equipment and other revenues, while the related equipment costs, including the purchase price from the original equipment manufacturer, are recorded in costs of sales of equipment and other revenues in our consolidated statements of operations.
We are currently establishing new resale relationships, where we may act as an agent for the original equipment manufacturer. Under those arrangements, we recognize revenue only on the commissions that we receive, which are recorded in other revenue within the sales of equipment and other revenues in our consolidated statement of operations.
Other revenues, which primarily include 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 rentals and leases included impairment charges of
$0
and
$443
related to our T&M rental and lease equipment during the three and
nine
months ended
February 29, 2016
. No impairments occurred for the three and
nine
months ended
February 28, 2015
.
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
$267
and
$857
for the three and
nine
months ended
February 29, 2016
and
$301
and
$720
for the three and
nine
months ended
February 28, 2015
. SG&A expenses also included shipping and handling costs of
$815
and
$2,688
for the three and
nine
months ended
February 29, 2016
and
$847
and
$2,968
for the three and
nine
months ended
February 28, 2015
.
Foreign Currency
The U.S. dollar has been determined to be the functional currency of all foreign subsidiaries. The euro, British pound sterling, Canadian dollar and Chinese yuan are our primary foreign currencies. 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 SG&A expenses or income taxes, as appropriate. The assets, liabilities, revenues and expenses of our foreign operations that are susceptible to
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
foreign currency fluctuations are individually less than
10%
of our respective consolidated amounts. Net 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, Chinese and Canadian operations. These contracts are designed to minimize the effect of fluctuations in foreign currencies. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Our derivative instruments are not designated as hedging instruments and, therefore, are recorded at fair value as an asset or liability, and any changes in fair value are recorded in our consolidated statements of operations. We do not use derivative financial instruments for speculative trading purposes.
The fair values of our foreign exchange forward contracts in the consolidated balance sheets are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Consolidated Balance Sheet Location
|
|
February 29, 2016
|
|
May 31, 2015
|
Foreign exchange forward contracts
|
|
Accrued Expenses
|
|
$
|
(18
|
)
|
|
$
|
(16
|
)
|
The table below provides data about the amount of gains and losses recognized in income for derivative instruments not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain/(Loss) Recognized in Income on Derivatives
|
|
Three Months Ended February 29, 2016
|
|
Three Months Ended February 28, 2015
|
Foreign exchange forward contracts
|
|
SG&A expenses
|
|
$
|
(4
|
)
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain/(Loss) Recognized in Income on Derivatives
|
|
Nine Months Ended February 29, 2016
|
|
Nine Months Ended February 28, 2015
|
Foreign exchange forward contracts
|
|
SG&A expenses
|
|
$
|
201
|
|
|
$
|
659
|
|
Other Assets
We include demonstration equipment used in connection with our resale activity 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 also 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:
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
May 31, 2015
|
Income taxes receivable
|
$
|
7,213
|
|
|
$
|
—
|
|
Demonstration equipment
|
5,207
|
|
|
81
|
|
Net investment in sales-type leases
|
3,700
|
|
|
5,876
|
|
Prepaid expenses and other
|
3,370
|
|
|
4,265
|
|
SERP
|
3,057
|
|
|
3,521
|
|
|
$
|
22,547
|
|
|
$
|
13,743
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued guidance that will require lessees to put most leases on their balance sheets but recognize expenses in the income statement. For lessors, the standard will be similar to the current model but will be updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The impact this guidance will have on the consolidated financial statements cannot be determined at this time.
In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued guidance to establish a new, more robust framework for the recognition of revenue related to the transfer of goods and services to customers. This guidance is effective for reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The impact this guidance will have on the consolidated financial statements cannot be determined at this time.
Other Comprehensive Income
Comprehensive income is equivalent to net income for all periods presented.
Out-of-period Adjustment
During the second quarter of fiscal 2015, we identified
$1.3 million
of previously recognized revenue which the Company was not entitled to recognize. We determined this adjustment to be immaterial to our current and previously filed financial statements. We have recorded this out-of-period adjustment as a reduction to sales of equipment and other revenues and an increase to accrued expenses for the quarter ended November 30, 2014.
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. We held no cash equivalents at
February 29, 2016
and
May 31, 2015
except for the money market funds that are part of our SERP assets.
Note 3: Fair Value Measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including SERP assets and liabilities, and foreign currency derivatives. The fair value of financial assets and liabilities 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 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 those that may be used with internally-developed valuation models.
Our assets and liabilities measured at fair value on a recurring basis were determined as follows:
|
|
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February 29, 2016
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Balance
|
Assets
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
|
|
|
Money market fund
|
$
|
187
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
187
|
|
Mutual funds
|
2,870
|
|
|
—
|
|
|
—
|
|
|
2,870
|
|
Total assets measured at fair value
|
$
|
3,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,057
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
SERP
|
$
|
3,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,057
|
|
Foreign exchange forward contracts
|
—
|
|
|
18
|
|
|
—
|
|
|
18
|
|
Total liabilities measured at fair value
|
$
|
3,057
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
3,075
|
|
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2015
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Balance
|
Assets
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
|
|
|
Money market fund
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166
|
|
Mutual funds
|
3,355
|
|
|
—
|
|
|
—
|
|
|
3,355
|
|
Total assets measured at fair value
|
$
|
3,521
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,521
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
SERP
|
$
|
3,521
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,521
|
|
Foreign exchange forward contracts
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
Total liabilities measured at fair value
|
$
|
3,521
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
3,537
|
|
The fair value measures for our SERP assets and liabilities were derived from quoted market prices in active markets and are included in Level 1 inputs. Our SERP assets include money market and mutual funds, which we classify as trading securities. 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”), as amended and restated, 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. Pursuant to the Equity Incentive Plan, we have granted restricted stock units to directors, officers and key employees.
Restricted Stock Units
Each vested restricted stock unit entitles the holder to be issued one share of common stock. The vested restricted stock units settle into common stock on the earliest of (i) the first January 1st after the fifth anniversary of the grant, (ii) a change of control, or (iii) termination of the holder’s employment or membership on our Board of Directors. Restricted stock units vest according to a vesting schedule determined by the Compensation Committee of our Board of Directors, generally over a one to three year period.
The following table represents restricted stock unit activity for the
nine months ended February 29, 2016
:
|
|
|
|
|
|
|
|
|
Restricted
Stock
Units
|
|
Weighted –
Average
Grant
Date
Fair Value
|
Nonvested at June 1, 2015
|
129
|
|
|
$
|
16.75
|
|
Granted
|
182
|
|
|
11.24
|
|
Vested
|
(76
|
)
|
|
16.08
|
|
Forfeited/canceled
|
(7
|
)
|
|
16.72
|
|
Nonvested at February 29, 2016
|
228
|
|
|
$
|
12.59
|
|
We granted
182
and
87
restricted stock units during the
nine
months ended
February 29, 2016
and
February 28, 2015
, respectively. We did not grant any restricted stock units during the three months ended February 29, 2016 and February 28, 2015, respectively.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
Under the terms of our restricted stock unit agreements, nonvested restricted stock unit awards contain forfeitable rights to dividends. Because the dividends are forfeitable, the restricted stock units are defined as non-participating securities. As of
February 29, 2016
, we have unrecognized share-based compensation cost of approximately
$2,119
associated with restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of approximately
2.0 years
.
We had
232
and
401
vested restricted stock units outstanding as of
February 29, 2016
and February 28,
2015
, 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 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, which is approximately
three 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 units.
We recorded
$368
and
$1,016
of share-based compensation as part of SG&A expenses for the three and
nine
months ended
February 29, 2016
and
$319
and
$968
for the three and
nine
months ended February 28,
2015
.
We receive a tax deduction for certain restricted stock units on the date the related shares are issued, generally for (1) the fair value of our common stock at the date of issuance and (2) for dividends paid on vested restricted stock units where the underlying shares have not been issued. Excess tax benefits are realized when restricted stock units are issued and the tax deductions (fair value at issuance) are greater than the compensation expense for financial reporting purposes (fair value at the date of grant). Shortfalls are realized when the fair value at issuance is less than the fair value at grant. For the
nine months ended February 29, 2016
and February 28,
2015
, we realized a total excess tax shortfall of
$40
and an excess tax benefit of
$348
, respectively.
Note 5: Goodwill and Other Intangible Assets
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 acquisition 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
February 29, 2016
are the result of our acquisition of Equipment Management Technology, Inc. on August 24, 2011, Telogy LLC on March 31, 2010, and Rush Computer Rentals, Inc. on January 31, 2006.
The changes in carrying amount of goodwill and other intangible assets for the
nine months ended February 29, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 1, 2015
(net of amortization)
|
|
Additions
|
|
Amortization
|
|
Balance as of February 29, 2016
|
Goodwill
|
$
|
3,109
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,109
|
|
Trade name
|
411
|
|
|
—
|
|
|
—
|
|
|
411
|
|
Customer relationships
|
333
|
|
|
—
|
|
|
(88
|
)
|
|
245
|
|
|
$
|
3,853
|
|
|
$
|
—
|
|
|
$
|
(88
|
)
|
|
$
|
3,765
|
|
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
February 29, 2016
and
May 31, 2015
.
ELECTRO RENT CORPORATION
NOTES TO 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 tables provide a summary of our intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
Estimated
Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Trade name
|
—
|
|
|
$
|
411
|
|
|
$
|
—
|
|
|
$
|
411
|
|
Customer relationships
|
3-8 years
|
|
|
2,094
|
|
|
(1,849
|
)
|
|
245
|
|
|
|
|
$
|
2,505
|
|
|
$
|
(1,849
|
)
|
|
$
|
656
|
|
|
|
|
|
|
|
|
|
|
May 31, 2015
|
|
Estimated
Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Trade name
|
—
|
|
|
$
|
411
|
|
|
$
|
—
|
|
|
$
|
411
|
|
Customer relationships
|
3-8 years
|
|
|
2,094
|
|
|
(1,761
|
)
|
|
333
|
|
|
|
|
$
|
2,505
|
|
|
$
|
(1,761
|
)
|
|
$
|
744
|
|
Amortization expense related to intangible assets was
$29
and
$88
for the three and
nine
months ended
February 29, 2016
and
$30
and
$100
for the three and
nine
months ended
February 28, 2015
, respectively.
Amortization expense for customer relationships is included in SG&A expenses. The following table provides estimated future amortization expense related to intangible assets as of
February 29, 2016
:
|
|
|
|
|
|
Year ending May 31,
|
|
Future
Amortization
|
2016 (remaining)
|
|
$
|
30
|
|
2017
|
|
118
|
|
2018
|
|
97
|
|
2019
|
|
—
|
|
2020
|
|
—
|
|
|
|
$
|
245
|
|
Note 6: Borrowings
On November 19, 2013, we entered into a credit agreement (the “Credit Agreement”) with J.P. Morgan Chase Bank, National Association (“JPM”), as administrative agent, J.P. Morgan Securities LLC, as sole bookrunner and sole lead arranger, and a syndicate of lenders. The Credit Agreement provides for a
$25,000
revolving credit facility, including swingline loans and letters of credit. The Credit Agreement expires on
November 30, 2017
.
We have an option to increase the commitments under the Credit Agreement by up to an additional
$25,000
, upon our request and subject to the lenders electing to increase their commitments or by means of the addition of new lenders. Borrowings under the Credit Agreement bear interest at a rate equal to, at our election, the applicable rate for a “Eurodollar Loan” or a “CB Floating Rate Loan.” Eurodollar Loan advances accrue interest at a per annum interest rate equal to (i) the quotient (rounded upwards to the next 1/16th of 1%) of (a) the applicable LIBO Rate, divided by (b) one minus the maximum aggregate reserve requirement (expressed as a decimal) imposed under Federal Reserve Board Regulation D (the “Adjusted LIBO Rate”), plus (ii)
0.75%
. CB Floating Rate Loan advances accrue interest at a per annum interest rate equal to (i) the higher of (a) JPM’s Prime Rate or (b) the Adjusted LIBO Rate for a one month interest period plus
2.5%
, minus (ii)
2.0%
. In addition, we pay a commitment fee of
0.10%
of the unused amount if the average borrowing under the Credit Agreement is less than or equal to
$8,000
on a quarterly basis.
The Credit Agreement contains customary affirmative and negative covenants (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on the ability to incur additional indebtedness, create liens, make certain investments, make restricted payments, enter into or undertake certain liquidations, mergers, consolidations or acquisitions and dispose of assets or subsidiaries. In addition, the Credit Agreement requires us to maintain minimum earnings and tangible net worth. We were in compliance with all financial covenants at
February 29, 2016
.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
We had
no
borrowings outstanding under the Credit Agreement at
February 29, 2016
and
$2,387
of borrowings outstanding at May 31, 2015. The weighted average interest rate under the line of credit was approximately
1.25%
at May 31, 2015.
Note 7: 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 a review of each customer’s credit profile, which may include the review of third party credit reports, customer financial statements and/or bank verifications. We monitor the credit quality of our sales-type lease portfolio based on payment activity and the related 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:
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
May 31, 2015
|
Gross minimum lease payments receivable
|
$
|
3,824
|
|
|
$
|
6,109
|
|
Less – unearned interest
|
(124
|
)
|
|
(233
|
)
|
Net investment in sales-type lease receivables
|
$
|
3,700
|
|
|
$
|
5,876
|
|
The following table provides estimated future minimum lease payments by year related to sales-type leases:
|
|
|
|
|
|
Year ending May 31,
|
|
Future
Payments
|
2016 (remaining)
|
|
$
|
1,084
|
|
2017
|
|
2,360
|
|
2018
|
|
363
|
|
2019
|
|
17
|
|
2020
|
|
—
|
|
|
|
$
|
3,824
|
|
Note 8: Segment Reporting and Related Disclosures
Accounting guidance establishes reporting standards for an enterprise’s 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 and 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 enterprise’s 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 in our business: our T&M and DP businesses.
In the past, we concluded that although we had separate operating segments for T&M and DP equipment, these two segments could be aggregated into a single reportable segment because they had similar economic characteristics and qualitative factors. However, as a result of a change in economic characteristics in fiscal 2015 in our T&M segment, primarily attributable to the expiration of the Keysight reseller agreement and greater competition in the marketplace, we concluded that we no longer expected similar economic characteristics and qualitative factors to continue in the future. As such, management determined that the operating segments should no longer be aggregated. Following the change in the composition of our reportable operating segments, we restated the segment information for fiscal 2015.
Our equipment pool, based on acquisition cost, consisted of
$409,310
of T&M equipment and
$32,656
of DP equipment at
February 29, 2016
and
$434,963
of T&M equipment and
$37,824
of DP equipment at
May 31, 2015
. Additional segment asset information is not available.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
Revenues for these operating segments were as follows for the three months ended
February 29, 2016
and February 28,
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T&M
|
|
DP
|
|
Total
|
2016
|
|
|
|
|
|
Rentals and leases
|
$
|
25,340
|
|
|
$
|
3,833
|
|
|
$
|
29,173
|
|
Sales of equipment and other revenues
|
9,857
|
|
|
468
|
|
|
10,325
|
|
Segment and consolidated total
|
$
|
35,197
|
|
|
$
|
4,301
|
|
|
$
|
39,498
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Rentals and leases
|
$
|
26,372
|
|
|
$
|
3,880
|
|
|
$
|
30,252
|
|
Sales of equipment and other revenues
|
25,799
|
|
|
291
|
|
|
26,090
|
|
Segment and consolidated total
|
$
|
52,171
|
|
|
$
|
4,171
|
|
|
$
|
56,342
|
|
Revenues for these operating segments were as follows for the
nine
months ended
February 29, 2016
and February 28,
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T&M
|
|
DP
|
|
Total
|
2016
|
|
|
|
|
|
Rentals and leases
|
$
|
79,937
|
|
|
$
|
13,712
|
|
|
$
|
93,649
|
|
Sales of equipment and other revenues
|
40,888
|
|
|
1,614
|
|
|
42,502
|
|
Segment and consolidated total
|
$
|
120,825
|
|
|
$
|
15,326
|
|
|
$
|
136,151
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Rentals and leases
|
$
|
84,410
|
|
|
$
|
13,200
|
|
|
$
|
97,610
|
|
Sales of equipment and other revenues
|
79,033
|
|
|
1,273
|
|
|
80,306
|
|
Segment and consolidated total
|
$
|
163,443
|
|
|
$
|
14,473
|
|
|
$
|
177,916
|
|
Depreciation of rental and lease equipment for these operating segments was as follows for the three and
nine
months ended
February 29, 2016
and February 28,
2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
T&M
|
$
|
12,699
|
|
|
$
|
12,856
|
|
DP
|
1,045
|
|
|
988
|
|
Segment and consolidated total
|
$
|
13,744
|
|
|
$
|
13,844
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
T&M
|
$
|
39,388
|
|
|
$
|
39,387
|
|
DP
|
3,297
|
|
|
3,042
|
|
Segment and consolidated total
|
$
|
42,685
|
|
|
$
|
42,429
|
|
Amortization expense is not material and is included in SG&A expenses.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
We consider the marginal contribution as our measure of segment profit or loss. The marginal contribution is calculated as operating revenue less operating costs and direct and allocated SG&A expenses. Marginal contribution for these operating segments was as follows for the three and
nine
months ended
February 29, 2016
and February 28,
2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
T&M
|
$
|
8,755
|
|
|
$
|
10,964
|
|
DP
|
967
|
|
|
1,094
|
|
Total marginal contribution of operating segments
|
9,722
|
|
|
12,058
|
|
Deduct:
|
|
|
|
Unallocated SG&A expenses
|
8,010
|
|
|
8,394
|
|
Add:
|
|
|
|
Interest income (expense), net
|
(221
|
)
|
|
82
|
|
Other income
|
1
|
|
|
—
|
|
Income before income taxes
|
$
|
1,492
|
|
|
$
|
3,746
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
T&M
|
$
|
29,272
|
|
|
$
|
37,410
|
|
DP
|
5,206
|
|
|
4,472
|
|
Total marginal contribution of operating segments
|
34,478
|
|
|
41,882
|
|
Deduct:
|
|
|
|
Unallocated SG&A expenses
|
25,123
|
|
|
24,532
|
|
Add:
|
|
|
|
Interest income (expense), net
|
(385
|
)
|
|
264
|
|
Other income
|
14
|
|
|
1,390
|
|
Income before income taxes
|
$
|
8,984
|
|
|
$
|
19,004
|
|
No
single customer accounted for more than 10% of total revenues during the
nine
months ended
February 29, 2016
and February 28,
2015
.
We conduct rental, leasing and sales activities in foreign countries. Selected country information is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
|
February 29, 2016
|
|
February 28, 2015
|
Revenues:
1
|
|
|
|
|
|
|
|
U.S.
|
$
|
30,528
|
|
|
$
|
47,922
|
|
|
$
|
110,451
|
|
|
$
|
149,320
|
|
Other
2
|
8,970
|
|
|
8,420
|
|
|
25,700
|
|
|
28,596
|
|
Total
|
$
|
39,498
|
|
|
$
|
56,342
|
|
|
$
|
136,151
|
|
|
$
|
177,916
|
|
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
As of
|
|
February 29, 2016
|
|
May 31, 2015
|
Net Long-Lived Assets:
3
|
|
|
|
U.S.
|
$
|
174,482
|
|
|
$
|
197,514
|
|
Other
2
|
45,670
|
|
|
47,277
|
|
Total
|
$
|
220,152
|
|
|
$
|
244,791
|
|
|
|
1
|
Revenues by country are based on the shipping destination.
|
|
|
2
|
Other consists of countries other than the U.S. Each foreign country individually accounts for less than 10% of the total consolidated revenues and net long-lived assets.
|
|
|
3
|
Net long-lived assets include rental and lease equipment and other property, net of accumulated depreciation and amortization.
|
Note 9: 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 and nine months ended
February 29, 2016
and February 28,
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
February 29, 2016
|
|
February 28, 2015
|
|
February 29, 2016
|
|
February 28, 2015
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average common shares outstanding (including shares issuable for vested restricted stock units)
|
24,426
|
|
|
24,377
|
|
|
24,413
|
|
|
24,355
|
|
Effect of unvested restricted stock units
|
14
|
|
|
—
|
|
|
9
|
|
|
—
|
|
Diluted shares used in per share calculation
|
24,440
|
|
|
24,377
|
|
|
24,422
|
|
|
24,355
|
|
Net income
|
$
|
1,009
|
|
|
$
|
2,425
|
|
|
$
|
5,669
|
|
|
$
|
11,991
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.04
|
|
|
$
|
0.10
|
|
|
$
|
0.23
|
|
|
$
|
0.49
|
|
Diluted
|
$
|
0.04
|
|
|
$
|
0.10
|
|
|
$
|
0.23
|
|
|
$
|
0.49
|
|
We did not include
97
and
108
shares in the calculation of diluted earnings per share for the three and
nine
months ended
February 29, 2016
, respectively, and
78
for the three and
nine
months ended
February 28, 2015
as to do so would have been antidilutive.
Note 10: 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 related penalties and interest. There were no uncertain tax positions in fiscal
2016
and
2015
.
ELECTRO RENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollar and share amounts in thousands, except per share amounts)
We are subject to taxation in the U.S., as well as various state and foreign jurisdictions. We have substantially settled all income tax matters for the United States federal jurisdiction for years through fiscal 2011. Major state jurisdictions have been examined through fiscal years 2004 and 2005, and foreign jurisdictions have not been examined for their respective initial statutory periods of approximately 3 years.
Note 11: 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 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 would reasonably be expected to have a material adverse effect on our financial condition, results of operations or cash flows.
Note 12: Other Income
In the second quarter of fiscal 2015, we recognized other income from a
$1.4 million
settlement received as one of the plaintiffs in a class action lawsuit involving the purchase of certain computer products.
Note 13: Subsequent Events
On March 17, 2016, our Board of Directors declared a quarterly cash dividend of
$0.125
per common share. The dividend will be paid on
April 8, 2016
to shareholders of record as of
March 31, 2016
.
Item 2
.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion addresses (a) our financial condition as of
February 29, 2016
and
May 31, 2015
, (b) the results of our operations for the three and
nine months ended February 29, 2016
and February 28,
2015
, and (c) our cash flows for the
nine
months ended
February 29, 2016
and February 28,
2015
. This discussion should be read in conjunction with Management’s 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, 2015
, to which you are directed for additional information.
Overview
We are a global organization devoted to the rental, lease and sale of new and used electronic test and measurement (“T&M”) equipment. We purchase T&M equipment from leading manufacturers such as Keysight Technologies, Inc. (formerly Agilent Technologies, Inc., “Keysight”), Anritsu, Inc. ("Anritsu"), Rohde & Schwarz Gmbh & Co. KG ("Rohde & Schwarz") and Tektronix Inc. Our customers rent, lease and buy our T&M equipment, and use that equipment primarily in the aerospace and defense, telecommunications, electronics, industrial and semiconductor industries.
In addition, although it represented only approximately
11.3%
of our revenues for the first
nine
months of fiscal
2016
, our Data Products ("DP") division is a large United States rental provider offering personal computers from leading manufacturers.
Our Businesses
Our businesses are as follows:
|
|
•
|
Rental and Lease Business
. We rent and lease state-of-the-art electronic equipment. We maintain an equipment portfolio comprising T&M and DP equipment purchased from leading manufacturers, which we warehouse in various locations around the world to enable us to serve rental and lease customers.
|
|
|
•
|
Used Equipment Sales.
We sell used T&M and DP equipment that we previously held for rent and lease. Used equipment is sold at substantial discounts compared to new equipment, and provides an economic advantage for customers seeking ownership of used equipment. All of our used equipment has been maintained and serviced by our professional maintenance team, and our customers have confidence in the quality of the used equipment purchased from us.
|
|
|
•
|
New Equipment Sales
. We sell new T&M equipment. We were, through May 31, 2015, an authorized reseller of certain new Keysight T&M products and services to small and medium size customers in the United States and Canada. Substantially all of our new equipment sales prior to May 31, 2015 were through our Keysight reseller agreement. In fiscal 2016, we entered into reseller agreements with other T&M equipment manufacturers, including Anritsu and Rohde & Schwarz.
|
Our Sales Strategy
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 an experienced, highly technical sales force that specializes in all the products and services offered by our Company. Our sales force identifies potential customers through coordinated efforts with our marketing organization, which 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 broad product offering and extensive knowledge of the T&M and DP equipment environment to determine the right product to rent, lease or sell to the customer.
Our Equipment Management Strategy
To maximize our overall profitability from the rental, leasing, and sales of equipment, we manage our equipment pool on an ongoing basis by controlling the timing, pricing and mix of our purchases and sales of equipment. We acquire new and used equipment for our rental pool 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 utilizing our proprietary PERFECT software to adjust our equipment pool 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 equipment’s 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 equipment that we are unable to rent or sell for a profit. We assess the carrying value of our
equipment pool on an annual basis or more frequently when factors indicating potential impairment are present. We recognized
$0.4 million
of equipment impairment charges related to our equipment pool during the
nine
months ended
February 29, 2016
.
Foreign Operations and Hedging
Due to our foreign operations in Europe, Canada and China, we have revenue, expenses, assets and liabilities in foreign currencies, primarily the euro, British pound sterling, Canadian dollar and Chinese yuan. We enter into forward contracts to hedge against unfavorable currency fluctuations in our monetary assets and liabilities in our European, Chinese and Canadian operations. As a result of these forward contracts, we were able to reduce the impact of foreign currency fluctuations flowing through our operating results during the
nine
months ended
February 29, 2016
.
Profitability and Key Business Trends
The following is a summary of certain financial metrics, comparing the first
nine
months of fiscal
2016
to the first
nine
months of fiscal
2015
, that our management deem important indicators of the performance of the Company:
|
|
•
|
our rental and lease revenues
decreased
by
4.1%
to
$93.6 million
from
$97.6 million
primarily due to a decrease in rental/lease rates as a result of a negative effect of a decline in foreign exchange rates and competition and, to a lesser degree, lower demand in certain industries we serve;
|
|
|
•
|
our sales of equipment and other revenues
decreased
by
47.1%
to
$42.5 million
from
$80.3 million
primarily due to a decrease in new equipment sales of
$38.1 million
as a result of the expiration of the Keysight reseller agreement on May 31, 2015;
|
|
|
•
|
our operating profit decreased
46.1%
to
$9.4 million
from
$17.4 million
primarily due to the decrease in sales of new equipment revenues without a commensurate decrease in SG&A expenses;
|
|
|
•
|
our net income decreased
52.7%
to
$5.7 million
from
$12.0 million
;
|
|
|
•
|
our net income per diluted common share (EPS) decreased
53.1%
to
$0.23
from
$0.49
;
|
|
|
•
|
our net income (annualized) as a percentage of average assets declined to
2.6%
from
5.3%
; and
|
|
|
•
|
our net income (annualized) as a percentage of average equity declined to
3.3%
from
7.0%
.
|
Comparison of Three Months Ended
February 29, 2016
and
February 28, 2015
Revenues
Total revenues for the three months ended
February 29, 2016
and February 28,
2015
were
$39.5 million
and
$56.3 million
, respectively. The
29.9%
decrease
in total revenues was due to a
3.6%
decrease
in rental and lease revenues and a
60.4%
decrease
in sales of equipment and other revenues.
Rental and Lease Revenues
Rental and lease revenues for the three months ended
February 29, 2016
were
$29.2 million
, compared to
$30.3 million
for the three months ended
February 28, 2015
as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
T&M rental and lease revenue
|
$
|
25,340
|
|
|
$
|
26,372
|
|
DP rental and lease revenue
|
3,833
|
|
|
3,880
|
|
|
$
|
29,173
|
|
|
$
|
30,252
|
|
Our T&M rental and lease revenues decreased by
$1.0 million
due to a decrease in rental and lease rates of
$0.8 million
and a decrease in demand of
$0.2 million
. The decrease in rates was primarily driven by a
$0.5 million
decrease resulting from a change in foreign exchange rates affecting our European and Canadian operations,as well as a change in product mix and competition. We also saw softening demand in telecommunications and semiconductor manufacturing sectors that was partially offset by an uptick in aerospace and defense sector.
The DP rental and lease revenues remained consistent to fiscal
2015
.
Sales Equipment and Other Revenues
Sales of equipment and other revenues
decreased
to
$10.3 million
for the
third
quarter of fiscal
2016
from
$26.1 million
for the
third
quarter of fiscal
2015
as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Sales of new equipment
|
$
|
1,704
|
|
|
$
|
17,273
|
|
Sales of used equipment and other revenues
|
8,621
|
|
|
8,817
|
|
|
$
|
10,325
|
|
|
$
|
26,090
|
|
The decrease in sales of new equipment in the
third
quarter of fiscal
2016
as compared to the
third
quarter of fiscal
2015
is primarily a result of the expiration of the Keysight reseller agreement on
May 31, 2015
.
The decrease in sales of used equipment and other revenues is primarily due to a decrease in used equipment sales while other revenue remained relatively consistent to fiscal
2015
.
Substantially all of our new equipment sales prior to
May 31, 2015
were through the Keysight reseller agreement. Keysight elected not to renew our reseller agreement on its expiration on
May 31, 2015
, as part of a strategic decision to pursue a direct sales approach. In fiscal
2016
, we entered into reseller agreements with other T&M equipment manufacturers, including Anritsu and Rohde & Schwarz. The expiration of the Keysight reseller agreement has continued to affect our new equipment sales, and consequently our revenues and net income, as we look to rebuild our new equipment sales under reseller agreements with these new resellers. Of the
$1.7 million
of new equipment sold during the
third
quarter of fiscal
2016
,
$0.5 million
related to the fulfillment of the Keysight backlog.
Operating Expenses
Depreciation expense in the
third
quarter of fiscal
2016
declined to
$13.7 million
as compared to
$13.8 million
in the
third
quarter of fiscal 2015. However, the depreciation ratio, as a percentage of rental and lease revenues, increased to
47.1%
in the
third
quarter of fiscal
2016
from
45.8%
in the
third
quarter of fiscal
2015
as T&M rental and lease revenues decreased.
Costs of rentals and leases, excluding depreciation, which primarily include labor related costs of our operations personnel, supplies, repairs, equipment subrentals, insurance and warehousing costs associated with our rental and lease equipment, declined to
$4.1 million
for the three months ended
February 29, 2016
from
$4.5 million
for the three months ended February 28,
2015
. Generally, this expense remains consistent from quarter to quarter as our existing infrastructure is capable of handling moderate changes in rental and lease activity.
Costs of sales of equipment and other revenues, which primarily include the cost of equipment sales,
decreased
to
$6.5 million
in the
third
quarter of fiscal
2016
from
$19.6 million
in the same period of fiscal
2015
, as a result of the decrease in sales of equipment. As a percentage of sales of equipment and other revenues, costs of sales of equipment and other revenues decreased to
62.7%
in the
third
quarter of fiscal
2016
from
75.1%
in the
third
quarter of fiscal
2015
. This decrease
was primarily due to a change in product mix with a decline in new equipment sales, while used equipment sales, which generally result in higher margins, remained relatively consistent. Our sales margin percentage is expected to fluctuate from quarter to quarter depending on the mix of used and new equipment sales and is impacted by competition.
SG&A expenses decreased to
$13.5 million
in the
third
quarter of fiscal
2016
from
$14.7 million
in the
third
quarter of
2015
. The decrease was primarily driven by a reduction in certain selling costs in our SG&A expenses for the three months of fiscal 2016, compared to the same period in fiscal 2015, partially offset by certain short-term administrative costs
.
As a percentage of total revenues, SG&A expenses increased to
34.1%
in the
third
quarter of fiscal
2016
from
26.1%
in the
third
quarter of fiscal
2015
, primarily due to the decrease in our new equipment sales without a commensurate decrease in SG&A expenses. While sales of new equipment declined in fiscal 2016, we did not implement any significant reductions in our sales team. The knowledge and experience of our sales team were a key competitive differentiator for our business, and we believed that they will be instrumental in developing revenues under the new reseller agreements.
Operating Profit
Our operating profit
decreased
53.3%
, or
$2.0 million
, to
$1.7 million
for the three months ended
February 29, 2016
from
$3.7 million
for the three months ended
February 28, 2015
. As compared to the same period in the prior fiscal year, our rental and lease business contributed
$0.6 million
less to operating profit, resulting from a
$1.1 million
decrease
in rental and lease revenues offset by a
$0.1 million
decrease in our depreciation expense and a
$0.4 million
decrease
in our costs of rentals and leases, excluding depreciation. Operating profit from sales of equipment and other revenues
decreased
by
$2.7 million
as compared to the third quarter of fiscal
2015
as our sales of equipment and other revenues
decreased
by
$15.8 million
while our
related costs
decreased
by
$13.1 million
. Our SG&A expenses for the quarter decreased by
$1.2 million
as compared to fiscal
2015
.
Average Acquisition Cost of Equipment
The following table sets forth the average acquisition cost of our equipment on rent and lease:
|
|
|
|
|
|
|
|
|
|
|
|
Average acquisition cost of equipment on rent and lease (in millions)
|
Three Months Ended
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
Change
|
T&M
|
$
|
255.0
|
|
|
$
|
256.9
|
|
|
(0.7
|
)%
|
DP
|
$
|
11.0
|
|
|
$
|
11.9
|
|
|
(7.6
|
)%
|
Average T&M acquisition cost of equipment on rent and lease for the three months ended
February 29, 2016
decreased as compared to the same period in fiscal
2015
due to a decrease in demand. Average DP acquisition cost of equipment decreased due to decreased demand for DP products in the
third
quarter of fiscal
2016
as compared to the
third
quarter in fiscal
2015
.
Average Rental and Lease Rates
Average T&M rental and lease rates decreased by
3.1%
while the average DP rental and lease rates increased by
6.7%
for the three months ending
February 29, 2016
as compared to the
third
quarter in fiscal
2015
. The decrease in T&M rates was due to the negative effect of exchange rates on our European and Canadian operations, a shift to markets where we generally experience lower rates and, to a lesser degree, competition in the marketplace. The increase in DP rates is the result of changes in DP product mix.
Average Utilization
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
63.6%
for the three months ended
February 29, 2016
from
64.9%
for the three months ended
February 28, 2015
. The decrease is primarily due to a large transfer of Keysight demonstration equipment into our rental pool upon the expiration of the Keysight resale agreement on May 31, 2015 and a decrease in demand. The average utilization of our DP equipment pool, based on the same method of calculation, decreased to
35.7%
from
35.8%
for the three months ended
February 29, 2016
and February 28,
2015
. Our utilization rate is impacted by new equipment purchases in support of existing and potential business, sales of used equipment and transfers of demonstration equipment into our rental pool.
Income Tax Provision
Our effective tax rate decreased to
32.4%
in the
third
quarter of fiscal
2016
from
35.3%
in the
third
quarter of fiscal
2015
. The
decrease
is due to a continuing decline in pretax income relative to the levels of permanent tax differences during fiscal 2016.
Comparison of
Nine Months Ended
February 29, 2016
and
February 28, 2015
Revenues
Total revenues for the
nine
months ended
February 29, 2016
and February 28,
2015
were
$136.2 million
and
$177.9 million
, respectively. The
23.5%
decrease
in total revenues was due to a
4.1%
decrease
in rental and lease revenues and a
47.1%
decrease
in sales of equipment and other revenues.
Rental and Lease Revenues
Rental and lease revenues for the
nine
months ended
February 29, 2016
were
$93.6 million
, compared to
$97.6 million
for the for the nine months ended February 28, 2015 as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
February 29, 2016
|
|
February 28, 2015
|
T&M rental and lease revenue
|
$
|
79,937
|
|
|
$
|
84,410
|
|
DP rental and lease revenue
|
13,712
|
|
|
13,200
|
|
|
$
|
93,649
|
|
|
$
|
97,610
|
|
Our T&M rental and lease revenues decreased by
$4.5 million
due to a decrease in rental and lease rates. The decrease in rates was primarily driven by competition and a change in product mix and included the effect of a decrease in foreign exchange rates of
$2.0 million
affecting our European and Canadian operations.
DP rental and lease revenues increased by
$0.5 million
, primarily due to an increase in demand.
Sales of Equipment and Other Revenues
Sales of equipment and other revenues
decreased
to
$42.5 million
for the first
nine
months of fiscal
2016
from
$80.3 million
in the prior fiscal year as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
February 29, 2016
|
|
February 28, 2015
|
Sales of new equipment
|
$
|
15,525
|
|
|
$
|
53,613
|
|
Sales of used equipment and other revenues
|
26,977
|
|
|
26,693
|
|
|
$
|
42,502
|
|
|
$
|
80,306
|
|
The
decrease
in sales of equipment and other revenues for the
nine
months ended
February 29, 2016
as compared to fiscal
2015
was primarily the result of a decrease in sales of new equipment, partially offset by an increase in sales of used equipment and other revenues. Sales of new equipment decreased by
$38.1 million
, or
71.0%
, as a result of the expiration of the Keysight reseller agreement. Sales of used equipment and other revenue increased by
$0.3 million
, as compared to prior period, which was impacted by a negative effect a $1.3 million non-recurring, out-of-the-period adjustment to other revenue in fiscal 2015.
Substantially all of our new equipment sales prior to May 31, 2015 were through our Keysight reseller agreement. Keysight elected not to renew our reseller agreement on its expiration on May 31, 2015, as part of a strategic decision to pursue a direct sales approach. In fiscal 2016, we entered into reseller agreements with other T&M equipment manufacturers, including Anritsu and Rohde & Schwarz. The expiration of the Keysight reseller agreement has continued to affect our new equipment sales, and consequently our revenues and net income, as we have fulfilled our existing Keysight backlog of sales and looked to rebuild our new equipment sales under reseller agreements with these new resellers. Of the
$15.5 million
of new equipment sold during fiscal 2016,
$11.8 million
related to the fulfillment of the Keysight backlog.
Operating Expenses
Depreciation of rental and lease equipment for the first
nine
months of fiscal
2016
and
2015
remained consistent at
$42.7 million
and
$42.4 million
, respectively. Depreciation as a percentage of rental and lease revenues increased to
45.6%
from
43.5%
for the
nine
months ended
February 29, 2016
and February 28,
2015
, respectively, due to a decrease in rental and lease revenues.
Costs of rentals and leases, excluding depreciation, which primarily include labor related costs of our operations personnel, supplies, repairs, equipment subrentals, insurance and warehousing costs associated with our rental and lease equipment, decreased to
$13.3 million
for the
nine
months ended
February 29, 2016
compared to
$13.7 million
for the
nine
months ended
February 28, 2015
.
Costs of sales of equipment and other revenues, which primarily include the cost of equipment sales,
decreased
to
$28.2 million
in the first
nine
months of fiscal
2016
from
$60.2 million
in the same period of fiscal
2015
, as a result of the decrease in sales of equipment revenues. Costs of sales of equipment and other revenues, as a percentage of sales of equipment and other revenues,
decreased
to
66.2%
in the first
nine
months of fiscal
2016
from
74.9%
in fiscal
2015
. This
decrease
was primarily due to a change in product mix with a decline in new equipment sales, while used equipment sales, which generally result in higher margins, remained relatively consistent. Our sales margin percentage is expected to fluctuate from quarter to quarter depending on the mix of used and new equipment sales and is also impacted by competition.
Selling, general and administrative expenses decreased to
$42.7 million
in the first
nine
months of fiscal
2016
compared to
$44.3 million
for the first
nine
months of fiscal
2015
. The decrease is primarily driven by a reduction in certain selling costs in our SG&A expenses for the
nine
months of fiscal 2016, compared to the same period in fiscal 2015, partially offset by certain short-term administrative costs
.
As a percentage of total revenues, SG&A expenses increased to
31.3%
for the first
nine
months of fiscal
2016
compared to
24.9%
for the first
nine
months of fiscal
2015
primarily due to a decrease in sales of new equipment revenue without a commensurate decrease in SG&A expenses. While sales of new equipment declined in fiscal 2016, we did not implement any significant reductions in our sales team. The knowledge and experience of our sales team were a key
competitive differentiator for our business, and we believed that they will be instrumental in developing revenues under the new reseller agreements.
Operating Profit
Our operating profit
decreased
46.1%
, or
$8.0 million
, to
$9.4 million
for the first
nine
months of fiscal
2016
from
$17.4 million
for the first
nine
months of fiscal
2015
. As compared to the same period in the prior fiscal year, our rental and lease business contributed
$3.9 million
less to operating profit, resulting from a
$4.0 million
decrease
in rental and lease revenues, a
$0.3 million
increase in depreciation expense, and a
$0.4 million
decrease
in our costs of rentals and leases, excluding depreciation. Operating profit from sales of equipment and other revenues
decreased
by
$5.8 million
as compared to fiscal
2015
as our sales of equipment and other revenues
decreased
by
$37.8 million
while the related costs
decreased
by
$32.0 million
. Our SG&A expenses decreased by
$1.6 million
as compared to fiscal
2015
.
Average Acquisition Cost of Equipment
The following table sets forth the average acquisition cost of our equipment on rent and lease:
|
|
|
|
|
|
|
|
|
|
|
|
Average acquisition cost of equipment on rent and lease (in millions)
|
Nine Months Ended
|
|
|
February 29, 2016
|
|
February 28, 2015
|
|
Change
|
T&M
|
$
|
258.4
|
|
|
$
|
258.2
|
|
|
0.1
|
%
|
DP
|
$
|
13.1
|
|
|
$
|
12.7
|
|
|
3.1
|
%
|
Average T&M acquisition cost of equipment on rent and lease for the
nine
months ended
February 29, 2016
remained consistent with fiscal
2015
levels. Our average acquisition cost of DP equipment on rent and lease for the
nine
months ended
February 29, 2016
increased as compared to fiscal
2015
due to an increase in demand for DP products.
Average Rental and Lease Rates
Average T&M rates decreased by
5.3%
while average DP rates increased by
1.1%
for the
nine
months of fiscal
2016
as compared to the same period in fiscal
2015
. The decrease in T&M rates was due to the negative effect of exchange rates on our European and Canadian operations, a shift to markets where we generally experience lower rates and, to a lesser degree, competition in the marketplace. The increase in DP rates is the result of a change in product mix in fiscal
2016
as compared to fiscal
2015
.
Average Utilization
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
63.4%
from
64.7%
for the
nine
months ended
February 29, 2016
and February 28,
2015
, respectively. The decrease is primarily due to a large transfer of Keysight demonstration equipment into our rental pool upon the expiration of the Keysight resale agreement on May 31, 2015. The average utilization of our DP equipment pool, based on the same method of calculation, increased to
40.1%
from
37.5%
for the
nine
months ended
February 29, 2016
and February 28,
2015
, respectively. Our utilization rate is impacted by new equipment purchases in support of existing and potential business, transfers of demonstration equipment into the rental and lease equipment pool, and sales of used equipment.
Backlog
As of
February 29, 2016
, our sales order backlog for T&M equipment relating to our resale channel was
$1.0 million
,
a decrease
of
85.9%
from
$7.1 million
at
February 28, 2015
. The decrease is primarily due to the expiration of the Keysight reseller agreement on May 31, 2015. Backlog represents the cumulative balance, at a given point in time, of recorded customer sales orders that have not yet been shipped or recognized as sales. Although backlog consists of firm orders for which goods and services are yet to be provided, customers can, and sometimes do, terminate or modify these orders. Backlog, on any particular date, while indicative of short-term revenue performance, is not necessarily a reliable indicator of medium or long-term revenue performance.
Income Tax Provision
Our effective tax rate remained stable at
36.9%
for the first
nine
months of fiscal
2016
and
2015
.
Liquidity and Capital Resources
We have three principal sources of liquidity: cash flows provided by our operating activities, proceeds from the sale of equipment, and external funds that historically have been provided by bank borrowings. We believe that cash, 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
The balance of our cash was
$18.2 million
at
February 29, 2016
,
an increase
of
$14.2 million
from
May 31, 2015
, primarily due to decreases in cash used in financing and investing activities being partially offset by a decrease in cash provided by operating activities. Outside our normal operations and equipment purchases, we use our cash to pay dividends to shareholders.
Cash Flows
During the first
nine
months of fiscal
2016
and
2015
, net cash provided by operating activities was
$36.2 million
and
$39.5 million
, respectively. The
decrease
of
$3.3 million
in net cash provided by operating activities for the first
nine
months of fiscal
2016
was primarily due to a $
6.3 million
decrease in net income partially offset by a
$2.9 million
increase in income taxes paid. This decrease was partially offset by changes in working capital, primarily a reduction in accounts receivable, as a result of a decrease in revenue.
During the first
nine
months of fiscal
2016
and
2015
, net cash used in investing activities was
$10.1 million
and
$23.0 million
, respectively. The
decrease
in cash used in investing activities for the first
nine
months of fiscal
2016
was primarily due to a
decrease
in payments for purchases of rental and lease equipment of
$12.7 million
as we deemed our equipment levels sufficient to satisfy the current demand.
Net cash used in financing activities decreased to
$11.9 million
from
$14.9 million
for the first
nine
months of fiscal
2016
and
2015
primarily due to decrease in payments of dividends to
$9.3 million
during fiscal
2016
from
$14.8 million
during fiscal
2015
.
Credit Facility
At
February 29, 2016
and February 28, 2015, we had no borrowings and $25 million available credit under our Credit Facility.
Capital Expenditures
Our primary capital expenditures have been for 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. Our equipment purchases will fluctuate based on changes in our utilization, used equipment sales activity and technology trends.
To meet current rental demand and support areas of potential growth for both T&M and DP equipment, we paid for
$36.0 million
of rental and lease equipment purchases during the first
nine
months of fiscal
2016
, compared to
$48.7 million
during the first
nine
months of fiscal
2015
, a
decline
of
26.0%
.
Dividends Paid
We paid dividends of
$0.38
and
$0.60
per common share during the first
nine
months ended
February 29, 2016
and February 28,
2015
, respectively, amounting to an aggregate of
$9.3 million
and
$14.8 million
during the first
nine
months of fiscal
2016
and
2015
, respectively. Payment of future dividends is at the discretion of our Board of Directors and depends on sales, profitability and other performance metrics of the Company, subject to compliance with applicable law.
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, 2015
.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2015
. Those include our policies related to Asset Lives and Depreciation Methods, Impairment of Long-Lived Assets, Goodwill Impairment, and Revenue Recognition. We have not made any material changes to these policies as previously disclosed in our Annual Report.